Apple (AAPL)

Apple (AAPL)

Summary:  ON SALE

Score:  12/20

MOS:  57%

Share Price:  $146

Sticker Price:  $341

Is Apple stock a good buy?

Apple was founded in 1976 and is headquartered in Cupertino, CA. They have about 512 retail locations and over 147,000 employees worldwide as of July 2021.

Apple is one of the world’s largest tech companies by revenue ($274B in 2020). Here is a comparison to other large tech in the same year.

  • Google: $182B
  • Microsoft: $148B
  • Facebook: $85B
  • Tesla: $31B

Apple also has the largest market cap ($2.4T)

  • Google: $1.8T
  • Microsoft: $2.1T
  • Facebook: $1T
  • Tesla: $621B

Back on 9/2/2020 we conducted our previous review of Apple and at the time it had an MOS of 1% and a Score of 10/20, making it Overpriced. As we can see, the Score and the MOS have both improved over the last year, moving it to On Sale.

Here is the recent news on Apple.

This article from cnbc.com states that Apple demolished the earnings expectations but the stock still fell due to chip supply warning. The chip supply warning is not expected to sustain long term as this article expects revenues only to decline over the next quarter. EPS estimates were targeted at $1.01 and the EPS came in at $1.30. Revenues were targeted at $73B and came in at $81B.

This article from cnbc.com in late 2020 states that Apple has switched from using Intel’s chips to using TSM (Taiwan Semiconductor Manufacturer Co. Ltd.) because Intel can only make 7-nanometer chips while TSMC can make 5-nanometer chips. We should also keep our eye on TSM stock (currently a Watch in Tykr with a score of 16/20 and MOS of 18%).

Apple has completed 5 stock splits and here is how a stock split works. In this example, we’ll use a 4-1 stock split. This means if you had one Apple share of $500 before the stock split, you now have four Apple shares of $125 after the stock split. In this case, a stock split does not make you 4X richer, it means you have 4X as many shares but the important thing to consider is it makes the stock more accessible!  See, most people pay attention to share price and when a popular stock like Apple completes a stock split, a lot of people will start buying the stock again which results in the price increasing again. If you don’t already know, Nvidia (NVDA) just completed a 4-1 stock split on 7/20/2021.

Here is Apple’s stock split history.

In 1991 Apple reached a share price of $79 and they did a 2-1 stock split which resulted in a new share price of $39.50. In four years the price went up to $68. That’s a total return of 72% and an annualized return of 14%. 

In 2000 Apple reached a share price of $135 and they did a 2-1 stock split which resulted in a new share price of $67.50. Timing on this stock split was bad due to the “dot-com bubble” so this stock actually went down to $22 and held there through 2004. That’s a total return of -67% and an annualized return of -24%. Don’t let this stock split discourage you. The “dot-com bubble” held many other tech stocks down for a few years. 

Now here is where things get really interesting…

In 2005 Apple reached a share price of $76. They did a 2-1 stock split which resulted in a new share price of $38. Over the next 7 years the stock took off like a rocket!  In 2012 the stock went to $667.  That’s a total return of 1,655% and an annualized return of 50%. Very impressive!

In 2014 Apple reached a share price of $633. They did a 7-1 stock split which resulted in a new share price of $90.  That brings us to 2020 where we just saw the stock reach $500. That’s a total return of 452% and an annualized return of 33%. Also very impressive.

In 2020, Apple reached a share price of $500 and they did a 4-1 stock split which resulted in a new share price of $125 in September of 2020. Now in July of 2021, the share price reached $146 which equals a total return of about 16% in less than a year which is fair. As Tykr investors we like to see annual returns between 15% and 50%. In some cases stocks will be less and in some cases they’ll be more. 

The big difference over the last year is Apple was Overpriced but recently moved to On Sale due improvements on the financial statements. In other words, the stock transitioned from a growth stock to a value stock.

Here is a quick refresh on how to determine the difference between the 4 types of stocks (value stock, growth stock, speculative stock, and dividend stock).

Value Stock: A good value stock is a stock that passes the 4 M’s. A business passes the MOS criteria if it’s On Sale. A business passes the Meaning criteria if it’s within an industry that will most likely be around in the next 10 years. A business passes the Moat criteria if it has a strong competitive advantage. A business passes the Management criteria if it’s led by a CEO with a track record of growing revenues, profits, and the share price.

Growth Stock: A growth stock is a stock that passes 3 of the 4 M’s. The only M it does not pass is the MOS. In other words, a growth stock will pass the Meaning, Moat, and Management criteria but it will be classified as Overpriced in Tykr.

Speculative Stock: A speculative stock is a stock that fails all 4 M’s. In other words, a speculative stock will be classified as Overpriced and it will fail the meaning, moat, and management criteria.

Dividend Stock: A dividend stock is easy to find. Any stock that pays a dividend may be classified as a dividend stock but keep in mind any dividend stock may also be a value stock, growth stock, or dividend stock.

Typically, a value stock or growth stock will have well diversified revenue streams. Let’s break down Apple’s approximate percentages.

  • iPhone sales = 60%
  • Service sales (Apple Music, App Store, Apple TV+, AppleCare Warranties, etc) = 13%
  • Wearable sales = 13%
  • Mac sales = 7%
  • iPad sales = 7%

Based on the chip news, we could see a hit to the top revenue generator, iPhone. This is worth preparing for but if you’re a long-term investor of Apple, don’t be alarmed. We know chip manufacturers are working as fast as they can to meet the demands.

Now let’s take a look at the 4 M’s

MOS (Margin of Safety): The stock has moved from Overpriced to On Sale over the last year which is a great sign. With a score of 12/20 and a MOS of 57%, the financials are pretty good. Pay close attention to the sticker price of $341 because we know this stock has gone that high before.

Meaning: The business is easy to understand. In this case, most people around the world know Apple. It’s a household name for phones, tablets, and computers. They went public in 1980 and have split their stock 5 times since. This has been a great long-term buy and hold.

Moat: The business has a wide moat.  In other words, it’s hard to duplicate.  Many would argue that the iPhone is the best phone on the market. This article from androidauthority.com provides 8 reasons why iPhone is better than Android including performance speed, ease-of-use, timely updates, ecosystem synchronization, security, Apple CarPlay, and support. Also, other phone manufacturers don’t have the diverse revenue channels that Apple has.

Management: The business is run by a great leader. In the case of Apple, Tim Cook has stepped in and done an excellent job running Apple since the unfortunate loss of Steve Jobs in 2011. Tim has continued to maintain Steve’s vision on creating world-class products but has further expanded the revenue channels including the addition of Apple TV+.

Now let’s take a look at the financials. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

 

Revenue (Found on the Income Statement)

2017:  $229B

2018:  $265B

2019:  $260B

2020:  $274B

Revenue is increasing which is a great sign.

 

Net Income (Found on the Income Statement)

2017:  $48B

2018:  $59B

2019:  $55B

2020:  $57B

Net Income is somewhat flat which is okay.

 

EPS (Found on the Income Statement)

2017:  2.32

2018:  3

2019:  2.99

2020:  3.31

EPS has increased which is a great sign. This is why the MOS has increased.

 

Free Cash Flow (Found on the Cash Flow Statement)

2017:  $50M

2018:  $64M

2019:  $58M

2020:  $73M

Free Cash Flow has increased which is a great sign.

 

Total Assets (Found on the Balance Sheet)

2017:  $375B

2018:  $365B

2019:  $338B

2020:  $323B

Total Assets have decreased which is worth paying attention to. We like to see assets increasing. This is part of the reason why the score is lower (12/20).

 

Total Liabilities (Found on the Balance Sheet)

2017:  $241B

2018:  $258B

2019:  $248B

 

2020:  $258B

Total Liabilities have remained flat which is okay.

 

Total Debt (Found on the Balance Sheet)

2017:  $115B

2018:  $114B

2019:  $108B

2020:  $112B

Total Debt has also remained flat which is okay.

 

Total Equity (Found on the Balance Sheet)

2017:  $134B

2018:  $107B

2019:  $90B

2020:  $65B

Total Equity has decreased which is also worth paying attention to.

 

When taking a closer look at the balance sheet, we can see why Apple has a score of 12/20. If they can increase their assets and equity while lowering their liabilities and debt, they will see the score increase. The exciting news on this stock is the change from Overpriced to On Sale over the last year. The MOS has passed 50% which is exactly what we want to see. Long-term investors should be excited for the financial statement improvements.

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.

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