As you may already know, Apple (AAPL) is the biggest company in the world with a total revenue TTM of almost $390 billion. Its market cap of $2.3 trillion represents 10% of the United States GDP in 2021. Be aware that we are comparing a single company with 154k employers with a country with 332 billion people. Fair enough.
Apple has created a huge ecosystem that can be understood as monopolistic competition. The competitors can offer phones, but only Apple can offer an iPhone. The competitors can offer Windows-based computers, but only Apple can offer an iMac. There are no perfect substitutes for Apple’s products.
In addition to that, Apple has a horde of loyal users that will never use anything else but its products. Some of them are always willing to change their own Apple products for new ones, even though these “new” products may not offer any innovation at all other than a higher version number or bigger screen. We can’t forget some of these users can spend nights (and sleep on the floor) in huge lines just to be the first ones to buy a new iPhone. Before you proceed, make sure to understand the basics of the stock market in this article.
How did Apple start?
The first iPhone model was released in 2007 with the slogan “Apple reinvents the phone”. It sure did. A year later, in 2008, the release of the iPhone 3 represented a watershed not only for Apple but for the entire market. The product added key features like GPS, tri-band UMTS/HSDPA, and 3G.
The results couldn’t be different. Since the 1st of February 2008, the stocks climbed 2.400% despite the bear markets we had during this time.
When we look at the last 6 months, the chart can lead us to believe that the party is over. Is it?
It’s fashionable to say that the “tech bubble has burst”. Really? iPhones represent about 47% of FY 21 revenues and sales increased almost 50%. The new iPhones include internal upgrades (A15 Bionic, double-entry storage at 128GB, an advanced dual-camera system, and a better battery). Be aware that we are not even talking about the iPad, the best-selling tablet computer in the world. Even during the pandemic, the popular Macs made up 10% of revenues in FY 21. But… is this enough?
The current state of the Apple company
The company has an enviable net cash position of $73 billion. Sales are expected to rise 7,5% in FY 22 pushed by a sustainable 5G upgrade cycle. Wearables, Macs, iPads, and iPhones sales are all expected to grow. Gross margins are also expanding by around 43% in FY 2022. Services margins are huge (70%+) and potential devices like AR headsets/glasses are being brought to life.
The following chart shows the Normalized Diluted EPS of AAPL from September 2012 to September 2021.
Disregarding the year 2021, the EPS CAGR was 7,70% between 2012 and 2020, and 13,27% if 2021 is considered. The orange line represents the moving average of $2,042 in September 2021, way below 2021 EPS because of the 4-for-1 stock split in August 2020 which surely helped to boost it.
The company has been aggressive with buybacks and announced a $90 billion share authorization program (a net cash position of $78 billion can do miracles…). We don’t take this as good news since the company would not be able to keep expanding EPS results much further without these strategies. Despite all of the new products, this can be a sign of a limited growth expectation.
Taking all of this under consideration, especially the buyback aggressive plan, the expected EPS (Earnings Per Share) for 2023 remains a mystery under actual circumstances. Some analysts are very optimistic about it, but if we consider a minor growth period between 2021 and 2022, the EPS would be something around $ 4,20 and $4,60 which would lead to a 12-month target price of something around $134 at the best-case scenario.
No doubt that Apple is a premium company with top-quality products and tons of cash, but the hype around it seems to be exaggerated and the company seems to be well valued already.
Even though Apple’s horde of loyal users will, in the long run, keep buying everything and generating growth for the company, it seems Apple needs to launch something in the upcoming years worthy of using the old slogan “Apple reinvents the (…)” again. In the meanwhile, keep your eye on Apple (or on your iPhone if you have one).