We think AAPL stock is one of the most attractive technology stocks now. Here's why Apple stock finds a place among our list of top stock picks.
Cupertino, California-based technology giant, Apple (NASDAQ:AAPL), has been among our top stock picks from the technology sector for over 25 quarters now. AAPL stock closed the last trading session at a per share price of $135.02, which puts Cupertino's market cap at nearly $715B. The stock is up by nearly 190% since its addition to our top stock picks, outperforming the S&P 500 (INDX:SPAL) and Nasdaq Composite (INDX:COMPX) over the same time frame. To give a broader context, our picks have outperformed the NASDAQ by over 120% since 2010. And, how do we go about picking these solid tech stocks? We filter our list of top stock picks based on a number of financial metrics which evaluate these companies for growth, profitability, cash flow, balance sheet strength and valuation. We then compare each company against its peers, which means that our top picks have to consistently outperform its peers, over the long term, across the different parameters. While some of these stocks do not manage to stay on our buy list for long, Apple stock has been one among the few which has been a consistent name on our list. With the stock still in our top stock picks list, here's why AAPL stock is a great buy, even today. Yes, even at a massive market cap of $715B.
Apple Stock Rating.
Shares of Apple Inc are off to a strong start in 2017. Apple stock price has already risen by 16.6% in the year-to-date (Feb 14 close), outperforming the 7.4% gains of the NASDAQ Composite and the 4.4% rise of the S&P 500. However, a deeper look at Apple's fundamentals and business environment indicates that Apple stock could be headed further higher this year. Our bullishness is also reflected in our Apple stock rating, which currently sits at 4.2/5, indicating that Apple is an attractive stock, as per our methodology. Taking a balanced view of the stock, we look at the key positives and risks of investing in AAPL stock today.
Apple Stock: The One Negative.
A deeper look at the Apple fundamentals highlights one clear risk, which has become a bigger and bigger issue with each passing quarter: Apple's rising debt levels. Apple had a debt-to-equity ratio of 0.66 at the end of the December quarter, which is significantly higher that its sector average. Also, the metric has risen steadily over the last 4 years up from a "0" debt position at the end of 2012. However, investors can choose to overlook this risk.
With the installation of the Trump administration at the White House, Apple can access its hoard of overseas cash by repatriating the same at a proposed 10% tax rate. If the Trump administration has its way, the company could bring in nearly $207B (90% of its overall $230B overseas cash) cash, which is today lying in overseas bank accounts. This could then be used to pay off Apple's debt obligations, which are currently being used to finance the company's ever increasing capital returns program. The repatriated cash, along with the domestic cash of just over $16B, would put Apple's net cash position at $125B (subtracting the debt of $97.3B). Hence, the rising/high debt-to-equity ratio shouldn't be a worry, as long as the company can grow its cash hoard faster than the total debt.
Apple Stock: The Multiple Positives.
The first and most obvious positive for Apple has been the strong growth the company has delivered over the last few years. The company delivered a topline growth of 11.3%, on average, over the last 5 years, a feat not many companies of a comparable size can talk of. To boot, the company has managed to deliver this growth at industry leading profit margins. Apple delivered an average net profit margin of 20.7% over the last twelve months, which netted the company over $45B in profits. Even more impressive has been the company's ability to generate cash, with the operating cash flow coming in at 1.5x the net income.
Moving over to return ratios, Apple stock is backed by some of the highest return ratios in the market. Apple generated a 35% return on equity (ROE) over the last twelve months while the return on invested capital (ROIC) came in at 23.3%. Apple's ROE has constantly clocked over 25% in each of the last 10 years, while the ROIC has stayed above 20% over a similar timeframe. If all of this ain't enough, Apple stock is also supported by a free cash flow (FCF) margin of over 30%.
One part of our methodology also takes into consideration a company's valuation. While all of the above numbers are industry leading, investors don't have to pay a premium to own shares of Apple. Apple stock is currently valued at a PE ratio of 16.2X, which compares against the sector average of 25.5X. Buying Apple gets you industry leading profitability and cash flows at valuations which are significantly lower than that of peers.
Putting It All Together.
Apple stock currently offers an attractive investment opportunity in the technology space. AAPL stock investors get industry leading profit margins and cash flows to go along with extremely attractive valuations with more than modest growth. While debt-to-equity ratio represents a key fundamental risk, the change of guard at Washington should free up Apple's overseas cash, thereby offsetting the risk of the increasing debt. With Wall Street pegging the 5 yr expected growth at 9.25%, Apple offers modest growth as well. However, the rise of Apple's services segment and a revival of the iPhone segment, as witnessed in the latest earnings report could lead to growth ahead of current expectations. We think Apple stock could rise to new highs even in case of a short term correction. All in all, Apple presents an attractive investment opportunity for long term investors, who should accumulate AAPL stock in a staggered manner, looking to buy on any possible dips.
If you're also interested in the Auto sector, do take a look at our list of auto stock picks, which have beaten the S&P 500 by over 172%.