Apple’s share price dropped from a recent high of $230 to $207 after they released their Q4 financial results. Why was this so and should you be tapping on the dip in price to buy up this wonderful business?
Let’s establish first that this is a great company with tremendous economic moat. Apple has the following financial metrics based on the latest financial year number:
- Free Cash Flow / Revenue = 22%
- Net Margin = 22%
- Return on Equity (ROE)* = 45%
- Return on Assets (ROA) = 16%
* Apple has been engaged in share buybacks and thus ROE is unusually high
The company has a revenue CAGR of 22.5% and EPS CAGR of 27.9% over the last 10 years. In this aspect, I rather you look at the last 3 years as growth is slowing but that will not be the crux of this discussion.
If you can find another company with nearly as close to this financial performance, you probably have found another gem and the next thing to do is to see if you can buy it at a discount.
The 2018 EPS reached a high of $11.91, a year-on-year growth of 29% but iPhone unit sales compared to the previous year hardly increased. Iphone sales still contributes to 60% of the total revenue and that’s why its performance matters, and matters a lot. From this, we know that the 2018 revenue and earnings growth is effectively boosted by increase in iPhone unit prices. Services revenue is growing but not tremendously. Apple also announced that it is going to stop reporting unit sales number and analysts are not pleased as they feel Apple is trying to hide something and not being transparent.
Apple is a CASH machine but is it still a growth company? I don’t think so. We should however note that it is dishing out dividends and doing share buybacks.
With price of $207 currently, is it undervalued? There lies the challenge of the art of valuation. If I am not wrong, Warren Buffett has 40% of his stock portfolio in Apple (I can’t get the average purchase price though). He sees something of huge value in this company. And part of why this is so is shown in the customer loyalty Apple enjoys. 92% of iPhone owners will buy another iPhone. I am an iPhone user myself, and not just that, my entire family uses iPhones, Macbooks, iPads, Apple TVs. The ecosystem is a very powerful one.
There are probably 800 million active iPhone users out there and Apple sells about 200 million new iPhones a year. I read from somewhere the average duration for an iPhone user to upgrade his/her existing phone is about 2.8 years. Can you interpret something from here?
Just for academic computational exercise, if the growth rate slows to 5% per annum long term, what’s the intrinsic value we can compute for Apple. I used a discount rate of 7% and computed $155 per share.
There are still significant risks if iPhone sales were to start to decline, and this could be due to economic downturn, or may be China market not responding well to new iPhones going forward or some other smart phones gaining better traction. Among the FAANG stocks, Apple has the lowest PE accorded by the market, this could be one reason.
Well, I don’t think I would be buying into Apple at current price of $207 but from $175 I will do technical buy and nearer $155, I will start to accumulate for long term. I was wrong when I walked away from Apple when it was traded at $100, and I may be wrong again?
I personally like Facebook better.
If you want to understand the possible reason why Warren Buffett likes Apple, may be this video will help.
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