Company: Apple Inc.
Ticker: AAPL Previous Close: $134.60 (2/2) Industry: Technology & Consumer Electronics
Free Cashflow: The free cashflow and net income figures analyzed in the below portion of the analysis will be quarterly in nature. This was done to bring focus to the recently published quarterly results and performance.
Free Cashflow: $35,263,000,000
Revenue ( = Sales): $111,439,000,000
Free Cashflow / Revenue (>5%) = 31.64%➤ This percentage is exceptionally strong. It does seem that the firm has done far better in this most recent quarter than in the past; however, when further reflecting on this number and looking into past performance, this ratio was certainly good enough as well.
Net Margins (> 15%)
Net Income (Consolidated) : $28,755,000,000
Revenue : $111,439,000,000
Net Margin = Net Income / Revenue = 25.80% ➤ This percentage is great, similar to the percentage for Apple's cashflows. Again, in past quarters and years this ratio was strong as well but it has increased and gotten even better over the past quarter.
ROE (> 15%)
Return on Equity (ROE)= Net Income/Shareholder's Equity
ROE = 87.87% ➤ At first glance this seems to be a very high percentage which can be a great factor in considering the long-term value of a company, but oftentimes such a high percentage is paired with high debt. To that end, these two factors have been further analyzed in the latter part of the analysis.
ROA (> 6%)
Return on Assets (ROA) = Net Income / Assets
ROA = 17.73% ➤ Considering the entirety of Apple's operations this is a very good percentage.
Economic Moat Conclusion
Apple (AAPL): Altogether, Apple has very good free cashflows in which the company was shown to have both increased and gotten even stronger during the past quarter according to this metric. Their net income is also very strong which resulted in their good net margins, return on equity, and return on assets. From this, it can be concluded that Apple does have an economic moat and actually a fairly strong one at that. As will be discussed later in the analysis, their economic moat is further strengthened by their cult like following.
To calculate this metric the 2020 free cashflows of $73,365,000,000 were used. In general, their free cashflows have grown steadily over the past years. Also, based on the figures from the most recent years we can assume a yearly growth rate of 13% in the first five years and 7% in the years following. Taking into consideration their very wide economic moat and strong position within the market, it can also be assumed that Apple has a discount rate of 7%. Combining each of these variables together and in conducting further analysis, we get an estimated value of $169.20
Current Price: $134.60
Estimated Fair Value Price: $169.20
➤ 22.01% Margin of Safety. As this percentage relates to the margin of safety, it reveals that with a company such as Apple that they have a good margin of safety. Taking into account their financials and valuation metrics, it could be said that the firm is currently well-valued.
20 Point Analysis
Apple: Tim Cook is the current CEO and has been working in that capacity since 2011 and before then, he was the COO at Apple. Going into his history a bit, Cook joined Apple in 1998 which has afforded him plenty of experience and familiarity with the company. Since his assignment as CEO, he has had a tremendously strong and positive influence on the financials and stock value over these past years. It should also be noted that before Cook's joining of Apple he gained 12 years of experience working at IBM as the Director of North American fulfillment and COO. Each of these aspects considered, Cook's professional history and successes are indicative of him possessing the capability to continue making the best decisions for Apple well into the future.
2. Is the company innovative?
Apple: They are not as disruptively innovating as they were in the the past with Steve Jobs at the helm, but they still bring new and improved products to the market. This consistency and decent innovation is of course reflected in their financials and overall growth. Apple's current innovation can be seen as positioned between incremental and disruptive. The main strength in their products in this current era is quality, which, in their case, refers to products and services that are both high-performance design and consistently rendered into the markets.
3. Can the company grow?
Apple: Apple, despite their massive growth and remarkable valuation, is certainly still capable of growing. This has been proven in the past where Apple has done extraordinarily well in areas that were thought to be detrimental to the firm. The future also seems quite bright with the company as technological advancements are made and adopted. This growth, as it pertains to Apple, is mainly driven by three forces. These being growth into new industries, high quality products and services, and a cult-like following of buyers and brand loyalists across the world.
4. How does the company grow?
Apple: There are three main factors contributing to their growth. Firstly, Apple does not just focus on consumer electronics as they did in the past. They have grown and made a name for themselves in different industries such as subscription services, payment processing, the possible development of electric vehicles, etc. Secondly, their quality products convince a growing number of people to purchase and continue purchasing their products and services. Last but certainly not least, is their cult-like following and brand loyalists across the world. Many Apple buyers have grown into stong supporters of the brand as they have integrated into the Apple ecosystem and continue to enjoy all that the firm offers as well. These people will not only remain faithful but they also will recommend these products and services to family members, friends, co-workers and colleagues, etc.
5. Is the company market leader?
Apple: There are number of large, household name brands that Apple competes with, but it is apparent from their continued success, both fundamentally and technically, that Apple has the most ‘loyal’ following allowing them to maintain a very sizable market share (This is certainly the case when looking at the high-end market).
6. Is their market leadership safe?
Apple: The firm has a very wide economic moat allowing them to be protected against competition and setbacks. Next to that, Apple's cult-like following explained in the previous point ensures even more protection against competition. Still, even with such factors securing their market leadership, market leadership is never 100% guaranteed. Competition from firms producing lower-priced phones or even other brands in the same price bracket is and always will befierce and thus should be monitored. In this information Age, it is important to remember that market leadership can be gained quickly, but just as fast as it was gained, it can be lost as well.
7. Is there foreign exchange risk or commodities risk?
Apple: They are indeed influenced by exchange risk and commodities risk.
8. How are the profit margins?
Apple: They have a net margin of 25.80%. This is a great percentage reflective of constant, increasing profit margins. Their track record is also superb which should give investors confidence that the company will be able to sustain such great profit margins.
9. How much capital does the company need?
Apple: Considering the broad scope of Apple's operations, they need sizeable amounts of capital to stay on top of their game. Entering into new industries and creating a high-quality product is very expensive for the company. Luckily, they have sufficient cashflows and cash reserves to pay for these newer ventures while also maintaining current output and rendering of products and services.
10. Does the company have a lot of loyal customer base?
Apple: As mentioned in the prior excerpts of the analysis, Apple has created one of the strongest brand names on earth which has garnered them a cult-like following. A strong brand name may appear as though it is something that is not crucial, yet, this could not be further from the truth. A company’s brand name can offer numerous benefits which allow for long-term survival, arguably the most important factor in running a successful business. Their strong brand name coupled with said cult-like following of buyers strengthens the loyal customer effect and allows Apple to thrive over the long-term.
11. How much cash does the company produce?
Apple: They have very high, free cashflow relative to their revenue. In past years this was also the case which is a factor that as investors, we love to see.
12. What is their value creation over the past ten years?
Apple: This company has seen their value creation increase 1,824% over the past 10 years which is truly remarkable. Such unprecedented growth, is of course, no guarantee for future growth but it does show that Apple certainly knows, understands, and can execute on the factors that work and stay far away from those that do not.
13. Can the company pay its bills?
Apple: They have a quick ratio of 1.13 and a current ratio of 1.16. These ratios mean that they can pay back their current short term debt, which is good. In the past, these ratios were even better, but Apple has assumed more debt which could allow for more growth well into the future. What is also interesting about this situation is that Apple has enough cash reserves enabling them to pay back the debt owedwithout getting into serious trouble.
14. How does the company finance itself?
Apple: Their strong free cashflows and cash reserves are supplemented by debt. Overall this seems to be well balanced in their case, which means that financing current and future endeavors is of no issue.
15. How much debt does the company have?
Apple: Long term debt: $99.28B Shareholders Equity: $66.22B ➤ Debt to Equity Ratio: 1.50 ➤This is a ratio higher than their historical levels and actually not great. Still, as long as their debt is under control it allows for more growth. Next to that, Apple's debt is very cheap at the moment so it is certainly not bad that they are benefitting from this. A point for the overall rating of Apple will not be given for this metric since the ratio is higher than one, but this ratio again is not yet concerning.
16. What is their Piotroski F-score?
Apple: 7/9 ➤ This is not only good but even better than most companies.
17. What is their P/E-Ratio?
Apple: 35.79 ➤ This is a ratio that is leaning toward the higher side, but considering how much Apple has been able to grow and scale over the years along with their strong position, this isn’t too bad at all.
18. What is the P/B-Ratio?
Apple: 33.53 ➤ This is a ratio that is far too high but often the case for large companies like Apple.
19. What with the EV/EBITDA Ratio?
Apple: 26.43 ➤ This ratio is also quite high similar to the other valuation ratios seen above.
Apple: 8.31% ➤ This is an average percentage, neither great nor poor, which would result in the normal valuation of the Apple company.
Apple: 15/20 ➤ All in all this is a good score as Apple is a great company with strong financials. Their valuation ratios seem to indicate that they are, at the current time, overvalued but all of this should be considered according to specific context. Their growth is quite strong and has been well sustained more than most other companies over the years; however,this of course comes at a price that can be detrimental to future progress. Still, taking into account Apple's unprecedented growth and the certainty in their valuation, it can be concluded that the firm is reasonably priced at the given time.
All the information provided is personal opinion and not directly applicable financial advice. I have no ties to the above company and am not being compensated on their behalf for the writing of this analysis. You should make your own decisions based upon evidence and what you believe is best for you and your financial well-being i.e., conducting your own due diligence.