- Apple tries to set itself apart with interesting products and an “ecosystem”.
- Apple resides in a position of market leadership.
- Apple sports excellent fundamentals.
As of this writing, Apple stock is down 28% from its 52 week high. Traders are running scared over concerns ranging from iPhone sales to the Chinese economy. Apple (NASDAQ:AAPL) huge size and scale probably leaves investors wondering how long it can grow. However, after taking a close look at Apple, it’s difficult to see anything negative about the company outside of market sentiment. Let’s examine.
Strives to Differentiate
Apple understands that it’s a technology company. More importantly, Apple understands the pluses and minuses of being a tech company. Tech companies can enjoy a tremendous amount of growth until product obsolescence sets in. Also, product differentiation can prove difficult for tech companies. At the most basic level a computer is a computer. Apple understands all of these aspects of its industry.
Apple tries to differentiate itself with aesthetically designed computers, phones, tablets, etc. Going way back, Apple famously set itself apart by not being IBM (NYSE:IBM) compatible. Apple maintains its own operating system. Also, in more recent years, Apple’s “ecosystem”, complete with its own app store, videos, music services, etc., serves as a way to immerse the consumer in its products.
Apple resides in a position of market leadership. In 2015, Apple was in the No. 1 spot in Interbrand’s list of brand rankings. It ranks No. 5 in the global computer hardware market, according to the Bloomberg Leaderboard. Apple also ranks No. 1 in terms of U.S. Smartphone Subscriber Market share, according to comScore. This kind of ubiquity strengthens Apple’s brand and public awareness. This certainly makes it easier for Apple to grow into new territories and move products.
Apple has one of the best financials I have ever seen. Over the past five years, its revenue, net income and free cash grew at an impressive CAGR of 30.3%, 30.7%, and 33.5% respectively. Apple’s balance sheet is the stuff of legend. In the most recent quarter, Apple’s cash balance came in at $21.1 billion with another $184.5 billion in investments (see table below). This adds up to an incredible $205.7 billion in cash and investments representing an incredible 172% of stockholder’s equity. Moreover, Apple keeps its long-term debt levels at around a reasonable 45% of stockholder’s equity.
|Apple's Cash and Investments Balance (in Millions)|
|Cash and cash equivalents||$21,120||$13,844|
|Short-term marketable securities||$20,481||$11,233|
|Long-term marketable securities||$164,065||$130,162|
Source: SEC filings
Apple’s solid fundamentals translates into a good dividend for its shareholders. In FY 2015, the company only paid out 17% of its free cash flow and 6% of its cash and investments balance in dividends. Currently, the company pays its shareholders $2.08 per share per year yielding 2% annually.
Apple’s P/E ratio resides at a rock bottom 10.5 which is awesome, considering its fundamentals, balance sheet and market position. This represents a 10 year low and makes Apple the most well-known value opportunity out there right now, according to Morningstar.
Slowdown in revenue growth in FY 2013 and FY 2014 helped sour sentiments on Apple Stock. However, year-over-year growth has sped up in FY 2015. Analysts are again worrying about another slowdown in growth, especially in places like China where growth seems to be maturing. Also, the ever present question of its innovative capability since the death of Steve Jobs looms over the Apple stock like a dark cloud. However, Apple is still growing in spite of the fact that incremental growth is hard to achieve with large companies.
Apple stock represents a no-brainer value opportunity. Apple stock sports excellent fundamentals, along with a rock solid balance sheet and dividend. However, investors need to understand that Apple may grow at a much slower rate in the future, and Apple stock may behave more in line with a slow growing blue chip. The smartphone is the center of 21st century life, especially in developed markets. I feel comfortable knowing that Apple owns a huge chunk of that market.