Summary
Apple is a SELL. Apple is an amazing company that executes its business at a top level. The sheer size of the company limits the opportunity for growth and therefore limits our opportunity for return on investment. This coupled with the premium it trades at leaves no room for multiple expansion only downside for multiple contraction. We would not be able to achieve our goal of 15% return yoy with Apple.
Understanding Apple as a Business
Apple is the largest company in the world. Apple Inc. (AAPL) operates through a business model that focuses on designing, manufacturing, and selling consumer electronics, software, and services. Apple is renowned for its innovative products and a seamless ecosystem that includes both hardware and software, making it a leader in the technology industry. Here’s an overview of Apple’s revenue streams:
iPhone: The iPhone is Apple’s flagship product and a significant revenue driver. It accounts for a substantial portion of Apple’s revenue. Apple releases new iPhone models annually, generating income through device sales, services, and accessories related to the iPhone ecosystem.
Services: Apple’s services segment has become a critical component of its business. This includes revenue from the App Store, Apple Music, Apple TV+, iCloud, AppleCare, and other services. With a growing subscriber base, services have been steadily increasing their share of Apple’s revenue.
Mac: The Mac product line consists of personal computers, including desktops and laptops. It targets both consumers and professionals. Macs run Apple’s proprietary macOS operating system.
iPad: The iPad is Apple’s line of tablets, catering to various user segments. These devices run on the iPadOS. Sales are generated from the hardware, software, and accessories associated with the iPad.
Wearables, Home, and Accessories: This segment includes the Apple Watch, AirPods, HomePod, and various other accessories. Wearables, in particular, have gained popularity and have contributed to revenue growth.
Other Products: This category consists of various products like the iPod touch, Apple TV, and third-party accessories. While these products represent a smaller portion of Apple’s revenue, they still contribute to the overall business.
License and Other Services: This includes income from licensing Apple’s intellectual property, such as patents and software. Additionally, it encompasses other service revenues not included in the primary services segment. A major part of this segment is the royalty they charge for companies to put their apps in the Apple app store. They take a cut of every purchase made on every app from the app store.
Apple is incredible at growing and coming up with new products. A large part of the potential growth in the future is AI and the meta verse. We have seen large amounts of investment by tech companies into the AI landscape. Apple will be developing their own AI models to grow their business. They are also attempting to compete with Facebook to develop the meta verse. They are developing virtual reality head gear in an attempt to compete with Facebook’s Meta quest product. These two markets are enormous growth opportunities in the tech sphere and Apple is one of the top executors on developing technology.
Valuation Metrics
The finviz stock screener is a great tool to see performance metrics that are important to assess a company’s valuation.
Apple is the largest company in the world valued at $2.8 Trillion. They currently trade at a price to earnings ratio of 30. Their earnings are projected to grow at a 7% annualized return for the next 5 years. This earnings valuation of earnings multiple compared to the projected growth rate could project Apple as overvalued.
FAST Graphs Analysis
The FAST Graphs software is a powerful tool used to analyze the earnings of a company compared to the share price. The black line is share price and the orange line is earnings multiplied by 15. The blue line is the average PE ratio over the time frame plotted.
Apple has always traded at a premium earnings multiple and is currently trading at a level higher than the average multiple. The conclusion you can draw from this graph is that Apple looks slightly over valued compared to the usual earnings multiple it trades at however it is close.
Bull Thesis
Apple is an amazing tech company with an ability to grow earnings. It deserves the premium it trades at because it has always delivered amazing products and amazing company performance. The new developments in terms of AI and the meta verse give this company a chance to keep growing even from its already massive size. This is the premier company in the world and it will keep performing at a top level. The demand for iPhones has not wavered and they continue to come out with new products that people want.
Bear Thesis
While Apple is an amazing company the room for growth is limited. The company is already enormous, for it to grow and provide the returns we are looking for in this portfolio it would need to grow by an enormous amount. While the metaverse and AI are going to be large ventures for this company the effect they have on the earnings won’t be as large because Apple already earns so much money. For a near $3 trillion company to grow 15% it would need to add an additional $450 Billion every year. In sheer numbers terms that is too large of additions needing to be made to think that high growth is achievable. Since Apple already trades at a premium there is no upside for multiple expansion only downside for multiple contraction. While Apple is a great company there is no opportunity for this company to provide the returns we are looking for in this portfolio.
Rating
Basil Leaf Capital rates Apple a SELL. Apple is an amazing company that executes its business at a high level. At its current valuation we cannot see how this company returns the amount we would like to see in our portfolio. There is no room for multiple expansion and because of its size the growth opportunity is limited. This is a high quality company that is the largest holding in the index. Since our goal is to outperform the index a large part of that is outperforming Apple in terms of return on investment. If something happens and Apple’s valuation stops trading at such a high premium and you can purchase this company for a lower price then it could be a great opportunity to obtain a great company at a fair price. However since that is not the case now we must maintain our sell rating.