Introduction
Apple holds the distinction, among many others, of being the most widely written about and talked about company on the planet. Some of what is written is factual, and those are the offerings that I personally appreciate and look for. On the other hand, high profile Apple (AAPL) has both enthusiastic fans and equally as enthusiastic critics. Consequently, much of what is written about Apple is based on opinion and even strong emotion context.
This last statement is perhaps understandable due to the emotional makeup and nature of human beings. For example, it is quite common for people to love an underdog, and there was a time in Apple’s storied history when it held the role of underdog in the technology sector. In contrast, in more recent times Apple has assumed the role of the entrenched technology giant as it has become the largest public corporation by market capitalization. There are many that believe that Apple is on its way to becoming the first trillion dollar market capitalization company in history.
Regardless of your opinion about Apple, the historical fundamental numbers underpinning the company are facts that cannot be debated, and I contend should not be overlooked. Therefore, my objective with this offering is to take a hard look at Apple by the numbers, with an attempt to be as devoid of opinion as humanly possible. When investing for the future, it is also undeniable that an opinion must be formed. The future is unknowable, and as such, contains uncertainty. However, I’ve always believed that opinions formed based on facts more often than not prove superior to those based on emotion.
Apple’s Businesses
Moreover, since Apple is so widely written about and is such a high profile company, I will not be directly discussing Apple’s management, technologies, technological prowess or recent innovations. I’m sure that most of you are quite familiar with what Apple generally does. Furthermore, there are many writers that are far more knowledgeable and experienced about technology and Apple’s position in that space. On the other hand, for those of you that are interested in knowing more about Apple’s current product offerings, I offer the following links to recent articles that I personally found contained valuable insights. However, I will point out that these articles contain a heavy dose of opinion, as well as facts.
Additionally, for those readers interested in a more factual in-depth look at Apple’s businesses, I include the following long business description courtesy of S&P Capital IQ. This next section can be read thoroughly, or utilized as a reference depending on each of your interests. In the spirit of this article, it is primarily factual:
“Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, watches, and portable digital music players. The company sells various related software, services, accessories, networking solutions, and third-party digital content and applications.
The company also sells and delivers digital content and applications through the iTunes Store, App Store, iBooks Store, and Mac App Store. In addition, the company sells various third-party iPhone, iPad, Mac and iPod compatible products, including application software, and various accessories, through its online and retail stores. The company sells to consumers; small and mid-sized businesses (SMB); and education, enterprise, and government customers.
Products
The company’s products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud, Apple Watch, Apple Pay, and various accessory, service and support offerings.
iPhone
iPhone is the company’s line of smartphones that combines a phone, music player and Internet device in one product, and is based on the company’s iOS Multi-Touch operating system. iPhone has an integrated photo and video camera and photo library app, and on qualifying devices, also includes Siri, a voice activated intelligent assistant. iPhone works with the iTunes Store, the App Store and iBooks Store for purchasing, organizing, and playing music, movies, TV shows, podcasts, books, and apps.
iPhone is compatible with both Mac and Windows personal computers and the company’s iCloud services, which provide synchronization of mail, contacts, calendars, apps, music, photos, documents, and more across users’ devices. The company offers iPhone 6 and iPhone 6 Plus that feature larger 4.7-inch and 5.5-inch Retina HD displays and support for Apple Pay.
iPad
iPad is the company’s line of multi-purpose tablets based on the company’s iOS Multi-Touch operating system, which includes iPad Air and iPad mini. iPad has an integrated photo and video camera and photo library app, and on qualifying devices, also includes Siri. iPad works with the iTunes Store, the iBooks Store and the App Store for purchasing, organizing and playing music, movies, TV shows, podcasts, books and apps. The company offers iPad Air 2 and iPad mini 3 that feature a Retina display, Touch ID and support for Apple Pay.
Mac
Mac is the company’s line of desktop and portable personal computers. Macs feature Intel microprocessors, the OS X operating system and include Mail, Safari Web browser, Messages, Calendar, Reminders, Contacts and the iLife apps. The company’s iWork apps are also available as free downloads with all new Macs. The company’s desktop computers include iMac, Mac Pro and Mac mini. The company’s portable computers include MacBook Pro, MacBook Pro with Retina display and MacBook Air. The company offers the 27-inch iMac with Retina 5K display with improved performance; and updated the Mac mini.
iPod
The company’s iPod line of portable digital music and media players includes iPod touch, iPod nano, and iPod shuffle. All iPods work with iTunes to purchase and synchronize content. iPod touch, based on the company’s iOS Multi-Touch operating system, is a flash-memory-based iPod with an integrated photo and video camera and photo library app, and also includes Siri. iPod touch works with the iTunes Store, the App Store and the iBooks Store for purchasing and playing music, movies, TV shows, podcasts, books and apps. iPod touch is compatible with both Mac and Windows personal computers and the company’s iCloud services.
iTunes and the iTunes Store
The company’s iTunes app, available for iOS devices, Mac and Windows personal computers and Apple TV, keeps users’ music, movies and TV shows organized in one place. iTunes is integrated with the iTunes Store, the App Store, the iBooks Store, iTunes U and iTunes Radio. The iTunes Store allows customers to purchase and download music and TV shows, rent or purchase movies and download free Podcasts. The App Store allows customers to discover and download apps and purchase in-app content. The iBooks Store features e-books from major and independent publishers. iTunes U allows users to download free lectures and videos from universities, museums, and other institutions. The company’s subsidiary, Beats Music, LLC, offers a subscription streaming music service that offers a curated listening experience and complements the company’s other music services and offerings.
Mac App Store
The Mac App Store allows customers to discover, download and install Mac applications. The Mac App Store offers applications in education, games, graphics and design, lifestyle, productivity, utilities and other categories. The company’s OS X operating system software and its iLife, iWork and other application software titles are also available on the Mac App Store.
iCloud
iCloud is the company’s cloud service, which stores music, photos, applications, contacts, calendars, mail, documents and more, keeping them up-to-date and available to multiple iOS devices, Mac and Windows personal computers and Apple TV. iCloud services include iTunes in the Cloud, iCloud Drive, iCloud Photo Sharing, Family Sharing, Find My iPhone, iPad or Mac and iCloud Backup for iOS devices.
Apple Pay
The company offers Apple Pay in the U.S., a new service aimed at making mobile payments easy, secure and private. Apple Pay works with iPhone 6, iPhone 6 Plus, iPad Air 2, and iPad mini 3.
Operating System Software
iOS
iOS is the company’s Multi-Touch operating system that serves as the foundation for iOS devices. Apps delivered with iOS for qualifying devices include Safari Web browser, FaceTime video calling, Maps, Mail, Contacts, Calendar, Clock, Weather, Calculator, Notes, Reminders, Stocks, Compass and Messages. Devices running iOS are compatible with both Mac and Windows personal computers and the company’s iCloud services. The company offers iOS 8, which provides new features for Messages and Photos, predictive typing for the company’s QuickType keyboard and a new Health app. iOS 8 also introduced Family Sharing, which enables sharing of purchases, photos and calendars within the same household.
OS X
OS X, the company’s Mac operating system, is built on an open-source UNIX-based foundation and provides an intuitive and integrated computer experience. OS X Yosemite is the eleventh major release of OS X. Support for iCloud is built into OS X so users can access content and information from their Macs, their iOS devices and other supported devices and access downloaded content and apps from the iTunes Store. Apps delivered with OS X include Mail, Safari Web browser, Messages, Calendar, Reminders, Contacts, Maps, iBooks and the iLife apps. OS X Yosemite incorporates additional continuity features, including Handoff, which allows users to start an activity on one Mac or iOS device and pass it to another Mac or iOS device.
Application Software
iLife
iLife for Mac is the company’s consumer-oriented digital lifestyle software application suite included with all Mac computers. iLife features iPhoto, a digital photo application for storing, viewing, editing and sharing photos; iMovie, a digital video editing application; and GarageBand, a music creation application that allows users to play, record and create music. The company also has Multi-Touch versions of these iLife applications designed primarily for use on iOS devices.
iWork
iWork for Mac is the company’s integrated productivity suite designed to help users create, present and publish documents, presentations and spreadsheets. iWork includes Pages for word processing and page layout, Keynote for presentations and Numbers for spreadsheets. The company also has iOS Multi-Touch versions of each iWork application designed specifically for use on iOS devices.
Other Application Software
The company also sells other application software, including its professional line of applications, such as Final Cut Pro, Logic Pro X, and its FileMaker Pro database software.
Accessories
The company sells various Apple-branded and third-party Mac-compatible and iOS-compatible accessories, including Apple TV, headphones, cases, displays, storage devices and various other connectivity and computing products and supplies. The company’s subsidiary, Beats Electronics, LLC, makes Beats headphones, speakers, and audio software.
Apple TV
Apple TV connects to consumers’ high definition TVs and enables them to access iTunes content directly for streaming HD video, playing music and viewing photos. Content from iTunes Radio, Beats Music and other media services, including Netflix, YouTube, Flickr, Hulu Plus, Vevo, MLB, NBA and NHL is available on Apple TV.
Apple Watch
Apple Watch is a personal electronic device that combines new precision watch technology with an iOS-based user interface created specifically for a smaller device. Apple Watch features Digital Crown, a navigation tool that allows users to scroll, zoom and navigate. The company offers Apple Watch, Apple Watch Sport, and Apple Watch Edition collections.
iOS and Mac Developer Programs
The company’s iOS and Mac Developer Programs support app developers with the development, testing and distribution of iOS and Mac apps through the App Store and the Mac App Store. Development tools included with the company’s Developer Programs include Xcode, the company’s integrated development environment for creating apps for iOS devices and Mac. Xcode includes project management tools; analysis tools to collect, display and compare app performance data; simulation tools to locally run, test and debug apps; tools to simplify the design and development of user interfaces; Swift, the company’s new programming language for both iOS and OS X; and the software development kits for iOS and OS X.
The company’s Developer Programs also provide access to multiple development resources, including the company’s Developer Forums, extensive technical documentation and sample code. The company’s Developer Programs also provide developers with access tools and information for submitting their apps to the App Store and the Mac App Store.
Product Support and Services
AppleCare offers a range of support options for the company’s customers. These include assistance that is built into software products, printed and electronic product manuals and online support, including product information, as well as technical assistance, the AppleCare Protection Plan (APP) and the AppleCare+ Protection Plan (AC+). APP is a fee-based service that includes two to three years of phone support, hardware repairs and dedicated Web-based support resources. AC+ is a fee-based service available in certain countries for iPhone and iPad. AC+ offers additional coverage under some circumstances for instances of accidental damage in addition to the services offered by APP.
Markets and Distribution
The company sells its products and resells third-party products in most of its major markets directly to consumers and SMBs through its retail and online stores and its direct sales force. The company also employs various indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers, and value-added resellers.
Business Strategy
The company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software and services to provide its customers products and solutions with innovative design, superior ease-of-use and seamless integration. The company’s strategy also includes building and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience.
Research and Development
The company’s research and development expenses included $6.0 billion in 2014.
Seasonality
The company has historically experienced higher net sales in its first quarter (year ended September 2014) compared to other quarters in its year due in part to seasonal holiday demand.
Significant Events
In April 2015, SunPower Corporation’s China joint venture partnered with the company to provide solar power to the environmentally-preserved ABA Region.
History
Apple Inc. was founded in 1977. The company was incorporated in the state of California in 1977.”
Apple By The Numbers
As I present and review Apple’s business by the numbers I will utilize select FUN Graphs depicting some of the company’s more noteworthy fundamental underlying numbers. As subscribers to MisterValuation you each have access to the complete set of fundamental metrics through your included subscription to F.A.S.T. Graphs™. Consequently, a secondary objective of this exercise is to familiarize you with this powerful research tool that is included with your subscriptions.
In the Analyze-Out-Loud video included in this presentation, I will run through my analysis of Apple based on the earnings and price correlated F.A.S.T. Graphs™. In addition to covering the historical valuation that the market has applied to Apple’s stock, and its current valuation, I will be simultaneously sharing how I personally utilize F.A.S.T. Graphs™ as the first step in a more comprehensive research effort on any company.
With my first graphic I provide a snapshot of some important balance sheet metrics on Apple. These include assets per share (atps), common equity per share or book value (ceps), debt long-term per share (dltps), total debt per share (dtps) and invested capital per share (icaptps). Clearly, Apple has a strong and healthy balance sheet. (Note: To review the entire balance sheet follow the link to F.A.S.T. Graphs™ on the site and select FUN Graphs.)
With these next set of graphics, I review the business strength and health of Apple. It is interesting to note that much of Apple’s most powerful historical growth coincides with the return of their iconic but deceased leader Steve Jobs. I penned an article on October 6, 2011 just after Steve Jobs passed away found here that you might find interesting, but more importantly, has relevance to this current offering.
Revenue growth has been incredibly strong since fiscal year 2002. Although due to Apple’s current size, it is logical to assume that the rate of change of revenue growth will slow. However, it is also reasonable to assume that it can, and will, continue to grow at above-average rates over the next 3 to 5 years or beyond. I will discuss that in the Analyze-Out-Loud video included.
Apple is one of the most profitable companies in the technology sector as evidenced by the following graphic depicting gross profit margin (gpm) and net profit margin (npm). Although both have fallen modestly in recent years, Apple remains one of the most profitable companies in the entire technology sector.
The following snapshot of Apple’s cash flow statement provides evidence that the probability remains high for Apple to continue as a highly profitable enterprise going forward. The company’s prodigious generation of cash flow per share (cflps) supports continued investment in the company’s future growth (capital expenditures per share capxps) and the company’s levered free cash flow (lfcflps) more than adequately supports the company’s ability to return capital to shareholders through dividends (dvpps) without jeopardizing future above-average growth.
One area where some investors have expressed concern is with Apple’s recent addition of debt. The following graphic reviews Apple’s long-term debt to capital (ltdc) and long-term debt to equity (ltde). A recent article found here did a great job discussing the pros and cons of Apple’s recent debt initiatives. I highly recommend that you take the time to review it.
Lastly, and in the spirit of this website, I turn to looking at Apple based on valuation. The primary focal point here is to ask and answer the question is Apple fairly valued today? I would like to interject that Apple is obviously faced with the law of large numbers due to its current size. This is important because it should be acknowledged that it would be unreasonable to expect Apple to continue growing in the future at its historical rates. However, I do not believe it is unreasonable to believe that Apple will continue to grow at significantly above-average rates going forward. But certainly, not at the historical levels they achieved when the company was much smaller.
The first valuation metric I offer is Apple’s current price to sales ratio (ps). Apple’s current price to sales ratio of approximately 3.35 is well within its normal range over the past decade or so. As an interesting aside, Apple’s price to sales ratio had significantly improved during the Steve Jobs’ return era, and has moderately fallen since Tim Cook took the reins. However, I believe some of that is attributed to the company’s current size.
With my next graphic I review Apple’s current valuation based on operating earnings. Clearly, Apple is currently available at the low end of its historical normal price to operating earnings (peo). Obviously, the market has recently been valuing Apple shares lower than they normally have. However, with my Analyze-Out-Loud video included with this presentation, I will present my views and rationale on why I believe this is occurring, as well as the opportunity I believe it represents going forward.
With my final graphic on Apple, I present the company’s recent share buyback activity in relation to the company’s historical norms. Up through fiscal year 2012, Apple was increasing their share count each year. In other words, they were raising capital. However, since fiscal year 2012 the company has been reducing shares. I believe it’s interesting to note that Apple was issuing shares when the valuation was high (see the above FUN Graph) and the company has been returning capital to shareholders by reducing shares when valuation was low.
Summary and Conclusions
Apple represents one of my highest conviction common stock investments, and as such, has been a core portfolio holding since 2011. When I first added Apple, it was purely on the basis of a growth stock. More recently, the company has morphed into a compelling dividend growth investment. However, and at the same time, I contend that it has not lost its appeal as a growth stock. At its current valuation, I believe this company still offers compelling long-term total return potential.
I understand that many dividend growth purists may feel that the company does not offer a high enough current yield for inclusion into their portfolios. However, I would add that consideration could be given to augmenting Apple’s current yield by pairing it with a higher-yielding investment, perhaps, and for example, in the REIT space. Even the investor that is primarily focused on maximum current income at reasonable levels of risk might benefit from the opportunity for adding the growth and total return potential that Apple offers.
With the included Analyze-Out-Loud video on Apple I will review the company’s past, present and potential future earnings and price relationship and opportunity. Simultaneously, I will be attempting to provide subscribers greater insights into how to most effectively utilize the F.A.S.T. Graphs™ fundamentals analyzer software tool that is included with your subscriptions.
My objective with this site is to help each of you become more prudent investors through focusing on and better understanding the importance of valuation as it relates to your future investment success. But more importantly, my goal is to help you determine fair valuation and provide you the opportunity to research common stock investments deeper and faster. Therefore, I thought it was fitting to present Apple as my first research recommendation because I do believe it is an investment opportunity that has appeal for most every investor, regardless of whether your objective is income, total return or safety.
Disclosure: Long AAPL at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.