Proprietary Data Insights
Financial Pros Mega-Cap Tech Stock Searches in the Last Month
Add AAPL to Your Portfolio, Just Not Right Now
Financial pros made Apple (AAPL) their top mega-cap search this past month and their second-most searched stock overall.
Apple reported a lower-than-expected quarterly profit for the first time since 2016.
But instead of punishing the stock, investors made it rally after its Q1 2023 earnings release.
This divergence has some believing we’re in a new bull market.
Apple is just 14% below its 52-week highs, rallying 19% year to date. It’s one of the best-performing Nasdaq stocks.
For example, Amazon (AMZN), Tesla (TSLA), and Meta Platforms (META) are all down around 50% from their 2021 highs.
The Fed’s less hawkish tone makes investors hungry again for mega-cap tech stocks. And according to the latest data from our proprietary sentiment indicator, Trackstar, financial pros want a piece of Apple.
Despite its outperformance, Apple still offers a compelling story and value, which should make it part of everyone’s portfolio.
Apple cofounder Steve Jobs built a company that’s been through trials and tribulations to become what it is today.
AAPL boasts the largest market cap of any publicly traded company in the U.S., at $2.39 billion. Most of its money comes from iPhone, iPad, Mac, and other hardware sales.
But its services and digital content through its App Store, Apple Music, and iCloud have quickly become a significant part of the company’s sales. It also earns income from licensing and other services.
Despite its massive size and multiple sources of revenue, the company keeps it simple, breaking its net sales into two categories: Products and Services.
As we said, Apple reported a lower-than-expected quarterly profit for the first time since 2016 when it released its Q1 2023 earnings report early this month. Breaking it down:
The bright spot from AAPL’s Q1 2023 earnings was Services revenues rose 6.4% to $20.7 billion, a company record.
While earnings were disappointing, shares rallied the following day.
Some speculate it’s because the company expects Q2 revenue growth to be higher than the previous year’s. Others think it was due to the Fed’s less hawkish tone.
Only time will tell who was right.
Source: Stock Analysis
Apple has a strong supply chain and distribution network, allowing it to efficiently and effectively distribute its products worldwide. Its profit margins have risen from 21.2% in 2016 to 25.3% in 2022. In addition, its free-cash-flow margins have improved from 24.8% in 2016 to 28.3% in 2022.
Warren Buffett’s Berkshire Hathaway is heavy on Apple. AAPL makes up 40.1% of its portfolio. When Buffett first got involved in 2016, Apple paid an annual dividend of $0.545. Today, it pays an annual dividend of $1.077.
AAPL is flush with cash, over $51.3 billion. In addition, it generates $109.1 billion in cash from its operations.
Source: Seeking Alpha
Apple trades at a P/E GAAP ratio of 25.8x, slightly above its five-year average of 24.5x. While it’s relatively cheaper than other mega-cap tech stocks like AMZN and Microsoft (MSFT), it trades at a higher multiple than Alphabet (GOOGL) and META.
Its price-to-sales ratio of 6.3x is notably higher than its five-year average of 5.6x. But other than MSFT at 9.4x, its peers trade at lower price-to-sales ratios, with AMZN at 2.4x, GOOGL at 1.2x, and META at 1.8x.
Moreover, Apple’s price-to-book ratio of 42.4x is historically high. Its five-year average is 23.9x. Meanwhile, MSFT is at 10.4x, AMZN is at 7.2x, GOOGL is at 5.2x, and META is at 3.9x.
Apple does look slightly more attractive from a valuation perspective when you compare its price-to-cash flow of 21.9x to MSFT at 22.7x and AMZN at 22.4x. But it’s still higher than GOOGL at 14.4x and META at 9.6x.
Investors are willing to pay a premium for Apple for many reasons, including strong brand and customer loyalty, effective marketing, a diversified product line, high profits, and tons of cash from operations.
Source: Seeking Alpha
While Apple’s valuation isn’t necessarily attractive, the company stands out in the profitability category. Its net income margin of 24.6% is significantly higher than AMZN at -0.5%, META at 19.9%, and GOOGL at 21.2%. Only MSFT at 33.1% beats AAPL.
Apple’s EBIT margin of 29.4% is stellar. While it’s not as strong as MSFT at 40.9%, it’s higher than AMZN at 2.4%, GOOGL at 26.5%, and META at 28.8%.
Notably, AAPL is the only mega-cap tech company with a triple-digit return on equity at 147.9%. MSFT’s is 39.3%, AMZN’s is -1.9%, GOOGL’s is 23.6%, and META’s is 18.5%.
Source: Seeking Alpha
Mega-cap tech stocks struggled in 2022, partly because they had trouble growing revenues. But despite a challenging macro environment, AAPL grew revenues 2.4%, which is better than META at -1.1%, but not as strong as MSFT at 10.4%, AMZN at 9.4%, and GOOGL at 9.8%.
AAPL’s EPS growth of -2.4% was significantly better than MSFT at -4.2%, AMZN at NM (not meaningful), GOOGL at -18.8%, and META at -37.6%.
Our Opinion 7/10
Apple is a highly profitable company with a competent management team.
But the latest earnings report was a disappointment.
We believe AAPL rallied on the Fed’s less hawkish tone. Apple’s current valuation is high, and we wouldn’t buy at these levels.
AAPL currently trades at nearly $152. We’d hold off on buying until it dips back down to $135 to $140.
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