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Everybody is talking about how Apple (AAPL, Market Cap $2.3 trillion) is testing its ATHs from early September. On September 2nd, AAPL traded as high as $137.98 before closing at $131.40. Yesterday (Tuesday), AAPL traded as high as $138.79 before closing at $134.87. Investors are asking: Is AAPL going to break out of this almost 4 month sideways range? (Chart Source: Chess Twitter, Tuesday December 29, 12:09pm PST).
Price is what the technicians are, not incorrectly, concerned with. But there are also fundamentals. Investors are willing to pay ~$135 for AAPL right now but what are the shares worth? Today seems like a good time to do a deep dive into AAPL’s business and fundamentals.
AAPL had revenue of almost $275 billion in its fiscal year 2020 ended Sept 26, 2020 – up 5.5% from FY19. iPhone sales, however, which made up half of AAPL’s revenue in its fiscal year, were -3.2%. In other words, AAPL’s core product actually had a down year in terms of revenue. Why? Because the smartphone business is mature. AAPL came out with the iPhone in 2007 and everybody who wants one and can afford one already has one. This is a stock that depends tremendously on a single product and that product is mature and no longer growing. Put another way: AAPL is no longer a growth stock.
AAPL’s second largest segment is Services which had revenue of almost $54 billion in FY20 – up 16% from FY19. Services is a growth business for AAPL, but while the iPhone makes up 50% of revenue, Services makes up about 20%. It’s important but pales in comparison to the iPhone.
The correct way to value AAPL then, really, would be a sum of the parts analysis. You’d give a value to each of its five major segments: iPhone, Services, Wearables, Home and Accessories, iMac and iPad. Unfortunately, AAPL only breaks out revenue for these segments, not operating income, which makes doing a sum of the parts analysis more difficult. However, it still stands to reason that the iPhone business, mature and declining, deserves a lower earnings multiple than the Services businesses, growing at 16%. We’ll take that into consideration in our valuation of AAPL.
AAPL earned $3.29/share in its FY20. It had net cash of $4.60/share on Sept 26, 2020. At yesterday’s (Tuesday) closing price, that puts a 34x multiple on AAPL earnings after backing out the net cash. That is way, way too high for a business whose core product is mature and declining. The iPhone business as well as the rest of the hardware businesses (Wearables, Home and Accessories, iMac and iPad) deserve about a 12x earnings multiple IMO. Services, growing at 16%, deserves ~20x IMO. Generously combining the two, we’ll say AAPL earnings as a whole deserve a 15x multiple, not 34x.
Let’s do the math. If AAPL earned $3.29 in FY20, those earnings are worth $49.35. Add in its $4.60 in net cash and you get ~$54. I believe that is a pretty good estimate of AAPL’s intrinsic value which means that AAPL shares would have to fall 60% from yesterday’s closing price to reach fair value. I’m not saying AAPL isn’t going to breakout. I’m saying the stock is massively overvalued. It’s worth knowing that the most important stock in the world, with a $2.3 trillion market cap, trading at $135/share is probably only worth ~$54. Gives you a window into the insanity of this market. Don’t let anybody tell you this isn’t a bubble.