Apple (NASDAQ:AAPL) stock has underperformed in 2021 as the stock is up about 8% through September, compared to gains of about 16% for the S&P 500.
Concerns about the U.S. debt ceiling and the rise in bond yields caused stock market volatility, which hurt tech stocks like Apple. Expectations that the Federal Reserve is poised to start tapering soon have not helped investor sentiment. A rise in the interest rates is bad news for the valuation of stocks, and especially for stocks at a lofty price.
But AAPL stock is not sporting an excessive price.
In this article, I will argue five main factors that support AAPL stock. Although it may not rally such as crazy and overvalued meme stocks, I believe Apple has an attractive valuation and can rise from its current price around $140. The mix of these five factors builds positive momentum for Apple.
Product Demand Aids AAPL Stock
In my previous articles, I stated that the start of financial analysis is revenue. And the iPhone is a key driver behind Apple’s revenue.
In mid-September, 2021 Apple presented the latest model of the iPhone. Also making the news were reports about delays. According to a Yahoo report, “Apple Inc’s customers will have to wait for a few more weeks to lay their hands on the new iPhone 13 as supply chain delays and strong demand lead to one of the longest waiting times for the phone in recent years, analysts said.”
Demand for the phone is booming. Another article reported that iPhone 13 preorders were soaring.
Sales of the iPhone are the key driver of Apple’s success when it comes to revenue growth, as they account for more than 50% of total company revenue. Such strong demand for the new iPhone 13 means that strong revenue growth should be expected in the coming quarters.
The third-quarter earnings report was a strong one. On July 27, Apple earnings came in showing that revenue was up 36% and set a new record. Services revenue also set a new high.
The company said revenue totaled $81.4 billion and quarterly earnings per diluted share were $1.30.
A great quarter may not be enough for a stock to move higher. Rather, the trend analysis of key financial metrics is a solid reason. Data taken from Morningstar shows that APPL stock excels at many important financial metrics.
Operating margin for the past five years is within the range of 24.1% to 27.8%. There are positive and increasing free cash flows. And, the 10-year averages for revenue, net income and earnings per share are 15.46%, 15.15%, and 19.75% respectively. These numbers show consistent growth that is not excessive but sustainable. Net profit margin is also stable ranging between 20.91%- 22.41% for the past five years.
Zacks Research estimates an expected EPS growth of 12.5% over the next three to five years. For such a large company as Apple, this expected growth is phenomenal.
I also like that Apple announced a share buyback program. Buybacks are a strong and very positive factor that is beneficial to shareholders.
There are two reasons.
First, a company buyback program improves the intrinsic value of the stock.
And second, the buyback program signals that the management of the company has strong confidence in their business prospects. Often, this is considered to be a sign that the stock is undervalued.
Data from CSI Market about the valuation of AAPL stock shows a mixed picture.
Note the price-book ratio (Q2 MRQ), which is 37.29, to the computer hardware industry’s 24.13. The technology sector posts a figure of 9.75. In comparison, then on a relative basis, AAPL stock seems expensive.
But the price-sales ratio (Q2 TTM) for Apple is 6.9. This is higher than the ratio of the industry at 4.8 and in line with the ratio of the tech sector at 6.82.
In contrast, AAPL stock has a PEG ratio (Q2 TTM) of 0.5, well below 1.0, which signals it is undervalued.
The company’s free cash flow trend for the past five years is another positive factor for investors. In 2020, Apple reported a free cash flow of $73.37 billion. That was an increase of 24.57% compared to $58.9 billion reported in 2019.
Recently, MarketWatch said the average target for AAPL stock by analysts was $166.21.
Quality of Earnings
The final argument in favor of AAPL stock is that Apple has a very high quality of earnings. According to Efinance Management, “A company is said to have high-quality earnings if it reports an increase in profit because of improved sales or cost reductions. An increase in sales due to a marketing campaign is also a sign of the high quality of earnings.”
Quality-of-earnings ratio is net cash from operating activities divided by net income.
A ratio higher than 1.0 shows a high quality of earnings. For FY 2020, Apple reported net cash from operating activities of $80.67 billion and net income of $57.41 billion. This makes the quality of earnings ratio 1.40.
For FY 2019, the quality-of-earnings ratio was 1.25.
AAPL Stock Verdict
These five arguments are all fundamental ones. I believe that AAPL stock is poised for future growth and is attractive now. I like it a lot.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.