Apple Inc. (AAPL) is one of the biggest companies in the world; in August of last year, with the stock pushing nicely above $465 per share, they were the first company in the modern era to officially cross the $2 trillion dollar threshold. Over the last ten years or so, it is without a doubt one of the biggest performers throughout the course of the bull market, including the surge off of temporary bear market lows induced by the COVID-19 pandemic. Along with its big tech brethren like Alphabet (GOOGL), Amazon (AMZN) and Microsoft (MSFT), AAPL has long been one of the companies that the rest of the market seems to have taken its cues from. AAPL’s stock price seemed made of teflon last year, nearly tripling in value from its pandemic low at around $53 to a peak in late January at around $145 (the stock split 4-for-1 in 2020).
The truth is that AAPL is a stock that I don’t pay a ton of attention to; not because I don’t like the company or their products, but simply because as a value-oriented investor it has been impossible to justify the stock’s incredible price increases. In late 2016, the stock was a little below $100 per share; but if you factor in the stock split in last year, the stock has more than quadrupled in value since then. That’s impressive if you’re a growth investor, and a lot of folks might point to that incredible performance and laugh at my contention that the company wasn’t worth the price the market was driving it to then. And that’s fine; if you were able to ride that increase and make money, I’m happy for you.
The problem I see is that if and when the end of this stock’s bullish run comes – and trust me, like all bull markets, it will, last year’s rapid, temporary drop notwithstanding – the market is going to start to push the stock back down to more reasonable price levels. AAPL is a company with some incredibly impressive fundamental measurements behind it, and its sheer size and influence, along with its history of innovation and leadership in the tech sector isn’t to be ignored; but it is also a stock that the market has priced far above its historical valuation metrics. That tells me that when the end comes, the drop is going to be steep, and it’s going to be painful. The stock has dropped about -17.5% from its January high, which is enough of a decline to start tempting investors to “buy the dip” and wait for the next wave back up. I don’t believe the this latest drop is the beginning of the end; but be careful about buying into the “buy the dip” mindset with this stock right now; I believe the risk to the downside is much greater than the upside potential and largely being ignored by the rest of the market.
To me, AAPL may be one of the biggest value traps in the stock market right now, which means that it’s probably a stock to avoid for the time being. At which price, then could it actually be considered an attractive value? Let’s take a look.
Fundamental and Value Profile
Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players. The Company sells a range of related software, services, accessories, networking solutions, and third-party digital content and applications. The Company’s segments include the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. The Americas segment includes both North and South America. The Europe segment includes European countries, India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and the Asian countries not included in the Company’s other operating segments. Its products and services include iPhone, iPad, Mac, iPod, Apple Watch, Apple TV, a portfolio of consumer and professional software applications, iPhone OS (iOS), OS X and watchOS operating systems, iCloud, Apple Pay and a range of accessory, service and support offerings. AAPL has a current market cap of $2 trillion.
Earnings and Sales Growth: Over the last twelve months, earnings increased nearly 34.7%, while sales increased more than 21%. In the last quarter, earnings growth was even more accelerated; earnings increased 130% while sales grew 72%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. The company’s Net Income versus Revenue has been rock solid over the last year as well as the last quarter; over the last twelve months, this number was 2173%, and strengthened to nearly 26% in the last quarter.
Free Cash Flow: AAPL’s Free Cash Flow is strong, at more than $80 billion. That sounds incredible, and relative to most of other stocks, it really is; but when you factor in their size, it translates to a modest Free Cash Flow Yield of about 3.92%, which actually falls below most of the other big tech companies, and also lower than you can find in most “growth” stocks.
Debt to Equity: AAPL has a debt/equity ratio of 1.5, which is very high and has nearly doubled over the last couple of years. AAPL’s balance sheet shows $76.8 billion in cash and liquid assets, which means they they have plenty of liquidity, against $99.3 billion in total long-term debt.
Dividend: AAPL pays an annual dividend of $.82 per share, which at its current price translates to a dividend yield of about 0.67%. Like many companies in the last year, AAPL reduced (but not eliminated) their dividend to preserve cash, from $3.28 per share to its current level. There is no indication at this time when, or if they will increase their dividend payout to early 2020 levels.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $43.50 per share. That suggests that despite the company’s fundamental strengths, the stock remains significantly overvalued by about -64%, with a bargain price around $35 per share. It is true that my approach doesn’t factor future growth estimates; but even adding that element to my calculations using the PEG ratio, the stock’s fair value target is only about $46 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart displays the stock’s price action over the past year. The red diagonal line traces the stock’s upward trend from its March 2020 low at around $53 to its January peak at about $145; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock is very near current support at around $117, and appears to be stabilizing after its recent drop from the January high. Immediate resistance appear to be at around $126 based on pivot low activity in early January, with additional near-term upside to about $131 if bullish momentum increases. A drop below $117 should find next support at around $110 based on the 38.2% retracement line, with next support at around $103 below that.
Near-term Keys: Despite AAPL’s fundamental strength, there is no practical to call the stock a good value right now; the market has simply priced the stock past the point of useful value. I’m not confident that it will drop far enough to offer an attractive bargain price for a strict bargain hunter like myself, which means that if you want to work with AAPL on a long-term basis, you need to consider it strictly on a growth-oriented basis. If you’re looking for short-term trading opportunities, you could use a bounce off of current support at around $117 as a signal to consider buying the stock or working with call options, with a near-term exit target sitting at around $126, and $131 beyond that if bullish momentum picks up. A drop below $117 could offer an interesting signal to consider shorting the stock or buying put options, with a useful target price on a bearish trade sitting at around $110, or $103 if downward momentum increases.