Would You Like a Slice of AAPL Pie?

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Apple (AAPL) makes up 6.59% of the S&P 500 and 12.58% of the Nasdaq 100.

It is the largest component of both major indexes and one of the most valuable companies in the world.

Hopefully, you aren’t shocked that it’s the number one search in the last month by financial pros and retail investors.

Wall Street braced itself for the quarterly earnings, fearing inflationary pressures, a sales slowdown, and supply chain problems.

Somehow, Tim Cook and his team managed to beat earnings estimates by $0.05 with revenues in-line with expectations of a year-over-year increase of 1.9%.

A few analysts take the single digit increase as a troubling sign considering the 33% growth posted in 2021.

Yet, the question isn’t so much what Apple did this quarter, but what its future holds.

And that’s what we aim to find out.

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Apple’s Business

If you don’t know who Apple is…well then shame on you.

Kids today take for granted that the iPhone was introduced back in 2007, not all that long ago.

Since then, the company has grown tremendously in the mobile space, while adding incredible value through services.

Currently, services account for only 3.6% of revenues, but are growing at a much faster pace than products.

THat’s good news for shareholders as the services segment boasts a 65.4% gross margin compared to 34.5% for products.

Apple’s ecosystem integrates its products and services, creating a deeper and richer customer experience.

Expanding from traditional iPhones and Macs, the company offers Apple Pay, Apple Music, Apple TV with original content, and much more.

While the PC market remains highly competitive, Apple’s mobile device dominance has helped it keep a loyal customer base around the globe.

Geographically, sales in the Americas, Europe, China, Japan, and the rest of Asia Pacific account for 41.9%, 24.4%, 7.8%, and 7.2% respectively.

In the near future, Apple faces several headwinds including a stronger dollar, and more importantly, supply constraints that will cost the company between $4-$8 billion depending on China’s lockdowns.

Financials

Apple is a cash cow.

On an operational cash flow basis, the company generates $118 billion per year. When you incorporate capital expenditures of around $10 billion per year, you’re still left with $108 billion in free cash flow.

That’s extraordinary.

Apple’s business continues to improve almost every year.

Gross margins are at the highest they’ve ever been while operating margins waver between its best ever in Q2 to not so great in this latest quarter.

The company does carry $94.7 billion in long-term debt and another $53.6 billion in non-current liabilities. Yet, with a current ratio of 1.07x, management keeps more than enough cash on hand to handle any problems that might arise.

It’s also worth point out the company continues to pay a growing dividend while buying back stock.

Valuation

At first glance, it might appear that Apple is expensive with P/E ratios over 26x compared to the sector average of 19x for Non-GAAP and 25.6x for GAAP. Even the price to cash flow of 22.14x and price to sales of 6.81x say the stock is expensive.

However, investors are paying a premium for a company that can, and continues to, provide steady cash flow.

Take a look at the company compared to some of the other big names out there.

When we put Apple up against Microsoft (MSFT) or Amazon (AMZN), shares are priced cheaper on nearly every meaningful metric.

Only Meta (META) comes in substantially cheaper, and that’s due to uncertain growth and advertising.

Growth

Here is where things get interesting.

Apple’s growth isn’t as high as some of the others. Even its forward revenue growth is lower than Meta’s.

And Apple’s cash flow growth is a bit lower than Meta’s.

Our Opinion – 6/10

Apple is a fantastic company. But from a value standpoint, it’s too expensive.

The good news is that we’ve reaffirmed our views that Meta is incredibly cheap and a 10/10 pick.