frugal

11% rise in revenue, is Apple (AAPL) still a buy?

When investing in a stock long term, you should focus on the company’s fundamentals. To break down the company’s fundamentals, I like to look at their qualitative and quantitative parts. For the qualitative part of the company’s fundamentals, it would look at their qualities, who they see as competitors and how they work as a company moving forward. For the quantitative part, it would be looking at their revenue, net income, profits and year-on-year growth over time. I will pen down my thoughts on Apple, one of the most valuable publicly traded companies in the world, talking about their fundamentals and explaining why I remain invested in them.

Qualitative

Looking at the quantitative aspects of Apple, there are many factors which will remain advantageous for them for many years to come. This part looks at the “intangibles” which are often more important than the quantitative parts.

Wide Investment Moat

Firstly, Apple has a very wide investment moat. Whenever someone says Apple, the first thing that pops in their mind is the iPhone. It is rightfully so. The iPhone has revolutionised how we used phones. You know the firm has a wide moat when the first google results of “apple” is not the fruit but the brand.

Among the higher echelons of society, people do not contemplate other phones other than iPhones. Instead of which phone should I buy, they would think “which iPhone should I buy”. Despite owning only 20% of the smartphone market share, Apple remains the leader in this industry. Whatever they do, they execute it very well and the industry follows.

They were the first to remove the headphone jack. Although to the dismay of users, they have forced innovation and spurred the use of wireless headphones. A few years back, we would never have access to such good options of wireless headphones.

Transition to Services

Although the main driver of Apple’s revenue remains to be the iPhone and it will be for many years because it is their flagship product, there is an attempt to shift towards services. They have in fact done very well to create an eco-system to deter users from switching away. This will help in persuading consumers to purchase another iPhone. However, an even better way to ensure constant revenue would be to sell services.

Adopting Adobe’s subscription model, Apple’s services allow them to generate a constant stream of revenue at an even higher profit margin. These services include Apple Music, App Store, iCloud, Apple Books, Apple Pay, AppleCare.

Although these services may not be the industry leader right now, they have shown to be growing significantly year-on-year. Although Spotify leads Apple Music (after Joe Rogan launched an exclusive partnership with Spotify) in terms of audio entertainment, and companies like Visa and Mastercard remain industry leaders instead of ApplePay, it is still beneficial for Apple to make a push towards these services.

As Apple continues to shake off its “luxury brand” image by introducing more affordable iPhones like the iPhone SE and introducing more wearables (nothing can compare to their iPads and Apple Watches), they will begin to invade a larger part of people’s lives. As people become more invested in the Apple ecosystem, they will be more likely to purchase these services.

Attention to quality and user experience

Apple pays a lot of attention to the user experience. It is almost like they made it for you. When unboxing a Macbook, it automatically boots up when you open the laptop. It just makes sense.

The Apple Pencil, although round, does not roll off the table. They have perfected the weight distribution such that the “Pencil” side will always face up.

The seamless connection between their various devices and the Airpods have not been achieved by any other manufacturer. When you take it out of your ear, the music stops. Everything they do just makes sense.

For a long time, their iPads and Macbooks have become the industry’s gold standard. They are robust and solid devices which are difficult to fault. Joining their family soon would be the Apple Watch.

Recently, with the announcement of iOS 14, they have released widgets. Many Android users laughed at Apple for being so late to the game. However, the way Apple uses widgets is just different. They are more intuitive, and more useful to the overall experience.

Competent management

Despite the passing of the visionary Steve Jobs, who is still one of the greatest leaders of our generation, Apple still has a very competent management. Although Tim Cook succumbed to the pressure of investors by issuing dividends, it is also proof that Apple has so much cash on hand that they can just pay off their debt.

Innovation

Innovation continues to be something I strongly believe that every company needs in order to survive. With this ongoing pandemic, it is even more apparent that an innovative company will emerge from a crisis even stronger. (Look at the bull run of the Big Tech stocks this year)

Outside of the iPhone, Apple has managed to innovate in every other product they sold. As the iPhone is their main driver of revenue, they continue to play it safe. However, as for the other products, there has been a constant push for innovation.

Look at the iPad. The new iPad and the Magic Keyboard combination is so mysterious. The magnets are industry grade and they have managed to produce it in such an intuitive manner and design.

Although not every one of their innovations may have been successful or well-received, it is good that a company continues to re-invent themselves. They admitted their mistake for the butterfly keyboard in the macs and switched back to a scissors switch. The touch bar on their macs may not be the most popular, but they are still pushing limits.

One exciting innovation would be the introduction of Apple Silicon Macbooks. This means that Apple will begin to produce and customise their own chips instead of using the ones from Intel. Macbooks are known to overheat and throttle after some use. However, these Apple Silicon Macbooks have proven to be promising. 

These chips are rumored to be from TSMC’s 5nm architecture, which is the most advanced one in the industry right now. Only TSMC and Samsung are capable of producing such advanced chips. These chips will allow Apple to connect their iOS apps with their Mac OS apps. Early leaks have shown the apps to run surprisingly well on the Macbook.

Attempt to grow market share

As Apple realised that they still have potential to grow their market share, they have released the iPhone SE to target low-income markets. The cheaper alternative will entice large emerging markets such as India to hop onto the Apple ecosystem.

As they continue to dominate the tablet and wearable markets, Apple will continue to expand their reach. Diving into financial services, audio services, untapped portions of the smartphone market and even the newly innovative Apple Silicon Macbooks that everyone continues to be excited about.

Quantitative (Earnings Report for Q2 2020)

Apple has just released their quarterly earnings report for Q2 2020 on 30 July. 

Stock Split (4-1)

Along with a huge surge in profits, they have also announced a 4-1 stock split. This means that current owners of the stock would get 3 more stocks for each stock they own but the value in total would remain the same. This change is mostly cosmetic and results in more retail investors being able to purchase Apple shares. However, do note that retail investors often do not have the purchasing power to affect the price of a share.

Important Metrics

Q2 2019 (M)Q2 2020 (M)Y-o-Y Growth (%)Refinitiv Estimates
Revenue53,80959,68510.9%52,250
Products42,35446,5299.86%
iPhones25,98626,4181.66%22,370
Mac5,8207,07921.6%6,060
iPad5,0236,58231.0%4,880
Wearables, Home and Accessories5,5256,45016.7%6,000
Services11,45513,15614.8%13.18
Net Income10,04411,25312.0%
Earnings Per Share (EPS)2.182.5818.3%2.04

Year-on-Year Growth

I have extracted some important numbers from their financial statement. As I have said earlier, Apple is beginning to earn more from their services. The coronavirus is one huge factor behind it. From services alone, they achieved 14.8% YoY growth.

Moreover, with their recent update of the Macbooks (change to scissors switches) as well as the introduction of the iPad Pro with the Magic keyboard, they have managed to garner huge growth for those products. Their wearables have also achieved significant growth. I am guessing this is due to the popularity of their AirPods and AirPods Pro.

Generally, their financials paint a very bullish picture. In a state where most firms are posting losses and forced to cut costs, Apple still manages to boast a significant 11% growth in revenue. Ultimately, this led to the surge in stock price of 6% to around US$400.

Very strong financially

Apple is a very strong company financially. Apple has US$193.82 billion of cash reserves. That is probably enough to turn a third world country into a prosperous developed country. They do not need to worry about their debt. They have more than enough to pay off their debt.

Dividends and Delay of iPhone 12 Release

Apple has also announced a $0.82 cash dividend payable on August 13. As compared to last year’s dividend of $0.77 in Q3, this continues to be good news for dividend growth investors.

However, it is not all sunshine and rainbows. Apple has confirmed that they will delay the release of iPhone 12, their main driver of revenue. There are a myriad of possible reasons, ranging from supply chain issues, people not willing to upgrade after purchasing the iPhone SE and the closure of Apple stores due to the coronavirus.

What I think would be most likely is that Apple does not want to cannibalise its own sales. There is a shortage of 5G capable chips (as the iPhone 12 is rumoured to be 5G capable). Along with the iPhone SE, Apple chose to delay the release. It may be released together with the Apple Silicon Macbooks. But that is just my speculation.

Final Thoughts

Apple remains to be a very strong company even in 2020. Like what the great investor Warren Buffett said, “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. Apple is a wonderful company. Although its valuations right now are not the cheapest, they are still fair if you compare to the other tech stocks. Compared to something like Netflix, Apple seems SO reasonable to buy. Because tech is such a speculative industry which always trades on future valuations, you cannot compare it with typical companies such as financials or utilities.

Apple remains to be a very strong company and I would hold it for a very long time to come. Until the day that Apple fails to innovate, I will continue to hold this equity. After all, high can go higher.

2 Comments

    • Junior

      Junior

      Hi, I think FB is a completely different company as compared to Apple. They dominate the social media space, with Whatsapp, Facebook and Instagram. Their main source of revenue is advertising. I would say that FB is still considered a growth stock and is relatively risky because they do not have diversified sources of income.

      FB currently has a high PE ratio of 32. For your money, I would say Apple is still a better buy. The rise of TikTok may render Facebook’s social media platforms less popular (since Microsoft is purchasing it).

      I may do a more in-depth analysis in the future! 🙂

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