Apple (AAPL): True Blue-Chip?

What is a blue-chip stock?

In this article, we are going to talk about Apple stocks one more time. If you missed the first article, check here.  In addition to this, we are going to talk about some conditions that must be met to consider a stock as a blue-chip.

The term refers to the classic three-colour poker chipset where the blue chips have the highest value.  By analogy, blue-chip stocks must follow the same rule and have the highest value in relation to their peers in the stock market. Investors must be aware that being a blue chip doesn’t necessarily imply a good investment.

Let’s take a look where the value of a stock comes from.

Profitability, Rentability, and Net Worth

Income statement: Economic profits

Blue-chip stocks are highly-recognized companies with a solid history of economic and financial results. The performance of a company can be analyzed through its financial reports.

The most importants are the income statement, where the profit is calculated; the free cash flow, where the money flows around the operation, investment, and debt; and the balance sheet, where the net worth, the difference between the assets and liabilities, is calculated.

Let’s start with Apple’s income statement. In this financial report, we can see briefly analyze the following items:

1.  (+) Total Revenue
2. (-) Cost of goods
3. (=) Gross Profit
4. (-) Operating expenses
5. (+) Operating income
6. (+) Non-operating income
7. (-) Taxes
8. (+/-) Other adjustments
9. (=) Net income

Analyzing the income statement will answer the following question:

Is Apple a profitable company? Let’s take a look at Figure 1:

Apple has a legion (or a herd) of lovers. It doesn’t matter if the next iPhone will have nothing more than a 1% bigger screen, some people are ready to buy it. All of this is reflected in Apple’s profitability. It’s undeniable the importance of this company to the sector of Information Technology. The quality of their products is recognized by specialists and globally used by billions of people.

If their products are overpriced or not, it’s not up to us to say. Let’s take a short view at Apple’s results:

From 2011 to 2021 (10 years):

1.  Total revenue has grown at 9% per annum;
2. Gross profit has grown at 13% per annum. The message here is clear: The company manages to grow through highly efficient cost management;
3. Operating income has grown at 12% per annum. Also highly efficient operating expenses management;
4. Net profit grows at 14% per annum. Great results.

Is the company profitable? Yes, but we need to analyze something else. Is the net profit being turned into CASH? Let’s move on to the cash flow.

Cash Flow: Financial profit

The company can be economically profitable but not financially? Yes. Profit is a promise of cash, not cash itself.  When Apple helps you to buy an iPhone “as low as $999 per month for 84 months”, the company has to recognize the full amount of this sale on their results as revenue, but the cash will only be recognized in the cash flow once you pay. Be aware of that.

Let’s take a look at Figure 2 to check Apple’s cash flow:

From 2011 to 2021 (10 years):

1.  Cash from operating activities has grown at 11% per annum. Higher than the total revenue;
2. Cash from investing activities is negative by nature, of course, since the company is disbursing money to invest in R&D, but it can also be positive on some years if the company decides to withdrawn an investment or cash, for example.  Between 2011 and 2017, Apple invested almost $250B. Wow!;
3. Cash flow from financing activities shows mainly how Apple is handling debt. The dividend payment also is considered here. Nothing to be worried about since the Net debt (the difference between the cash and debt position was over $70B in 2021);
4. Free cash flow represents the combination of all of the cash flows. It has grown almost 11% per annum in the given period.

Is the company financially profitable? Yes. Profit is being turned into cash and the promise of money given by the income statement is being fulfilled in the cash flow.  Let’s now take a look at its health.

Balance sheet: net worth (total equity) and health

Net worth (total equity) is the difference between the total assets and the total liabilities. Each one of these items has thousands of regulations that we will not cover. The focus here is to show you how Apple’s health is reflected in its net worth overtime.

Let’s take a look at Figure 3:

The total assets kept growing strong from $17B in 2005 to $350B in 2021. The total liabilities also grew, from $4B to $287B in the same period. The total equity decrease since 2017 is related to the company’s capital structure. Nothing to be worried about since the company has a strong cash position of almost $65B.

Apple’s Market Cap and Enterprise Value

So far, we already know that Apple meets the condition of economic-financial profit and healthy net worth. But this is not enough. There are several companies performing well out there. We need to take a look at its Market Cap that is represented by the number of shares multiplied by its price. In order to be considered a blue chip, the market cap MUST be extremely valued in relation to its peers.

Enterprise Value is equal to the market cap + total debt – cash. The market cap is the company’s value in the stock market and the difference between the total debt and cash is equal to net debt.

Let’s take a look at Figure 4:

Apple’s market cap grew from 0.9B in 2007 to 2.5T in 2022. The enterprise value is close to the market value, which means that the company has a net debt position close to null.

Conclusion

Time to conclude using a little bit of math. According to the World Bank, the world’s labor force was 3.45B in 2021. Apple has about 154K employees. Apple’s market cap is higher than the GDP of 186 countries. Only US, China, Japan, and Germany are ahead of it. You can take a look at this information here.

The conclusion is quite simple. Apple is clearly a blue-chip stock. The company has proven to have solid and strong financial results that seem to be crisis-proof along with an astonishing market cap and enterprise value. But, to find out if Apple it’s a good pick at current prices, then we would need another article.

Keep your eyes on the bigs, but don’t buy them only because of this.