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XM
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 XM
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Apple hits another record in exponential uptrend

Apple’s stock price continues to hit record highs after record highs, with the rate of gains increasing exponentially in recent months, something shown by the increasingly steep slope of the uptrend lines that have been supporting the price action. Practically everything paints a bullish picture, with the stock posting higher highs and higher lows above all its moving averages, and above the steepening uptrend lines.

The only warning signal comes from the RSI, which seems to have topped deep within overbought territory – a soft signal that upside momentum may be losing some steam. The MACD is also extremely high but remains safely above its red trigger line.

If the bulls stay in control and push the price back above the record high of 316.9, that would bring the price into unchartered waters again, turning the focus to round psychological numbers such as 320.0 initially. If that fails to hold too, the next target may be the 330.0 handle.

On the downside, the first obstacle for the bears may be the 306.0 area, where a negative break might open the door for the 295.0 region, marked by the January lows. Even lower, the 285.0 zone could attract attention.

In short, everything paints an extremely bullish picture from a technical perspective, though the RSI is warning of a slowdown in upside momentum.

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elina
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Apple Stock Has Inflated Another Dangerous ‘Dotcom’ Bubble In The Nasdaq

First, the bullish argument: Apple is a runaway train, flush with cash and enjoying strong demand for its wireless headphones. Throw in the fact that it’s successfully cornering the Chinese market with its smartphones and some enthusiasm about the upcoming 5G compatible iPhone 12. Combine all this with ultra-low interest rates, low inflation, and a generally positive risk environment, and it’s no wonder APPL stock is so in demand.

Over the past few years, Apple has embarked on an enormous share-buyback scheme. In 2019, ignited by Trump’s tax cuts, Tim Cook and the gang bought back an astonishing 6% of all outstanding APPL stock. Averaging 5.4% over the last few years, this both squeezes the value of the stock while also increasing the dividend the company can pay. Apple’s payout per share has increased more than 80% over the last seven years, putting even more upward pressure on its value.

With a market cap of $1.4 trillion, there is no questioning how important APPL stock is to both the Nasdaq and the stock market as a whole. With every possible fundamental pumping the price, Wall Street analysts are coming up with increasingly wild forecasts. Deja vu, anyone?

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stocktips
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Apple Earnings Preview: 5G Launch, Expanding Services Business To Fuel Growth

By Haris Anwar
 

* Reports Q1 2020 results on Tuesday, Jan. 28, after the close

* Revenue expectation: $88.38B

* EPS expectation: $4.54

No other earnings report is as important to investors as the one which the iPhone maker Apple (NASDAQ:AAPL) will release on Tuesday evening. The reason: the meteoric gains of Apple’s shares provided much of the fuel for the U.S. market’s strong rally during the past year.

After more than doubling in value, Apple is now priced to perfection, leaving no margin for the company to disappoint. The rally of the past 12 months has been so powerful that it added over $725 billion to the company’s market capitalization, taking it to about $1.4 trillion. The stock closed Friday at $318.31, only slightly lower than its record high of $323.33.
Apple Weekly Price Chart

Apple Weekly Price Chart

Driving this extreme optimism is hope that Apple’s iPhone business remains robust and will get another boost when the company releases its 5G models, currently expected in September 2020, which will allow consumers to have a much faster connection speed and help iPhone shipments see growth for the first time in two years.

With the prospects for expanding iPhone sales looking strong after 5G technology, the fast-increasing revenue from Apple’s AirPods, smartwatches and services such as streaming-music subscriptions and mobile payments are also bolstering the belief that the company is succeeding in cutting its reliance on the more cyclical hardware business and is on the way to becoming a service company.

Growth in its services division last year helped Apple offset the 14% decline in its iPhone business. Indeed, sales from services are forecast to rise to $54 billion in fiscal 2020 and account for a fifth of total sales, up from 18% at the end of 2019, according to analyst data compiled by Bloomberg.

Apple’s Valuation Leaps

With growth for iPhones reviving and Apple’s services operations showing strong expansion, investors have become confident about future prospects. For the first time since 2011, the iPhone maker’s shares have been trading at a higher price-to-earnings ratio than the S&P 500.

Apple is trading at 27 times last year’s earnings, the highest level since 2008. That compares with a multiple of 24 for the S&P 500. Apple’s persistent strength shows that investors have started to ignore the bearish scenario recommending investors avoid the company because its growth is too dependent on iPhones. The flagship product still contributes about half of total sales, making the business vulnerable to a shift in consumer preferences and a potential slowdown in economic activity.

In addition to these growth drivers, the macro environment, which became hostile last year following the U.S.-China trade spat and the growing risk of recession, is improving fast. The stock market is rising, volatility is low, and employment is growing.

The U.S. Federal Reserve is firmly on the sidelines and it seems unlikely that President Donald Trump would purposely cause any market shocks in an election year. This positive backdrop is prompting consumers to spend more on gadgets globally. Apple’s iPhone sales in China, the company’s biggest foreign market, rose more than 18% last month, according to CNBC calculations.

Bottom Line

Apple’s push to expand its sales from services is clearly succeeding, while growth from iPhones is reviving. This powerful combination justifies the stock’s current valuation and its future growth potential. Any post earnings weakness, in our view, should be taken as a buying opportunity.

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stocktips
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I Bought Apple In 2013: Now I’m Selling, Here Is Why

by Cory Cramer
I first bought Apple in 2013 and added in late 2015 and 2018 during dips in the stock price.

Apple stock has been very good to me over the past several years, but the estimated forward returns have become too low for me to continue holding the stock.

I sold my Apple stock this week and will be looking to reallocate my funds while I wait for Apple’s price to trade at a lower valuation.

Introduction

I have been a long-term Apple (AAPL) shareholder and bullish on the stock for nearly seven years. I first purchased the stock as a value investment for my then three-year-old daughter’s custodial account in the summer of 2013 for about $59 per share, split-adjusted. That purchase has done very well for her and has contributed a substantial sum toward her college education, a down-payment on a house, or her retirement someday.

 

Chart

The total return on that first Apple investment has been almost 500%, about 4x that of the S&P 500 over the same time period.

I wasn’t finished buying Apple. For my son, who is two years younger than my daughter, I made a second purchase of Apple stock in late 2015 at a price around $109.

Chart

Again, this investment has produced fantastic returns over the past four years, returning about 3x the S&P 500 index.

And I made one last Apple investment on 12/14/18 during the market correction, this one for my Roth retirement account.

Chart

And once again, I was able to more than triple the returns of the S&P 500 index.

I imagine that I’m somewhat unique in that I made so many deliberate Apple investments, yet have never purchased a single Apple product. My kids have a second-hand iPad and a Mac desktop they received from their grandparents, and my wife has used Macs for years as a graphic designer, but I, much like Warren Buffett, don’t own an iPhone. I’m hardly an Apple fanboy.

But the fact is, up until recently, Apple stock has been a good value, and one would have to be blind in order not to see the devotion Apple fans have for their products. I first noticed it back in 2013 when I went back to graduate school. College students loved their Apple products. Their MacBooks and iPhones brought them a joy that few other things in life seemed to bring them, and walking in between classes their eyes were always buried in their phones. These phones had become similar to what a car had been to teenagers when I was growing up. The trend didn’t seem like a fad to me, even though I wasn’t participating (and still don’t use a smartphone to this day).

But 2020 is a new year. Apple stock is not only no longer cheap, it has gotten expensive. And this week, I sold all of my shares.

Apple’s Valuation

This is, surprisingly, the first article on SA I’ve written about Apple despite it being one of the two largest positions in my portfolios for the past several years. (The other being Berkshire Hathaway (BRK.B), which also holds a large stake in Apple.) The reason I haven’t previously covered Apple is that the company is fairly difficult to value, and whenever possible, I like to keep my SA articles focused mostly on the numbers and less on speculation and stories about what might happen in the future. In fact, each time I purchased Apple stock, the news and expectations for the company were horrible at the time. And I didn’t buy the stock because I had some wonderful story about Apple with which to counter the negative stories, I bought it because the price was cheap, and the forward returns looked good so long as nothing absolutely terrible happened.

So, I lacked a positive story when bought Apple, just as I lack a negative story now that I’m selling. But when I made my Apple purchases, I considered them speculative, even though I thought the price was cheap. The reason for that is because with the invention and launch of the iPhone around 2007, Apple became a very different company than it was before then. So, starting around that time, I felt like Apple needed to be treated as a ‘new’ business. And this meant that an investment in Apple was speculative. Here’s why.

Part of my stock valuation process is to include earnings growth for a full economic cycle. I even call them “full-cycle analyses”. Any full cycle analysis must, in my opinion, include at least one recessionary period. And since we aren’t currently in a recession, I typically like to go back to 2006 or 2007, a little before the last recession and measure earnings growth from that point in time in a way that includes any earnings declines that occurred during the recession. For some moderately cyclical stocks (like Apple), this can be very important because when recessionary earnings growth declines are included, often, the earnings growth rate will be lower than if we just measure earnings at point A and then measure them at point B, and assume a smooth earnings growth increase was spread evenly throughout the entire period.

Examining the stock and earnings during a recessionary period is also useful in helping to determine what sort of opportunity one might have to get back into a stock at a reasonable price if one decided to sell it because history can serve as a guide for how far earnings might decline during a recession. Unfortunately, because the iPhone was essentially being launched during the last recession and was in heavy growth mode during that time, we don’t have any good data on what Apple’s business might do during the next recession. That is why I’ve always considered it a speculative bet, even if it turned out to be a good one. (I’ll revisit this idea of speculation later in the article.)

Right now, I want to begin by performing a basic ‘full-cycle’ analysis, starting in 2007 for Apple. Spoiler: I’m eventually going to disregard these initial estimates, but I wanted to share them nonetheless, first, before I share my preferred, alternative approach.

Market Sentiment Returns

In order to estimate what sort of returns we might expect over the next 10 years, let’s begin by examining what return I could expect 10 years from now if the P/E multiple were to revert to its mean from the previous economic cycle. I start the previous cycle around 2007, about a year before the last recession.

Apple’s current blended P/E is 25.09, while its normal P/E this past cycle has been 19.00. With most stocks, unless there is a dramatic change in their business over time, their P/E will fluctuate up and down around its long-term mean, which F.A.S.T. Graphs labels ‘normal’ P/E in blue. If, over the course of the next 10 years, the P/E were to revert to its normal 19.00 level, and everything else was held equal, it would produce a 10-year CAGR of about -2.74%. So, if the market simply changed its mind about how it feels about the stock and reverted to its long-term ‘average’ feeling over the course of 10 years, and nothing else changed, an investor buying the stock today should expect to lose -2.74% per year, for 10 years with this investment, based just on sentiment alone.

Current and Historical Earnings Patterns

We previously examined what would happen if market sentiment reverted to the mean. This is entirely determined by the mood of the market and is quite often disconnected, or only loosely connected, to the performance of the actual business. In this section, we will examine the actual earnings of the business. The goal here is simple, we want to know how much money we would earn (expressed in the form of a CAGR %) over the course of 10 years if we bought the business at today’s prices and kept all of the earnings for ourselves.

There are two main components of this, the first is the earnings yield, and the second is the rate at which the earnings can be expected to grow. Let’s start with the earnings yield, which, according to FAST Graphs, is +3.99%.

The way I like to think about this is if I bought Apple’s whole business for $100, I would earn $3.99 per year on my investment if earnings remained the same for the next 10 years.

But that’s not the end of the story. Business earnings do not typically stay the same every year. Sometimes earnings grow; sometimes, they shrink; and sometimes, they fluctuate both up and down. So, in order to estimate how much money the business might earn over ten years, one needs to estimate how the annual earnings might change over that time period.

There are as many ways to estimate this as there are investors. My approach is to base my forward expectations on the earnings of at least one full previous economic cycle (so that at least one recession is included in the estimate) for businesses whose earnings are not highly cyclical. For businesses whose earnings are highly cyclical, earnings history is not very reliable at predicting future returns, so I use the price history from at least two previous economic cycles for those highly cyclical stocks.

As you can see in the green shaded area that represents EPS in the FAST Graph, Apple has experienced two years where earnings declined by -10% over the past 13 years. These declines took place outside of a recession and are likely due to Apple’s product cycles more than anything else. So, we know that there is some cyclicality with Apple’s earnings even when the wider economy is doing good. It was during these downcycles I made my purchases of Apple stock. Ultimately, we know Apple’s earnings will be affected by the next recession. We just don’t know how much. I feel comfortable assuming that earnings will be moderately cyclical, meaning they will probably decline more than -20%, but less than -50% off of their eventual highs, during a recession. So, I don’t think Apple’s earnings will be so cyclical that using a P/E ratio as part of a valuation process becomes useless (as it would with a highly cyclical stock like Micron (MU), for example). But we should assume that there will be some moderate cyclicality, so we shouldn’t just project Apple’s future earnings in a straight line over the long term. It’s more reasonable to assume some significant dips in earnings along the way.

Earnings Growth

We know what Apple is currently earning. The next step is to estimate their earnings growth over the next decade. I do that by figuring out at what rate earnings grew during the last cycle and applying that rate to the next ten years. This involves calculating the EPS growth rate since 2007, taking into account each year’s EPS growth or decline, and then backing out any share buybacks that occurred over that time period (because reducing shares will increase the EPS due to fewer shares).

Let’s start by looking at how much shares were reduced since 2007.

Chart

Apple has reduced its shares outstanding by about -27% since 2007. When I back these buybacks out, I get a cyclically adjusted earnings growth rate for Apple of +23.38%, which is an incredible earnings growth rate (more on this later).

Next, I’ll apply that growth rate to current earnings looking forward 10 years in order to get a final 10-year CAGR estimate. The way I think about this is, if I bought Apple’s whole business for $100, it would pay me back $3.99 the first year, and that amount would grow at +23.38% per year for 10 years. I want to know how much money I would have in total at the end of 10 years on my $100 investment, which I calculate to be about $251.01. When I plug that growth into a CAGR calculator, that translates to a +9.64% 10-year CAGR estimate for the expected earnings returns.

10-Year, Full-Cycle CAGR Estimate

Potential future returns can come from two main places: market sentiment returns or earnings returns (both of which we just estimated). If we assume that market sentiment reverts to the mean from the last cycle over the next 10 years, it will produce a -2.74% CAGR. If the earnings yield and growth are similar to the last cycle, the company should produce a +9.64% 10-year CAGR. If we put the two together, we get an expected 10-year, full-cycle CAGR of +6.90%.

 

Currently, I consider an expected 10-year CAGR greater than 12% a “Buy,” in between 4% and 12% a “Hold”, and less than 4% a “Sell.” This is currently in the range of 4-12%, so Apple stock would be a ‘hold’ based on my most basic analysis here.

However, I don’t think it’s wise to use the basic analysis in Apple’s case. The reason for that is because Apple experienced huge earnings growth for the five years from 2007 to 2012 with the launch of the iPhone. These were people buying iPhones for the first time. That sort of growth is unlikely to happen again. So, I think it’s a good idea to run the numbers for the last seven years, from 2012 through 2019, so see what Apple has done since the initial growth spurt from the iPhone.

Market Sentiment Returns (Since 2012)

Apple’s current blended P/E is 25.09, while its normal P/E since October 2012 has been 15.32. If over the course of the next 10 years, the P/E were to revert to its normal 15.32 level, and everything else was held equal, it would produce a 10-year CAGR of about -6.80%. That’s a pretty big decline, and it may be overstated due to Apple’s shift into services, but even if we used an average P/E of 20, we would get an expected 10-year CAGR of -2.21%.

Earnings Growth (2012)

For this section, I’ll calculate the EPS growth rate since 2012, taking into account each year’s EPS growth or decline, and then backing out any share buybacks that occurred over that time period (because reducing shares will increase the EPS due to fewer shares).

Let’s look at how much shares were reduced by since 2012.

Chart

Apple has reduced its shares outstanding by about -33% since late 2012. When I back these buybacks out, I get a cyclically adjusted earnings growth rate of only +3.34%, which is much, much lower than what we had when measuring from 2007.

Now, let’s go through the same process and apply that growth rate to current earnings looking forward 10 years in order to get a final 10-year CAGR estimate. The way I think about this is, if I bought Apple’s whole business for $100, it would pay me back $3.99 the first year, and that amount would grow at +3.34% per year for 10 years. I want to know how much money I would have in total at the end of 10 years on my $100 investment, which I calculate to be about $148.00. When I plug that growth into a CAGR calculator, that translates to a +4.00% 10-year CAGR estimate for the expected earnings returns.

10-Year, Full-Cycle CAGR Estimate (2012)

If we assume that market sentiment reverts to the mean from the last cycle over the next 10 years, it will produce a -2.21% CAGR (I’m using the more generous number here of an average P/E of 20). If the earnings yield and growth are similar to what we have experienced since 2012, the company should produce a +4.00% 10-year CAGR. If we put the two together, we get an expected 10-year, full-cycle CAGR of +1.79%. This forward return estimate is below my 4% threshold for a ‘sell’, so I currently rate Apple a ‘sell’, and I have sold my shares.

Importantly, these assumptions do not include a recession, which, as I discussed earlier, would probably cause Apple’s earnings to drop anywhere from -20% to -50%, so I think the assumptions I’m making here are pretty optimistic since I didn’t include that assumption in my earnings growth rate calculation. Perhaps, this will be offset by growth in services and other segments of their business that are potentially counter-cyclical, but those assumptions are speculative.

Time Until Payback Perspective

Since with Apple there is a big gap between the market sentiment returns and the actual business returns, some long-term investors might want to just ignore the market sentiment and focus solely on the business.

 

I think this is a legitimate way to think about long-term investing (that’s what Warren Buffett does). But I think if one does that, one of the key questions an investor should ask is, “How long will earnings from this business take to pay me back on my investment?” In other words, if I invest $100, how long will it take for my $100 investment to return an additional $100 so that I end up with $200?

The shorter this time until payback is, the better the investment. But just as importantly, when the time until payback gets quite long, I think an investor really has to think about whether they can predict earnings and earnings growth that far into the future. Personally, I prefer investments that pay me back in 8 years or less (and when I first purchased Apple stock, it would have). Additionally, I would look to sell if the time-until-payback exceeded 16 years in most cases, and I would likely never hold onto a stock if the time-until-payback was over 20 years because I don’t think it’s possible to predict that far into the future. Each investor will have to decide what time until payback they are willing to accept for each business, but having a solid number to reference when making that determination can be very useful.

Using the numbers since 2012, I calculate that it would take about 16 years for Apple to pay for itself if purchased at today’s prices. That’s right at my ‘sell’ threshold. This doesn’t take into account market sentiment at all and is purely based on the business.

Opportunity Risk/Reward

Since I think Apple is a great business but is simply priced too high, it’s worth looking at the odds of the price falling to a level where we could buy it near its average P/E ratio if we sell at today’s levels versus what we might miss out on by rotating out of the stock at today’s prices.

Apple’s business is obviously rapidly changing, but it doesn’t seem unreasonable to me to think that during the next economic slowdown, or perhaps even before then, Apple’s P/E will fall at least to a 20 level. If the company’s P/E contracts from its current multiple of 25 to 20 while earnings are held steady, the price would drop about -20%. If it falls to the long-term market average and Apple’s average PE since 2012 of about 15, it would lose -40%.

 

In order to estimate the opportunity risk/reward, I use F.A.S.T. Graphs’ forecasting tool to estimate future price appreciation, including dividends, for the next 2 years using analysts’ estimates. What I want to know is, if the stock reverts to the mean after 2 years, whether I will have a reasonable chance to buy the stock at a significantly lower price than it trades today or if I would likely never get a chance at a lower price.

Forecasting out 2 years using analysts’ estimates to January 2022, including dividends, we can expect to add $85.60 to Apple’s current price. That gives us a price estimate 2 years from now of $387.90 using today’s 25.09 P/E ratio. If the stock price at that point reverts to a 20 P/E, it would lose about -20% of its value and produce a price of $310.32, which is essentially where the stock trades at today. So, even a modest correction over the course of the next two years would give an investor a chance to get back in at a similar price.

I think it’s getting more and more likely we will experience a serious economic slowdown at some point during the next couple of years, though. And if that happens, even after we allow two years of growth for Apple, if the P/E reverts to 15, the stock could lose -40% just on market sentiment alone and bring the price down to $232.74. If earnings were to fall -20% to -50% as I suspect they could during a recession, that would cause the price to fall even farther.

For these reasons, I don’t see much opportunity risk in rotating out of the stock today. For some ideas on where to put the proceeds from the sales, consider reading about my rotational strategy in these three articles: Part 1 – “Ignore Sentiment Cycles At Your Own Risk,” Part 2 – “Mitigating Sentiment Cycles” and Part 3 – “Sentiment Cycles: When To Sell And When To Buy Back Again.”

Since Apple was such a large part of my portfolio, I’m going to take a few weeks to reallocate my funds. I have a list of several stocks I need to examine as potential buys, and then most of the remaining funds will likely into the default ETFs I suggest in my rotational strategy.

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craig
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Apple May Underperform The Market In The 2020s: Here’s Why

by Louis Stevens
 
Long only, value, growth at reasonable price, research analyst
Summary

Apple’s recent meteoric rise has left many wondering if they should hop aboard as it rockets upwards.

I demonstrate what return you can expect from buying Apple at this price and why buying here will likely lead to underperformance of the SPY.

With services and wearables growing at healthy rates, Apple has once again restored investor confidence, as evidenced by their ~25x price to free cash flow, but that doesn’t mean buy.

apple products

Introduction

In today’s article, we will go through a sum of the parts valuation analysis of Apple (AAPL) based on two factors. The first factor is somewhat qualitative, in that, it’s a description of the ecosystem, or walled garden as some call it, upon which the second factor rests. The second factor relates to the growth of certain business segments within the ecosystem that have proven themselves capable of fueling Apple’s business growth for years to come.

With these two factors in mind, we will assess the growth prospects for Apple and determine whether the growth prospects warrant purchasing shares here.

The Walled Garden

The walled garden refers to the technological ecosystem in which one finds themselves once they have purchased two or more Apple products. It’s the idea that Apple has a substantial competitive advantage over their competition because one can own a smartphone, laptop, desktop, watch, speaker system, and TV, and they can all be seamlessly integrated with user friendly Apple software.

In the world of Android and Windows, such seamless integration does not exist because Alphabet (GOOG) (GOOGL) designs the Android operating system, Microsoft (MSFT) designs Windows OS, and, for example, Roku (ROKU) or Amazon (AMZN) designs smart TV operating systems. This leads to a fragmented user experience that cannot rival that of Apple’s. Hence, once one enters the Apple ecosystem, it is unlikely that they will exit, and as Apple introduces more products, i.e., their AirPods or Apple TV streaming service, those new products seamlessly and conveniently integrate into the ecosystem, building the wall ever higher.

 

Great! So What’s It All Worth?

While the walled garden is certainly something to celebrate for shareholders, parts of the walled garden have reached terminal growth, and it has become utterly imperative for Apple to focus on other aspects of the wall, lest competitors besiege their ecosystem and create an opening through which “eco-citizens” might leave.

Valuing Each Of Apple’s Individual Businesses

As a point of clarity, I will be using Apple’s most recent 10-K, instead of their most recent 10-Q to extract pertinent financial data. I will of course extract certain items such as updates to their capital return programs from their most recent 10-Q. If I were to use their most recent 10-Q for much of my modeling, the number of assumptions I would have to make would increase such that my model would become more unreliable in determining future returns. So let’s get started!

apple stock

Source: Apple 10-Q FY20 Q1

As can be seen in the above, “Wearables, Home and Accessories” grew at 41% yoy from 2018 to 2019. Additionally, Services grew at 16% yoy. These two growth rates are essential in forecasting the value of Apple, because the iPhone, Mac and iPad have essentially stopped growing entirely, as can be seen below.

apple stock

Source: Apple 10-K FY19

In Apple’s last quarter, “Wearables, Home and Accessories” grew at 37% yoy, with Services’ growth accelerating slightly to 17%.

With the above metrics, it’s rather easy to create a sum of parts valuation, whereby we can identify exactly what to expect in the way of future returns from our Apple holdings.

 

iPhone, Mac and iPad

For simplicity’s sake, I combined Apple’s iPhone, Mac and iPad segments into one low-growth, mature titan of free cash flow generation.

Assumptions: The following DCF model is predicated on a few assumptions regarding the margins of these businesses and the resulting free cash flow they should produce.

1) Gross Margins for the segment (iPhone, Mac, and iPad) as a whole rest at 32% throughout the 10 year period of the following DCF model, and operating expenses rest at 13% throughout the same period of time.

2) Free cash flow to shareholders is assumed to be about 80% of the above operating margin when we account for deductions resulting from an effective tax rate around 20% and interest expense.

3) For modeling purposes and in light of the recent stagnation in revenues, we assume 1% annualized growth for the entire segment, and 0% thereafter for a 100 year period of time.

iPhone, Mac and iPad Valuation

Assumptions Values
FCF To Equity Growth Rate (10yr) 1%
Terminal Growth Rate 0%
Discount Rate (90yr Annualized Return S&P 500) 9.8%
Initial Free Cash Flow To Equity Per Share (2019) $9.07
Fair Value $99.08

Source: Data Extracted From 10-K, Calculations Done By Myself

If you’re a reader of mine, you know that in all of my DCF models I incorporate the rate at which the company will likely repurchase shares. The repurchase and retirement of shares results in higher free cash flow per share, e.g., $10 distributed over 9 shares is more valuable than $10 distributed over 10 shares.

iPhone, Mac and iPad with share repurchase program:

Assumptions Values
FCF To Equity Growth Rate (10yr) 1%
Terminal Growth Rate 0%
Discount Rate (90yr Annualized Return S&P 500) 9.8%
Initial Free Cash Flow To Equity Per Share (2019) $9.07
Fair Value $99.08
Fair Value (Including Effects of 14.5% Share Reduction) $110.61

Source: Data Extracted From 10-K, Calculations Done By Myself

As the above model demonstrates, a reduction of 14.5% in shares outstanding over a 10 year period would result in a CAGR of 2.6% instead of just 1%, leading to a fair value of $110.61.

 

Wearable, Home, and Accessories

This is where the fun starts.

Assumptions:

1) Firstly, the model assumes an average of 20% top and bottom line growth for the next ten years. Considering Wearables, Home and Accessories are growing at a steady 35-40% presently, this may certainly prove to be a conservative estimate.

2) Gross margins for the segment as a whole rest at 32% throughout the 10 year period of the following DCF model, and operating expenses rest at 13%. This is the same as the iPhone, Mac and iPad segment because Apple combines both of these into one “products” segment, for which they give a total gross margin. This may lead to some distortion in results due to the chance that newer products will have higher operating margins, and therefore generate more FCF.

3) Free cash flow to shareholders is assumed to be about 80% of this operating margin when we account for deductions resulting from an effective tax rate around 20% and interest expense.

Assumptions Values
FCF To Equity Growth Rate (10yr) 20%
Terminal Growth Rate 1%
Discount Rate (90yr Annualized Return S&P 500) 9.8%
Initial Free Cash Flow To Equity Per Share (2019) $1.17
Fair Value $59.06

Source: Data Extracted From 10-K, Calculations Done By Myself

With share repurchase program:

Assumptions Values
FCF To Equity Growth Rate (10yr) 20%
Terminal Growth Rate 1%
Discount Rate (90yr Annualized Return S&P 500) 9.8%
Initial Free Cash Flow To Equity Per Share (2019) $1.17
Fair Value $59.06
Fair Value (Including Effects of 14.5%) $67.59

Source: Data Extracted From 10-K, Calculations Done By Myself

Services

Lastly, I will model 10% growth for the next 10 years in services.

Assumptions Values
FCF To Equity Growth Rate (10yr) 12.5%
Terminal Growth Rate 1%
Discount Rate (90yr Annualized Return S&P 500) 9.8%
Initial Free Cash Flow To Equity Per Share (2019) $4.41
Fair Value $120.06

Source: Data Extracted From 10-K, Calculations Done By Myself

With share repurchase program:

Assumptions Values
FCF To Equity Growth Rate (10yr) 12.5%
Terminal Growth Rate 1%
Discount Rate (90yr Annualized Return S&P 500) 9.8%
Initial Free Cash Flow To Equity Per Share (2019) $4.41
Fair Value $115.02
Fair Value (Including Effects of 14.5% Share Reduction) $130.77
 

Source: Data Extracted From 10-K, Calculations Done By Myself

Projected share buybacks resulted in a CAGR in FCF to equity per share of 14.28%, instead of the initially assumed 12.5%.

To sum up the DCF present value, and to identify in the near term how shares will trade, let’s add up the values of the individual businesses:

We arrive at a present value of $308.97. Will it trade to $400 in the near term? Potentially, but as you will see later in the article, much of Apple’s future growth has been priced in at $320.

Capital Return Programs

Share Repurchase Program

Apple continues to aggressively repurchase shares as they execute their leveraged recapitalization, whereby they eventually will become cash neutral, which means the cash on their balance sheet will equal their total long-term debt.

share repurchase program

Source: YCharts

In April of 2019, Apple increased their $100B share repurchase program to $175B, of which $116.1B had been used at the end of calendar year 2019.

This means that Apple will likely execute another $58.9B worth of share repurchases during fiscal year 2020. This is likely because Apple’s financial team is probably employing a DCF model nearly identical in nature to mine, which is further demonstrating to them that their shares are fairly valued at worst, and potentially undervalued.

Dividend

For myself and my team at L.A. Stevens Investments, we view share repurchase programs more often than not as the most ideal method by which to return capital to shareholders. It enables investors to maximize tax efficiency by strategically liquidating their holdings during a period in their lives when it would be wisest, from a tax perspective, to do so.

Therefore, we see Apple’s conservative dividend policy juxtaposed by their aggressive share repurchase program as very positive. With that being said, dividend policy cannot be ignored in creating a company’s valuation.

 

apple stock chart

Source: YCharts

In the next section, I will tie together all of the components of this valuation and include a valuation based on DRIPing Apple in, for example, a Roth IRA.

Tying It All Together: Price Targets & Expected Returns

Below you will find what is normally the third step in my valuation model. Refer to some other far shorter articles of mine, in which I clearly employ the three step model, for further clarification.

The third step always involves normalizing the share price for the reality that after 10 years, they will have a P/FCF multiple, by which their share price will be defined. Below you can see that normalization:

Free Cash Flow Per Share Assumed P/FCF Multiple Share Price
$16.75 (Services) 15x $251.25
$8.47 (W, H & A) 20x $169.40
$11.72 (iPhone, Mac & iPad) 10x $117.20

Source: Data Extracted From 10-K, Calculations Done By Myself

Adding the three business share prices together, we arrive at a price target of $537.85 by 2030, which implies a CAGR of only 5.33% for the next 10 years based solely on share price appreciation.

I want to point out that the largest influencing factor on this estimate is my assumption that Wearables, Home and Accessories would grow at an average rate of 20% annualized for 10 years. For the past few years, it has grown at 35%-40% annualized, so 20% may be slightly too pessimistic. A sustained 30% growth rate would indeed materially alter the final share price, though such an assumption would be rather reckless, as 10 years of sustained 30% growth would be challenging for the mature titan that is Apple.

So in light of these rather conservative estimates (feel free to tell me if or how you disagree), Apple has share price appreciation ahead; however, the share price alone may not be able to rationally beat the market over the next decade.

 

But before we write off Apple as a market under-performer, let’s look at what returns would be for a person DRIPing Apple in a tax exempt retirement account.

Here’s your expected return DRIPing from $320 (current share price) in a tax exempt retirement account:

apple stock chart

 

At a 2030 share price of $603.07, you would achieve a CAGR of 6.55%. If you’re in a taxable account, it’s even worse.

Concluding Thoughts

We purchased a great deal of Apple at around $180, and we hope to achieve a stable 11.6% CAGR from the investment through DRIPing; however, at today’s price, we would not recommend putting capital to work in the stock.

Will Apple reach $400? Yes, of course, but that doesn’t mean it’s going to outperform the market over the coming 10 years from a starting point of $320.

As always, I’m very grateful for your readership, and happy investing!

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FxPro
Posts: 81
(@fxpro)
Trusted Member
Joined: 3 months ago

Coronavirus hit Apple

 

Apple has warned that disruption in China from the coronavirus will mean revenues falling short of forecasts. The tech giant said production and sales were affected, and that “worldwide iPhone supply would be temporarily constrained”. The iPhone maker is the first major US company to say that the epidemic will hit its finances.

Coronavirus hit Apple

Apple, which had forecast record revenues of up to $67bn in the current quarter, did not reveal the likely hit. “We do not expect to meet the revenue guidance we provided for the March quarter,” the company said in a statement, adding that it was “experiencing a slower return to normal conditions” than expected. With most stores in China either closed or operating at reduced hours, sales of Apple products would be lower, the company said.

Apple said that “while our iPhone manufacturing partner sites are located outside the Hubei province – and while all of these facilities have reopened – they are ramping up more slowly than we had anticipated. Analysts have estimated that the virus may slash demand for smartphones by half in the first quarter in China, which is the world’s biggest market for the devices. The car industry is another sector that has been affected by disruption to its supply chain. Last week, the heavy equipment manufacturer JCB said it was cutting production in the UK because of a shortage of components from China.

Apple warns coronavirus will hurt iPhone supplies
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caballero
Posts: 28
(@caballero)
Eminent Member
Joined: 3 months ago

Apple shipped fewer than 500,000 iPhones in February, a 60% year-on-year decline

Apple got off to a strong start and looked unstoppable in 2020. Then the coronavirus broke out

On Jan. 29, a day after its earnings, Apple shares hit an intra-day high of $327.85, even after it gave wider-than-usual guidance for its March quarter. Investors felt content.

At that point, the number of coronavirus cases in China stood at over 7,000 versus more than 80,000 on Monday. In early February, analysts reiterated their buy ratings on Apple’s stock and strong price targets. While acknowledging the outbreak of the coronavirus, they felt Apple could withstand it.

On Feb. 17, Apple said it did not expect to meet the revenue guidance for the March quarter of $63 billion to $67 billion. China was mostly to blame. The coronavirus forced the annual Lunar New Year holiday to be extended. That meant Apple stores and the factories that make iPhones, run by Foxconn, remained shut for longer. Production wasn’t happening and demand had waned.

Even now, Taiwan’s Foxconn, the main company that assembles iPhones in China, is not at full capacity and not all of Apple’s retail stores in mainland China have opened.
China accounts for nearly 15% of sales for the company but crucially, it is at the heart of iPhone production which will affect supply globally. The bad news kept rolling in. On Monday, official Chinese government figures showed Apple shipped fewer than 500,000 iPhones in February, a 60% year-on-year decline.

On top of that, there are concerns that Apple may not be able to launch new products on time, and that may include a rumored 5G-capable iPhone. Since the record intra-day high, Apple shares have fallen nearly 19% that’s wiped off billions of dollars in value, even as the broader equity markets saw a violent sell-off.

UBS lowered its June quarter iPhone unit sales by an estimated 2 million, to 38 million units. It also reduced its earnings and revenue estimates for Apple for the fiscal year ending September 2020. But analysts still feel that the coronavirus is a near-term issue for Apple and that its long-term growth story remains intact.

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