Downside at Apple. (I wouldn't touch this here)
“I think the iPhone is the best consumer product ever. That's what I feel about it. And it's become so integrated and integral to our lives, you wouldn't think about leaving home without it.”
— Tim Cook
Philoinvestors know that Apple is one of my favourite companies, I first bought it in December of 2013 — when not many dared to touch it.
The excuses: It was a handset maker like Nokia, it should sell for 7 times earnings, its margins were too high and the Chinese smartphone makers were about to kill it etc.
I talked about my experience researching Apple in the podcast I did with Brandon of Value Hive here.
I compare the difference between investing in Apple and the US 10-Year Treasury in my piece below. Stock yields and bond yields are not the same thing.
A 10X in 10 Years
Apple shares returned a ~10X in 10 years, or roughly a 26% return, annualised.
Let’s look through to what actually drove this return…
The Bottom Line
Net income more than doubled from a $39.5bln in 2014 to a $100.9bln in 2024. Operating margins have been stable all throughout — considering that sales mix, geography mix and dollar fluctuations affect overall margins.
The Bottom Line: 2.55X
The Share Buyback Hoover
The “buyback” is one of the levers a company can pull to “return capital” to its shareholders. Buybacks can be bad when they destroy value — and they can be good when they create value. In the case of Apple Inc., it has been the latter.
With 24.3bln shares outstanding y/e 2014 and reducing to 15.7bln y/e 2023 — Apple achieved a 35% share count reduction in 10 years.
The Share Buyback: -35%
The Multiple Expansion
You can’t really make a killing in markets without some good old multiple expansion!
A 2.55X increase in earnings and a 35% reduction in shares outstanding only gets us to an EPS increase of (2.55/0.65=3.38) a 3.9X.
December 2014, Apple shares sold for ~$28.50 each and EPS for the year was $1.61 — a P/E of 17.7X.
February 2024, Apple shares are selling for $180 each and EPS for 2023 was $6.13 — a P/E of 29.4X.
The Multiple Expansion: 1.66X
Summing it all up
An increase in net income of 2.55X, a reduction in shares outstanding of 35% and an earnings multiple expansion of 1.66X gives us a 6.5X return since December 2014 - a 9 year period. Since December 2013 the return is >10X as shares were even cheaper.
But there’s more…
When Apple started buying back shares some 12 years ago, not only was it much cheaper than it is today (refer to Multiple Expansion above), it also had more cash per share than today.
Year end 2014 Apple had >$5 of cash per ~$25 share and today it has $3.12 of cash for a ~$180 share. So you understand Apple wasn’t exactly buying back the same payoff back then…
Risks for Apple
The EU is reportedly going to fine apple 500mln Euros over restrictions on access to music streaming services. The amount may not be significant for Apple, but what the fine means is extremely important for Apple’s future domination in its own ecosystem.
The NYT has reported last month that the U.S. is closer than ever in filing a federal antitrust case against Apple. The case will focus on how Apple has used its hardware and software to make it harder for consumers to switch, and for rivals to compete. LINK.
In the case that Apple loses this potential case potentially brought against it would force the company to drastically change its business model, causing it to lose material business advantages in doing so.
Apple is also having problems on the tax-avoidance front; with the EU actively trying to force it to pay more than 10bln Euros in Irish taxes. Note that Apple’s income tax rate went from a 26% to a 15% in the past decade.
Apple’s future in China is at risk as the Chinese smartphone market is considered “the most competitive in the world”. Apple has been having difficulty growing in China with dropping sales q/q. And with the current geopolitical environment heating up, I don’t expect China to make it so easy for a US company to dominate its smartphone market. LINK.
And of course its current high valuation coupled with the fact that most of its share gains have been achieved by a massive share buyback at lower prices, while the company isn’t expected to have the same growth trajectory in the next 10 years.
I wrote about a brewing antitrust case against Apple last year.
And warned on believing that Big Tech is bulletproof and will continue to go up forever, 2 years ago. Apple hasn’t done much since then has it?
Earlier this month I published a piece on the Nasdaq and a brewing boom/bust process with big tech and the current rush into AI. I consider it very important for markets.
And if you’ve had enough of Tech and AI — why not look into some oil & gas?
Sincerely,
Philo
Wonderful post. I surely do not see how AAPL is priced where it is at today. But the strong brand name, loyalty, and cash flow generation still remains. It is truly a great marketing ploy that no one gives up on.
I wrote my thoughts here - https://divistockchronicles.substack.com/p/apple-cash-is-king-fy24