Apple is a great company, or the most valuable company in the world. It has a market capitalization of more than $2 trillion. But should we add it to our portfolio right now? Well, in this Apple stock analysis, we are going to take a look at some of its recent performance figures to decide.
Apple Stock Analysis: Business Overview
For completeness sake, let’s rundown quickly on the key revenue drivers for Apple.
Source: Apple Annual Report FY2020 / Products and Services Performance
You can see that the key business driver comes from its product sales, and mostly from its iPhone sales. This segment alone takes up about half of the company’s revenue.
And of course the Mac computers and iPad tablets as well.
Key Growth Segments
Wearables, Home and Accessories Segment
Here I want to highlight its Wearables, Home and Accessories segment. This segment is related to sales of AirPods, Apple TV, Apple Watch, HomePod, iPod touch and Apple-branded and third-party accessories.
You can observe that this segment is becoming increasingly significant. It registered a year-on-year growth of 41% from 2018 to 2019, and a further 25% growth from 2019 to 2020. For FY2020, the increase in net sales was attributed mainly to higher sales of AirPods and Apple Watch.
So, this segment is definitely a growth driver for Apple.
Next, I also want to highlight the Services segment. This segment is related to the company’s
1) Advertising Services,
2) AppleCare that takes care of technical support for its product repair and replacement,
3) Cloud Services that store customers’ content,
4) Digital Content that operates various platforms like App Store, and offers content subscription through Apple Arcade, Apple Music, Apple News, Apple TV and the more recent Apple Fitness, and finally,
5) Payment Services related to Apple Card and Apple Pay.
Observe that this segment still registers a pretty good growth rate of 16% in FY2020. For 2020, the net sales increase was due primarily to higher net sales from the App Store, advertising and cloud services.
Apart from the growth rates, this segment is becoming increasingly significant to the company’s bottom line.
Source: Apple Annual Report FY2020 / Gross Margin
While Apple’s Products segment is enjoying a good gross margin of more than 30%, its Services segment is recording more than 60% gross margin. In fact, the Services segment’s margin had been increasing over the past few years.
So, even though the Services segment makes up only about 20% to Apple’s revenue, it actually contributed about 34% to the company’s gross margin.
From here, you can see that these 2 segments are definitely something that the company will be focusing on in the coming years.
Apple Stock Analysis: iPhones, The Cash-Generating Machine
However, that’s not to discount the company’s strength in its product business, especially for its star product, the iPhones.
Source: Canalys / Worldwide smartphone shipments by vendor, top six, Q1 2018 to Q4 2020
Observe that Apple did not sell the most smartphones. For the full year of 2020, Apple shipped 207 million units, while Samsung shipped 256 million units.
Source: Counterpoint / Global Mobile Handset Operating Profit Share Trends
Yet, incredibly, in terms of profits, Apple has consistently captured a lion share of the mobile handset profit of more than 60% in the industry.
This signals a really strong competitive advantage the company has as a phone maker.
So, Apple’s iPhones will continue to generate good income and cash flow for the company. Apple will then be able to redeploy the resources to its R&D efforts, while developing its two key growth segments.
Apple Stock Analysis: Financial Performance FY2020
Now, let’s review quickly on the company’s financials.
Source: Apple Annual Report FY2020 / Consolidated Statements of Operations
Take a look at its consolidated income statement for fiscal year 2020, which ended on 26 September 2020.
Year-on-year revenue growth was 5.5%, while its earnings growth was about 10.4%. Again, the growth was driven by the higher net sales in the Services segment, as well as the Wearables, Home and Accessories segment.
Apple Stock Analysis: Financial Performance Q1 2021
Source: Apple Annual Report Q1 2021 / Condensed Consolidated Statements of Operations
On the other hand, Apple recorded an all-time high revenue of $111.4 billion in the first quarter of FY2021 that ended on 26 December 2020. This is 21% on a year-on-year basis. As for its quarterly earning per diluted share, it rose 35% to $1.68.
This was largely attributed to the launch of the new series of iPhone 12, as well as double-digit growth in each product category.
So from here we can say that Apple products still remain pretty sticky to its base of loyal customers.
But, this record-high quarterly revenue and earnings will be tapered down after the first quarter of FY2021. Because we have seen the trend historically that sales slowed down after the launch of new iPhones.
Apple Stock Analysis: Potential Upside
So the question is, what are the potential upsides for Apple?
Source: Statista / Iphone unit shipments as share of global smartphone shipments from third quarter 2007 to fourth quarter 2020
Well first thing is, Apple’s smartphone penetration is still hovering at around an average of 20%. So there will still be opportunity to capture more market share. A 3 – 5% year-on-year increase in revenue, like in FY2020, seems to be a reasonably good estimate for the next few years.
Source: Apple Annual Report Q1 2021 / Net Sales By Category
The second thing will be its other products and services category, which we continue to see strong momentum. They registered more than 20% growth in quarterly revenue for Q1 2021, compared to the same quarter last year.
But again, historically, year end sales are usually higher, due to holiday season shopping.
So for the full year, we would still estimate these other products and services segments to increase at a 15% growth rate collectively.
iPhone sales will continue to be the key driver, contributing about half to the company’s revenue. Therefore, we expect Apple’s revenue to grow at an overall growth rate of around 5-10% for the next few years.
Source: Stockrow / Apple Inc Issuance (Purchase) of Shares
The final thing I want to highlight here is that Apple had been repurchasing its share. And more aggressively so in the recent years.
The negative cash amount here represents the company’s spending to repurchase shares from the open market.
This will reduce the number of outstanding shares, and drive up shareholder’s value.
Meaning that even if Apple’s earnings in absolute amount doesn’t grow, by repurchasing and reducing the outstanding shares, it will increase the earnings per share value, thereby driving up its share price as well.
While we can’t be sure that the company will continue to repurchase shares in the future, we think that based on Apple’s communication and direction to create shareholders’ value, the company will continue to return to shareholders mostly through its share repurchase programs and a bit from its dividends at this point in time.
Apple Stock Analysis: Valuation
Therefore, based on the information we have on these existing businesses, Apple’s earnings should grow 10-15% in the next few years.
Source: Nasdaq / Apple Inc Yearly Earnings Forecast
In fact, we saw analysts’ projected Apple’s earnings to grow at an average compounded annual growth rate (CAGR) of 17% from $3.28 in 2020 to $5.33 in 2023. And I think this is very possible and close to our estimate of around 10-15% growth rates.
Let’s say we use the $5.33 earnings per share forecast, and use the same P/E ratio currently at around 33, it will translate to a target share price of $176.
From $120 to $176 over a 3 years period, it will translate to a 13.6% CAGR in terms of capital gain.
Apple Stock Analysis: Multiple Compression Risk
Source: YCharts / Apple PE Ratio
However, I want to highlight the risk of multiple compression here.
Observe that Apple’s P/E ratio has been hovering around 20 in the last few years. But recently it has surged to more than 30 and hitting 40 at some point in time.
This implies potentially some elements of overvaluation. But it could also be the fact that the market is pricing in the growth elements from its emerging Services and Wearables segments as discussed earlier, thereby giving the company a higher valuation.
But just to have a sense. Say, if the market revalues Apple to have a P/E of 25 a few years later. At the projected earnings per share of $5.33, it will translate to a target price of $133 three years later.
So, not a fantastic return per se to get in at the current share price range of around $120.
Well, this multiple compression risk may or may not happen, but something to keep in mind for investors.
Catalysts For Growth
Source: Apple Annual Report FY2020 / Consolidated Statements of Operations
On the other hand, we are not pricing in any potential catalyst that can fuel the company’s growth further.
The company has been spending billions of dollars in R&D and it’s still increasing in the recent years. Moreover, Apple has also been acquiring other companies to continue to diversify to other technologies.
We are not sure what the company is working on exactly in terms of newer innovations and technologies.
But any surprise elements, such as the augmented and virtual reality smart glasses or its rumored self-driving car that the company is developing, will definitely be catalysts to drive Apple’s share price higher.
To sum it up this Apple stock analysis, Apple is a great company to hold in the long run. Although it is not a steal given the current share price, I’m definitely tracking it closely on my watchlist. And prepare to add some of its shares if the market corrects.
It has a very strong competitive advantage not only in its iPhones and other hardware products. But also perhaps even more importantly, its ecosystem of operating systems in its computers and mobile phones. And its App stores, iCloud, digital content, and many other services that are all interlinked with one another.
Plus Apple’s brand, I think customers’ reliance and attachment to Apple products will sustain in the years to come.
Even if there’s any risk of short term corrections, its business is strong enough to recover from these short term shocks.
So, if you want to add some of its shares to your portfolio now, i think it will turn out fine in the long run. It’s just a matter of how much difference in the returns you can expect.
If you want to find out how we research and identify investment opportunities, remember to subscribe to our newsletter below, so that you can be informed once our next investing tip is out!
In the meantime, check out other insights and analyses that we have done.
Keep learning and happy investing. 🙂