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And a brand that inspires! A tech company that doesn't stop innovating. And a stock that pays consistent dividends. Apple is the perfect company.
But a perfect company doesn't mean a perfect stock. Apple is priced at more than 30X its earnings and more than seven times its sales. Can it grow into its current seemingly ambitious valuation?
Today, I review Apple's latest product and feature announcements at its worldwide developers' conference, WWDC, and discuss its fundamental analysis and valuation to decide whether it can get even bigger than its current roughly $3T market cap and whether it is still a good stock to buy now.
Let's talk about that!
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of a series I started a few weeks ago to fundamentally research companies to manage my real-money portfolio. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), Unity (U), JD.com (JD), NVIDIA (NVDA) and several others. I'll continue with this series for a few more weeks.
Remember, this content is for education and sharing ideas and not advice to buy or sell any securities.
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Apple becoming the largest publicly traded company in the world is one of the most fascinating stock market stories. The stock has generated a 120,000% price return since its IPO and has consistently paid dividends since 1989, eight years after it went public in 1980.
How has the company achieved such an extraordinary return?
There is never only one reason for a company's success. But, for Apple, if we can narrow down our answer to the most important reason for its success, it has to be about building a strong competitive advantage and moat by keeping its customers loyal and engaged for decades.
And if there is any way Apple can continue growing, it has to be its ability to keep strengthening its moat. As you watch the company's announcements at the latest WWDC conference, you'll see evidence of it fortifying its competitive moat.
Before discussing how Apple can continue building it's moat, Let's talk about the elephant in the room.
What Does Vision Pro Launch Mean For Apple's Investors?
The most talked-about portion of WWDC was the release of Apple's new Augmented Reality glasses. People are so excited about this product release. The Virtual and Augmented Reality market is expected to grow 46.00% annually between 2021 and 2025 globally. AR and VR glasses will become a $7B market by 2027. If Apple manages even to own the entire market, the new Vision Pro glasses aren't going to make a dent in the company's nearly $400B revenue per year.
There are some caveats to my argument:
How Does Apple Build and Protect Its Moat?
Apple's WWDC wasn't all about the new Vision Pro AR Glasses. The company talked about a slew of new features and technologies that are much more important to its future and its ability to grow revenue and expand its moat. Specifically, two things captured my attention:
Let's talk about the M2 Chips first.
In 2021, Apple moved away from using Intel's chips in its devices and switched to designing chips, naming them Apple silicon. These semiconductors are powerful and designed to handle Apple's specific needs. The company is now releasing the second generation of its chips, called the M2 series, which are much more powerful and can handle extremely challenging workloads such as enabling professional video and audio editors to stream and render high-quality content. Interestingly, during the presentation, the presenters kept comparing Apple silicon-powered devices with Intel-powered ones and emphasized the superior speed and performance of Apple Silicon.
It kept reminding me how much Intel has fallen to the point that its stock may not be saved anymore. I have done a detailed analysis of Intel's stock which I leave a link to it here.
Back to Apple, the chips are so powerful that the new Mac computers can now run high-fidelity games such as Death Stranding. These powerful semiconductors open Apple's doors to the world of computer gaming in addition to its growing mobile gaming. The chips are strong enough that famous game maker, Kojima San, accepted to appear at WWDC and endorse Apple's technology calling it s a new era for Apple's gaming.
Of course, it's not all about gaming. These powerful chips make all Apple devices more powerful and keep Apple at the forefront of the personal devices market.
The second note-worthy portion of the WWDC was about a slew of small but interesting software improvements and new feature releases.
Apple is notorious for observing its users and figuring out ways to make them a little bit more comfortable and a little bit more dependent on its ecosystem. If you listen to any of the features Apple released during WWDC in isolation, they mean nothing. But they delight users at tiny moments and solve their day-to-day problems one small feature at a time. Features like better profiles, stickers, Journaling on your phone, and many more.
As they say, "Trenches are dug one shovel at a time." And these days, Apple's competitive moat is built one small feature and software improvement at a time.
Do all that moat-building and competitive advantage translate into Apple being a great investment now?
Apple's Fundamental Recap
Let's look at Apple's fundamental analysis:
Using common valuation ratios such as the Price-to-Earnings ratio of more than 30 times, and the Price-to-Sales ratio of more than seven times, Apple is overvalued. A high valuation ratio, such as more than 30 times Price-to-Earnings, shows investors' expectation of higher earnings and profitability in the future.
In this case, using a PEG ratio can be a more reliable indicator. The PEG ratio considers the historical growth rate in a company's earnings and paints a better picture of its valuation.
Apple's PEG ratio is 2.5 times. This means Apple investors expect the future earnings will grow faster than its historical growth rate. Is it reasonable to assume that Apple will be much more profitable in the future than today?
How Can Apple Become More Profitable?
There are a few things that can improve Apple's profitability in the future. The most important factor is the growing share of the Services in the company's revenues. Service or software are much more profitable than hardware and devices. We have seen the share of services grow in total Apple's revenue, which may translate to higher earnings. However, Apple is still a hardware company looking to lead the hardware market, evident by its new VR glasses launch in the latest Word Wide Developer Conference. Overall, it seems Apple is a strong, well-managed, cash-generating company that investors are too excited about now. So what should we do with Apple stock?
Is Apple Stock A Buy Now?
If you own Apple's stocks, holding on to them isn't a bad idea. It is an overvalued stock, but that doesn't mean the share price will drop anytime soon. Because of its reliable dividend and market leadership, the stock is one of those shares many indexes and large funds tend to own and hold for the long term. Therefore there is limited price drop risk, especially if no major economic crisis or unexpected factors impact Apple.
If you don't have Apple's shares, buying them at the current valuation most likely wouldn't give you a significant return, and it only preserves your capital.
If you are looking for reliable and steady investment, picking up shares of broad market index ETFs such as SPY or similar mutual funds would give you the same result with less risk because you will diversify by owning a broad market ETF while still owning Apple indirectly. The company is among the largest holdings of almost all broad market indexes.
To find such ETFs, you can go to Apple's Stock Card and look for the ETFs that hold Apple in its top 25 holdings. For example, Vanguard Information Technology (VGT) or iShares's Global Tech ETF (Ticker: IXN) are ETFs with big exposure to Apple and reasonable costs and risks. By investing in them, you will benefit from possible Apple price increases while protecting yourself against possible price drops that come with owning an ETF that diversifies your holding into other large and successful companies worldwide.
It is also worth monitoring Apple's price for possible buy-the-dip opportunities. For example, if some external factors drag the stock price down while the company maintains its moat, you may have a chance to get a better return.
Before I wrap up, I have to say that if you look for investment opportunities to double or triple your money, Apple most likely won't be the best choice, even if the stock price drops a few percent in the future. You can only generate outsized returns by investing in Apple's of the future that are much smaller and unknown at this point.
See you next time!