Apple Inc. (NASDAQ:AAPL) had the luxury of reporting its earnings results on February 1st.
As you remember, the stock market hit its highs near the end of January and saw the bottom fall out in the first few days of February. So while Apple beat analyst expectations, it was hard to get a grasp on what Wall Street thought, given that Apple stock was under pressure amid a market-wide correction.
So what do we think, were the results good?
I thought the results were very solid. While the report wasn’t perfect, there was a certain comfort in pouring over the highlights. Why? Despite carrying an $870 billion market cap, Apple is flush with cash and quite cheap on a valuation basis. That’s why we said on February 7th — when the market was in the midst of a 10% correction in 10 days — that if there’s one stock to plough into, it should be Apple stock.
Let’s take a deeper look.
Valuing Apple Stock
Apple’s low valuation is the whole reason we were big buyers during the decline. It wasn’t clear at the time whether the S&P 500 was going to fall 5%, 15% or more. The decline was occurring so quickly that it was too frightening for many investors to buy stock. That’s okay, but now many are left wondering if they’ve missed their chance.
We’ll go over the chart in a minute, but ultimately, I don’t think investors have totally missed their chance in AAPL stock.
For the year, analysts expect Apple to earn $11.54 per share, up 25% from 2017. In 2019, they expect about 15% earnings growth. In both years, this outpaces revenue growth, which calls for 14.7% and 4.1% growth, respectively.
For this, we are paying 14.7 times this year’s earnings. On a forward basis, AAPL stock price trades at less than 13 times earnings. This a low valuation in general, but very low when you consider Apple’s earnings growth. Further, consider its industry-leading margins, world-renowned brand and fortress-like balance sheet. Heck, Apple stock has cash reserves in excess of $285 billion!
Management said it plans to return over $160 billion to shareholders. That’s likely to come in the form of a dividend boost (now yielding 1.5%) and another massive buyback. Historically, we receive a detailed update in April from the company. In essence, AAPL has a colossal grip on its end markets and rather than sit on all of that cash, it simply returns a bulk of it to investors. Why not invest in this company?
If AAPL were expensive, I’d say maybe we should look elsewhere. But with a low valuation, a booming business and a huge capital return plan, it’s hard to leave Apple stock out of the portfolio.
Trading Apple Stock
At the start of 2018, AAPL stock price surged for seemingly no reason. Others, like Amazon.com, Inc. (NASDAQ:AMZN) Walmart Inc (NYSE:WMT), Netflix, Inc. (NASDAQ:NFLX) and even the S&P 500 did the same.
So where are we now? On the chart below there are two levels of supports shown in black lines. I like to keep things simple whenever I can. In this case, I would be a buyer between these two levels. If Apple stock falls a lot, we can build out a rather sizable position. If AAPL only falls a little bit before rallying, it’s better to have a small position than none at all.
Click to Enlarge
The bottom line here is simple: AAPL stock price is likely heading to $200 unless there’s a long-lasting broader market correction. The valuation is simply too low and the cash pile is too large. When Apple is in the market buying back $40 billion in stock, it’s too difficult to stay short.
However, AAPL stock has been susceptible to declines and if that happens, long-term investors know they still own a great company.
Services revenue makes up a larger portion of sales and continues to grow at a rapid pace. The average selling price for the iPhone jumped more than $100 per unit last quarter. As a result, Apple’s margins should continue to widen, allowing it collect more profit. As its bottom line continues to swell, it will keep buying back stock and returning capital to shareholders. That’s why we want to own a piece of this fabulous business at a reasonable price.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in AAPL.
