Take a bite of AAPL?

Apple (AAPL) got investors worried.

While the company reported an excellent quarter, the warning for supply chain constraints potentially costing $8 billion was a bitter pill to swallow.

For all the doubts, Apple continues to perform well, expanding margins and revenues.

The most recent quarter reflected revenue growth tied to users switching from Androids to iPhones.

And the ecosystem is second to none.

Unsurprisingly, the stock is typically in the top five stock searches amongst financial pros, whether you look at large-cap stocks as a whole or technology companies.

Heck these days the two are almost synonymous.

But you can’t doubt Apple’s performance.

Source: Google Finance 

The one-year chart says it all. 

Expand it out to five years and Apple’s 323% return, as of April 2022, trounces upside in Facebook (33%), Amazon (166%), Netflix (21%), and Google (148%). 

Apple – the ideal stock for the long-term investor. It can fly high with the best of them, but stands at the top of the heap during relatively tumultuous times. 

In today’s edition of The Spill, we take a deep dive into Apple, asking if it remains one of the most sound long-term investments in tech and throughout the broad market. 

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Apple’s Business

Apple designs, manufactures, and markets consumer electronic devices, including iPhone, Mac, iPad, and Wearables such as Apple Watch, AirPods, and Beats Headphones. 

Additionally, the company operates a slate of Services, which includes digital content through the App Store, platforms such as Apple TV and Apple Music as well as Apple Care (protection programs for Apple devices) and Apple Cloud Services. 

Apple sells direct to consumers, businesses of all sizes, and public institutions.

The company reports its revenue by sales category and geography.

While iPhone sales make up the majority of total revenues, services continue to expand at the fastest pace of the segments.

That’s important because the Services segment delivers nearly twice the gross margins of products.

Financials

As we often discuss in The Juice, Apple represents the ideal ecosystem play. 

Despite a more recent slowdown, Apple continues to grow at an incredibly fast pace.

Revenues grew at just 8.59% in the latest quarter from the prior year. However, the 5-year average is 11.15%.

Plus, operating income grew at a 5-year average of 12.66% with net income’s 5-year average landing at 15.69%.

Taken together, this implies Apple’s either achieving economies of scale or cutting costs. Again, the growth in services plays a key factor in this as well.

Valuation

While Apple’s P/E ratio comes in high compared to pure hardware companies, at approximately 25x earnings, compared to FAANG stocks and Tesla, Apple looks like a bargain. 

For example, Amazon trades at roughly 60x earnings. Tesla at about 118x. Microsoft at 30x. 

Meantime, Apple’s prices-to-sales ratio comes in at just under 7x. 

Generally speaking, the lower the ratio the more undervalued investors consider a stock. P/S ratio simply represents how much you’d have to pay to buy one share of a stock compared to how much one share produces in revenue for a company. 

A major part of the Apple story – it’s a cash cow. 

The company is, obviously, free cash flow positive, at a formidable $105.8 billion over the last 12 months. Its debt-to-equity ratio stands at roughly 1.5X, meaning the money Apple owes to others is just 1.5X greater than its shareholders’ equity. 

That said, the current price to cash ratio sits at 22x which isn’t cheap, but not expensive either.

Apple pays a small dividend of $0.92 annually. It has raised its dividend for 9 consecutive years at 9.0% clip over the last five years

Additionally, the company allocates billions each year to share buybacks,

Our Opinion – 7/10

On a comparative basis to another FAANG stocks, Apple is fairly valued.

It’s not expected to see cash or earnings change in the next 12 months.

That said, we see long-term success as services become a larger proportion of revenues, helping improve margins and drive incremental growth.

Plus, the segment doesn’t rely on supply chains and is much more scalable.

Ideally, we’d like to see shares below $140. Anything near $120 would be delectable.