What greater conundrum does the value investor have but to choose whether to buy Apple Inc. (NASDAQ:AAPL) stock now, wait for a better entry or just hide in the closet and forget about it?
It’s not like APPL stock hasn’t had its share of setbacks. A couple of years back, AAPL stock was sitting in the 90’s and people were saying the best days of AAPL stock were behind it.
Today AAPL stock sits at $170 per share with a market cap of $876 billion, almost a third of which is straight up cash. To figure out what to do, you first have to determine your time horizon. The Liberty Portfolio, my stock advisory newsletter, has a minimum time horizon of 10 years, and it seeks stocks that are both value and growth oriented, but with limited risk.
I’m not concerned about AAPL stock in the long-term. I’m concerned that the market is 30% overvalued and AAPL stock could take a hit in a broad market selloff. So the question is whether it is a value play right now.
AAPL Stock By the Numbers
In its last report, Q4 revenue increased about 12%, and about 6.5% for the year. Gross margin was about the same at 38%. Net income was up $1.7 billion to $10.7 billion for the quarter, and up from $45.69 billion to $48.35 billion. That’s increases of 19% and 5%, respectively.
I’m going to take 20% off the $172 billion of net cash to account for possible repatriation of that cash, via taxation. Thus, I back out $138 billion or about $25 per share in cash to value the business on its own. So APPL stock trades at $144 (net of cash) and on $9.21 in EPS for the year, trades at 15.6x FY17 earnings.
Analysts see 11.6% annualized EPS growth going forward. Now, I give APPL stock a 10% premium each for having a world-class brand name, strong cash position, and fantastic cash flow — $64 billion in operating cash flow for the year.
Thus, I get a fair value for APPL stock right at 15x earnings. So far, so good. Does the underlying business support this valuation? My concerns with Apple stock price have been centered around the company’s apparent inability to get into new businesses. The iPhone accounted for 70% of sales.
The latest earnings report shows considerable progress. The iPhone’s revenue only grew 2% to $28.84 billion, but that now only represents 55% of total revenue.
There was 14% growth in iPad revenue and 25% growth in Mac revenue. The big news was 34% growth in services to $8.5 billion.
Bottom Line on AAPL Stock
Now, Apple has figured out that the iPhone isn’t just a stand-alone product, but is the gateway to other products, i.e. services. Apple figured out that it just needs to get iPhones into as many hands as possible.
Sure, many will buy the iPhone X, but Apple is happy to push older models out there also. I usually buy older models to save money. In India, the iPhone SE goes for only about $300.
Developers are being encouraged to use in-app subscriptions now, when that function used to be limited. They can also have search ads within the App Store. Add in iTunes and the App Store apps themselves, and Apple is building its services division.
So what do you do? I don’t think you can go wrong buying AAPL stock for the long term, even at this price. I’m nervous about the overall market, so I would buy a half position, and add on a major correction.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
