The last time I covered Apple, it was struggling with iPhone sales growth and PE valuation awarded by the market was around 15. Currently the trailing PE is a whopping 33.4 while the forward PE is about 27.5. What has changed?
Now that the share price has dropped by 22% from its peak, is it an opportunity for us to own this gem?
We first look at the key product lines Apple has:
- iPhone (44.3%)
- Mac (11.9%)
- iPad (11.0%)
- Wearables (10.8%)
- Services (22.0%)
Apple is now less reliant on iPhone sales while the higher-growth wearables together with Services now constitute 32.8% of overall revenue. The Wearables like Apple Watch and Airpod were launched under Tim Cook’s leadership and seem to be catching on well. Services are also growing nicely.
For the quarter ended 27 June 2020, the result is actually impressive given the economic calamity caused by the Covid-19 pandemic.
Geographically, Apple operates in the following regions:
- Americas (45.3%)
- Europe (23.8%)
- Greater China (15.6%)
- Japan (8.3%)
- Rest of AP (7.0%)
Let’s look at the Profitability analysis for years 2010 to 2019.
How about the balance sheet?
The cash hoard that Apple holds plus the gigantic Free Cash Flow of about $60 billion generated every year is allowing Apple to continue doing share buy backs, though it is a separate debate whether it is wise to execute share buy backs when the share price is overvalued.
In order to calculate the intrinsic value of Apple using the Discounted Cashflow method, we first determine the eps growth rate of Apple. From the latest Quarter results:
We do not know if 18% growth is going to be sustainable, but let’s use this as the upper limit.
The current price of $110 is definitely still overvalued while to be more prudent, I would probably determine Apple’s intrinsic value to be around $75 to $80 even if I do not require any margin of safety. The current low interest environment may also impact the discount rate that we should use, lowering it to 8 or 9%, so net net $80 to $90 would be a great price to buy Apple.
Let’s look at Apple’s price chart:
Trend seems to indicate more downward movement, however there is a good support level at $100. Apple is also expected to be announcing their line-up of 5G iPhone 12 phones in October, so there will be hype around it.
Personally, I have my shorter-term trading plans using Options while if the price continues to slide, I will start accumulating the shares slowly.
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