Apple Inc (NASDAQ:AAPL) Investment Analysis

Read this Apple Inc. (NASDAQ:AAPL) Investment Analysis to see if AAPL is worthy of further investment research. Now let’s get down to business…

AAPL Investment Analysis: Overview and Introduction

aapl stock fundamental analysis

Read this article to learn if investing in Apple make sense.

AAPL is a premium supplier of consumer technology products. The company is well-known for it’s mobile, desktop, laptop and tablet devices, as well as the software products and offerings supported by these devices.

And as you probably know…

Apple generates a ton of cash by selling these devices and services on its website, app store and through retail stores. AAPL has a global foot print, but is headquartered in Cupertino California.

None of this should come as a surprise to you. So let’s start digging into what the market thinks of AAPL as an investment opportunity.

Have Investors Lost Faith in Apple?

AAPL shares used to be all the craze of stock market investors. In fact…

During late 2012 investors were so smitten with AAPL that shares climbed up to around $700 in price! But money managers are a fickle crowd. And after the enormous run-up, AAPL quickly fell over 40% in value. Without Steve Jobs, and facing increasing competition in the smartphone category, investors seem to have lost faith in the shares of Apple.

Just see for yourself:

Apple Price History Analysis

Apple’s share price has seen better days. Since peaking in 2012 AAPL stock has languished.

But is this market perception of AAPL share price overly-pessimistic? 

In this investment analysis of AAPL, we’ll look at why investors might be over-reacting to the shortcomings of AAPL. And what questions you should research to find out if AAPL presents the right investment opportunity for you. As you can see above…

Since the decline, shares of AAPL have bottomed out around $400, and slowly climbed back, before settling in to a trading range just above $500. So let’s look at what the market has priced in at this current price, okay?

Apple Fundamental Valuation Analysis:

Apple maintains a market cap of about $465B at time of writing (corresponding to a per share price of about $520). The company is in a strong capital position and does not have any liquidity issues or large amounts of short term debt. At this price, AAPL is showing a PE ratio of less than 13 and a free cash flow yield of just under 10%. And really…

That’s not bad for a best-in-class technology hardware company, right?

When we dig a bit deeper into an intrinsic value calculation, it becomes clear that the market isn’t expecting much of Apple. The good news is…

With such a low cost of capital and sustainable free cash flow, even if Apple earnings languish lower by a couple percent points in the coming years it is still worth about $550 per share based on the discounted present value of future cash flows. (And this speaks nothing of the 2.35% dividend.)

On the other hand…

If you look at AAPL’s key statistics from Morningstar, Apple has an impressive track record of growing revenue, EPS and free cash flow over the last 10 years. Check it out:

Apple Cash Flow and Revenue History Analysis

At the current price, the market is discounting Apple’s track record of growth. (All numbers in Mil USD)

To be fair:

Figuring out the intrinsic value of a company isn’t always easy – and the assumptions aren’t always straightforward. But by looking at the conservative growth case we can find opportunities that give us a low-risk option on profiting from future growth. In this case…

The market is currently discounting Apple’s track record of growth… and… that’s a bet I might be interested in taking the other side of.

Plus:

The case for investing in Apple becomes even more attractive when you start to look for catalysts to unlock shareholder value.

For example…

The Icahn Indicator – Do Activist Investors Present Value Catalyst for AAPL Shareholders?

carl icahn apple activist investor analysis

Do you want to partner with AAPL activist investor Carl Icahn?

Apple is a potential under-valued mega cap stock. This anomaly has attracted some of the most exciting activist investors to the scene. And these big players might just present a catalyst for Apple to unlock shareholder value.

Most notably…

Famed investor Carl Icahn has been showing an incredibly active interest in Apple, as of late. Icahn has a track record of building shareholder value, so having him as your partner isn’t a terrible thing. Icahn was originally demanding ever-increasing share buybacks from Apple (to put their large cash pile to use). But after tabling these demands and still holding $4B worth AAPL, investors might speculate Icahn is in it for the long haul.

But Icahn isn’t the only activist investor to voice support. Previously David Einhorn’s hedge fund Greenlight Capital called on Apple to institute a dividend and better manage capital for shareholders. Greenlight has remained an advocate of Apple into mid 2013, citing the dividend and share buyback programs as investor-friendly activities.

A more tacit endorsement comes from Joel Greenblatt’s Magic Formula Stock Screen, where AAPL is currently showing up as a “buy.”

But besides relying on others, what other catalysts are there for Apple?

New AAPL Product Launch Could Excite Investors:

google glass vs iwatch analysis

Will AAPL announce a new product to compete with technologies like Google Glass?

In the last couple of years, Apple CEO Tim Cook has taken the baton from the late Steve Jobs. But other than the iPhone 5C and a couple new operating systems, we haven’t seen any new products from Apple.

In the meantime, it seems like rivals Samsung and Google are diving deep into the world of high tech hardware.

These competitive pressures (especially in the mobile device market) might be responsible for eroding investor exuberance in shares of Apple.

While it’s a bit speculative to bet an investment strategy on a successful new product, such as an iWatch, any new device or compelling product extension could remind investors that AAPL is a growth-focused company with a track record of innovation. Were the stock market to price AAPL shares for growth, they could easily see 15-25% appreciation from current prices (which don’t seem to factor in growth).

Without the catalyst of an activist investor or new produce launch, AAPL shareholders might just have to wait for regularly improving quarterly earnings announcements to paint a picture of ongoing profitability and revenue growth.

Again, the good news for AAPL bulls is that not even low single-digit growth is currently priced in to AAPL shares; so, even without a catalyst there may be potential upside for those considering an investment in AAPL.

But what are the risks of holding an investment in Apple?

Analyzing the Risks of Investing in AAPL Stock:

There are a number of risks associated with investing in Apple stock. And no matter what your opinion on AAPL after reading this article I encourage you to do more of your own thorough due diligence. My interest in buying AAPL is not a recommendation in any way shape or form to you, especially considering the many risks of investing in Apple.

As for the specific risks of investing in AAPL stock:

To be sure: Apple isn’t exactly a small cap start-up anymore. It’s a massive mega-cap company with a strong cash position, established high margin sales channels and one of the most powerful brands in the world.

But the flip side is…

This also means that money managers, hedge funds and major institutional investors are jumping in and out of AAPL stock. This could mean that while AAPL is definitely liquid it’s also likely to be pushed around. If you’re investing AAPL you should be ready for some short-term volatility given the interest by these big players and the major financial news media. You might have to actively guard against getting shaken our of your position.

Additionally…

Even though AAPL isn’t going bankrupt any time soon, the market perception is pricing in relatively stable cash flow. If cash flows deteriorate significantly in the future, AAPL shares may continue to languish. This slow burn in the share price will be exacerbated if AAPL can’t excite investors with new or improved products. Without a catalyst (either in the form of a new product launch, an activist investor unlocking value or even improved earnings and sales growth), you might be stuck holding “dead money” for awhile if you invest in AAPL. Given the dividend and the margin of safety, this is a risk I’m comfortable with, but you should evaluate it for yourself.

Finally:

While AAPL has a lot of the same top talent it’s always had, some naysayers will undoubtedly proclaim that AAPL died with Steve Jobs. This is made worse because Tim Cook is perceived as a boring but efficient operator/logistician. I think the current valuation reflects this and it’s already baked into the price. But it’s something worthy of consideration.

AAPL Investment Analysis – The Final Word:

Based on the quick fundamental analysis above, I think AAPL presents an interesting opportunity for conservative long term investors, especially those who are fans of AAPL already.

That’s because the current stock price of AAPL is not pricing in any type of growth, and even mid-single digit growth could lead to double digit returns for patient investors in the years to come. Additionally, there is a small dividend of 2.35% and no immediate risks for permanent destruction of capital. For these reasons I encourage you to do more of your own research on AAPL and see if it’s a good investment for you (this article is not a recommendation to do anything in any capacity).

For full disclosure: I own a small AAPL position at a cost basis slightly above the current price. I’m interested in buying more shares of AAPL if the stock slides to 500 or lower.

And By The Way: If you want more information on how to analyze companies yourself, I encourage you to download my free eBook below. You’ll get interesting insight into how to improve your approach to the stock market. I’ll also send you free tools and tips each week to help you improve your long term investing returns.

Leave a Reply