Below is my analysis of Apple (AAPL). As of 2/22/17 it is trading at $137.11 and has EPS of $8.31.
Business outlook: I believe that their business model faces significant headwinds. They distinguish themselves as a company by being able to sell the same product at a significant premium to their peers (this includes their smartphones, tablets, and computers). According to their financial reports, iPhones account for over 60% of their earnings. I believe that the smartphone industry as a whole is saturating, meaning there are less people out there needing to buy a smartphone, and further, that Apple is losing market share to their Android peers as other smartphone companies are consistently cranking out very, very solid products (Samsung, Google to name a few). I believe that within 5 years we will see severe margin compression as Apple struggles to attract new iPhone users and keep existing iPhone users. I believe in the future smartphones will all be very similar in performance and thus will be subject to a price war.
Valuation: Currently AAPL trades at a p/e of about 16.5. I believe that their earnings may be higher YOY 2017, but in the subsequent years will continue the downward trend seen in 2015-2016. Thus I personally do not consider them to be a growth play and any purchase in the security would be as a value play. For a company with a pessimistic earnings future, I view a p/e of 16.5 to be too high and provides a poor margin of safety.
The good (or is it really that good?)
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Their Cash hoard: Yes, they have a lot of cash - about $240B according to their latest filings. However before we get too giddy about this, there are several obstacles in the way: there is no guarantee that Trump will be able to allow repatriation of foreign overseas cash (90% of AAPL’s cash is overseas), and even if he did, we have no way of knowing if it’ll be this year, the next year, or in 4 years, and even if it was this year, just how much is that cash worth? There are several ways to value cash on hand, the most generous being to directly discount it from market cap. Subtracting $240B from AAPL’s market cap would put them at an adjusted p/e of 11. This is cheap, but not that cheap - especially if my bearish outlook on the smartphone industry comes to fruition. The reason this is considered an optimistic valuation of the cash is because they are more likely to use the cash to overpay for an acquisition than simply buy back stock.
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Their 10th anniversary iPhone: I’m sure it’ll be amazing, actually I hope it will be (I’m an apple user). However, these earnings will be short term as then they’ll face the same challenges they faced 2015-2016: everyone would already have a great iPhone and would no need to upgrade. We can be wishful and hope that Wall Street only cares about 2017 and early 2018 earnings, but we should know better than that - Wall Street cares about future earnings more than anything else.
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They might have something else down the pipeline: This is true, but there isn’t evidence of this yet and thus I would rather not pay a premium for this - I’d rather get this for free as part of the margin of safety.
Is it a short? Not quite, it is not majorly overvalued as of this point. Even if we assume that earnings drop 50%, they are still selling at a p/e near 30, which isn’t overly pricy.
At what price do I like it?: I like AAPL <$100. Because I do not believe in their long term earnings prospects, I require a larger than normal margin of safety. At $100, That would put them at a p/e of about 12, or an adjusted p/e of 6.5 (accounting for cash, using the optimistic estimation seen above) I think that at this price, it would make for a very good value play that can generate 30-40% median upside.
As always, do your own due diligence. Happy investing.
Submitted February 23, 2017 at 01:03AM by linlaoda http://ift.tt/2laZRJA
