Apple Stock: The King of Big Tech Does It Again! (NASDAQ:AAPL)

Apple Stock: The King of Big Tech Does It Again!  (NASDAQ:AAPL)

Apple holds a launch event in Brooklyn

Stephanie Keith

Apple (NASDAQ:AAPL) released its fiscal fourth quarter earnings yesterday. Results exceeded expectations in both revenue and EPS. Revenue came in at $90 billion, up 8% and above the estimate of $88 billion, while Profits per share was $1.29, ahead of the estimate of $1.27. Investors took the gains very well. The stock was up in pre-market trading on Friday, and even higher during the trading day. The guidance was less impressive than the statement itself: The company declined to provide revenue guidance, saying it expected slowdown due to a 10% Forex hit. He didn’t forecast an actual decline in revenue, which looked strong compared to what other tech companies did in the third quarter.

Apple’s launch showed strength in many of its business segments. hardware revenue grew 9%, iPhone revenue grew 9.8%, wearables grew 9.8%, and even services grew 4.98%. I use the word “even” here because services are the part of Apple’s business that is most similar to those of the ad-tech companies that didn’t make a profit this week. The segment includes advertising in app stores and a variety of other software offerings; the fact that its revenue increased was extremely impressive after other software companies dropped the ball in the third quarter.

Apple shares stumbled in the weeks leading up to the launch. Expectations were low, peers missed earnings estimates, and a rumor circulated that Apple cut Production of the iPhone 14 Plus. Personally, he was bullish on earnings as he knew the iPhone 14 rumor was overblown (the 14 Plus is just one of the four iPhone 14 models). Still, the magnitude of the pace of gains impressed me. I didn’t expect Apple to raise the top line faster than Alphabet (GOOGLE) did, nor did he expect positive earnings growth. Not only was it a strong showing by the low standards of big tech in 2022, it was a strong showing in any market. In the fourth quarter of 2019, Apple revenue only grew 2%so Apple is, in the midst of a bear market, growing faster than it was in the 2019 bull market.

On the day this article was written, Apple rallied 7.6%, its best submission since july 2020. The stock was most likely helped by its favorable comparison to other tech stocks. Goal (GOAL), alphabet and Amazon (AMZN) all lost, Microsoft (MSFT) won but fell due to misguidance. Apple’s great pace and relatively bullish guidance buoyed the stock, which was the only ‘FAANG’ name to post any really good news in the recently recorded quarter. So the 7.6% one-day rally was quite justified, and there are reasons to think that Apple could go much higher than the level it is trading at today.

competitive landscape

Apple has a pretty good track record with profits. Gets a ‘C’ in reviews on Searching for Alpha’s Quant System, which may sound low, but remember that revisions refer to estimates, not reported results. Apple beat estimates in the last four reported quarters, but its guidance for 2023 was slightly below expectations.

Apple's earnings exceed

Apple earnings outperform (Seeking Alpha Quant)

One of the main reasons Apple is doing so well in terms of earnings is due to its competitive position. In general, a company with a strong position in its industry will produce good profits over time. There are exceptions, of course: a strong position in a dying industry won’t save you. But Apple has a strong foothold in a good industry, so its earnings should be at least adequate most of the time.

How do we know that Apple has a strong competitive position?

It boils down to three things:

  1. Customer loyalty.

  2. Brand strength.

  3. The ecosystem strategy.

Apple’s customer loyalty is legendary. Apple itself touted this factor as one of the reasons for its fourth-quarter pace. Additionally, the firm ‘Access’ calculated Apple brand loyalty (defined as customers who repeatedly buy similar products) at 87%. That figure is higher than average, so Apple’s claims of high customer loyalty are backed up by third-party studies.

Next we have the strength of the brand. Apple was rated the world’s most valuable brand in 2022 by the visual capitalist. This is a factor in itself and also an explanation of factor #1 (customer loyalty). The strength of the Apple brand keeps people interested in the first place, and it also keeps current customers coming back for more. So the strength of the Apple brand contributes to both winning and retaining customers.

Finally, we have the ecosystem strategy. Apple puts a lot of emphasis on building an interconnected ecosystem of devices that integrate well with each other. When you buy a new MacBook with an existing Apple ID, your iPhone, iCloud, and other apps connect immediately. You can achieve this integration by combining other tech companies’ products, but that usually involves downloading apps after you’ve finished setting up your computer—Apple lets you integrate all of your devices before setup is complete. This incentivizes the purchase of one Apple product after another, leading to repeat sales.

Google is the only other company that offers something close to this. You are trying to build your own ecosystem, but the problem is that remove products from your line so often that the ecosystem is not consistent. For example, it recently removed the Next generation PixelBook due to poor sales. Because of moves like this, Google rarely has a truly up-to-date ecosystem; to integrate all your Google products, sometimes you have to buy outdated models. Technically, there is a Google ecosystem, but it is rarely “complete”.

It’s also worth noting that even if Google’s ecosystem becomes something, Apple will only have one real competitor. The rest of the big tech companies have completely given up on building ecosystems. Microsoft has left the smartphone game entirely, while Amazon only builds a few of the devices used in a typical ecosystem. So the worst case scenario for Apple is that it has to compete with Google, it’s not going to face an avalanche of competition that appears out of nowhere.

Finance and Valuation

Having analyzed Apple’s competitive position, we can now turn to its financials and valuation.

In the most recent quarter, Apple delivered:

  • $90 billion in revenue, up 8%.

  • $38 billion in gross profit, an increase of 8.2%.

  • $24.8 billion in operating income, an increase of 4.7%.

  • $20.72 billion in net income, an increase of 0.82%.

  • $1.29 in EPS, an increase of 3.2%.

  • $122 billion in full-year cash from operations, up 17%.

It was a pretty solid showing in terms of growth. In addition, profitability was healthy. Based on the above metrics, we get a gross margin of 42%, an EBIT margin of 27.5% and a net margin of 23%. A big win on all these metrics.

Apple’s balance sheet is less good than its quarterly performance. Based on the fourth quarter balance, a current ratio of 0.88 and a debt/equity ratio of 1.95 are obtained. Typically, you want the current ratio to be above 1 and the debt-to-equity ratio to be below 1, so Apple’s most important balance sheet metrics are a little less than ideal. That said, all of Apple’s debt combined is worth less than a year’s operating cash flows, so you can argue that asset-based solvency metrics aren’t as relevant here.

Apple Balance Sheet

Apple Balance Sheet (Apple)

Now, let’s move on to the valuation. According to Seeking Alpha Quant, Apple is listed on:

  • 23.7 times earnings.

  • 6.1 times sales.

  • 40 times the book value.

  • 19.7 times operating cash flows.

This is quite a mixed picture. The sales and book value ratios are very high, but the earnings and cash flow multiples are not. We would conclude that Apple is value rich, but not “insanely” based on multiples alone. Discounted cash flows present a different picture. Apple had $6.87 in free cash flow per share in the subsequent 12-month period. If you assume that Apple stops growing this year and discount its FCF to treasury yield (about 4%), you get an estimated terminal value of $171, which is higher than the current price. If he assumes that the cash flows grow at 5% per year and then stop growing after that, he obtains an estimated total fair value of $215. If you add a 1% risk premium to the return on treasury, you get $171 in fair value, the same as in the “no growth hereafter” scenario at a 4% discount rate. So, assuming interest rates don’t go TOO MUCH, Apple is worth buying today.

The great risk to take into account

As I showed earlier, Apple stock is basically undervalued in current economic conditions. However, it is somewhat vulnerable to rising interest rates. If the yield on treasury increased to 6%, Apple would need to grow much faster than 5% a year to make it worth buying. It is not conservative to simply assume that a large company will grow faster than 5% per year forever, recessions make it difficult to achieve 10% growth. Currently, Fed officials point to a 5.25% terminal fed funds rate. If the Treasury yield stays fairly close to the fed funds rate, then Apple will still be a buy, but if it goes higher, it won’t be as attractive. So if you are going to buy Apple, pay attention to the macro image. The stock is expensive enough to be vulnerable to monetary tightening.

Bottom line

Putting it all together, Apple stock looks to be a great value in 2022. It is certainly a comparatively good value by big tech standards. One of the few FAANG names that continues to deliver positive growth in earnings and cash flow, it really stands out. Just be careful not to chase the stock price higher and higher, because the ongoing monetary tightening weakens the thesis a bit. I personally would not be buying at prices above $171.

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