AAPL Research Notes

Topics: Apple, Innovation, Economic Moats, Product Entrenchment

Price: $131

$180 to $131 isn’t horrific in this market... At least you're outperforming Tesla?

Technicals

Apple is oversold on a technical basis. If you're a junkie for technical analysis, you may want to jump in, though Jim Cramer recently suggested that he's bearish on the stock. Here's what he said:

Despite being a long-time bull of Apple, going as far as calling it "the greatest stock of all time", it appears that these anonymous chartists have spooked Jimmy.

Frankly, reviewing a chart of a stock and performing technical analysis on it to make an investment decision is immensely imprudent. It's like watching the price of a certain sweater throughout the year so that you can buy it for your friend as a Christmas present without first considering its style, size, or suitability for your friend. You'll probably find your friend at your Secret Santa exchange saying something along the lines of "Oh wow, how thoughtful, you bought this sweater at its 52-week low when it was 'oversold', but I'm going to return it because it's itchy, is a small when I wear a large, and is the color of Patone 448." Next thing you know, your friend and everyone else who got said sweater will return it, driving the price down past its most recent 52-week high. Did you really get a good deal or did you just buy something that was cheap?

Buy quality companies at quality prices, as the price of an asset (whether it be a stock or sweater) only tells part of the story.

In summary, if you're an inverse Jim Cramer investor or a technical analysis guru, it's time to buy Apple; if you identify as both, maybe it's time to really double down on Apple.

Financials

Here’s the quick and dirty: Apple makes products that are exceptional, and you’ll likely never want to get rid of them because it’s “too hard” to change.

Apple makes it intentionally hard to switch to another brand, whether it be to a Dell computer or an Android phone, by integrating all their products (iPhone, Mac, iPad), software (Apple music, iCloud storage, Apple TV), and services (Apple Pay, Apple Support, Apple News); plus, you'll be excommunicated by all your friends and family when the color of your group text messages changes to green. *Gasp*. The unimaginable horror.

I'm under the impression that constantly updating and improving the iPhone's camera isn't what keeps consumers with Apple: it's because Apple's products are dependable, consumers haven't had a reason to make a switch, and switching would be hard for them and their friends/family (because the color green is more emotionally tolling for them to look at, duh).

In bizness terms, the network effect is significant and the switching costs are high.

In termz of number$, most sales are generated by product sales from iPhones, Macs, and iPads (~70%), though services revenue from advertising, cloud space, etc represents ~20% of revenues. The products bring consumers and businesses in, and the cloud space, product interconnectivity, and text message history keeps them (just ask my mother, she cannot lose her text message history).

Despite it representing only ~7% of Apple's revenue, Apple's Wearables, Home, and Accessory product segment has grown 25% over the last two years and has given Apple an opportunity to cross-sell and create an even larger moat around their products. I mean, can you even imagine wearing a watch that doesn't send you notifications?? You think I'm joking, but would you really give up your smartwatch?

For those of you wondering, growth has largely stagnated over the past 12 months, partially due to lower global demand, partially due to high labor costs and supply chain issues.

Operating margins have historically been 30% (ROE is V high - we love to see it - thank you share buybacks) and could increase as they continue scaling their services revenue, as that is recurring revenue billing monthly on your credit card without you having to think about it (yes, this is for you mom. You can get a thumb drive to save your pictures instead of paying $2/month for more cloud storage).

Products and Innovation

Hehe. New camera? Apple is ON IT! Anything else? Ehhhhhhhh..

Don’t believe me? They mention the word “innovation” twice in their entire 10-K.

They do mention “development” several times, but it’s most frequently regarding research and development costs. Haha.

They've developed some ancillary products over the last few years (AirPods in 2016 and AirTag in 2021), but what's the next big thing? Maybe they'll join Meta and take a trip to the metaverse.

Valuation

The stock’s price has decreased, as have their valuation multiples, but they are barely below pre-pandemic levels. Given the forecasted decreases in consumer spending from lower net disposable income, I would have expected Apple’s valuation multiples to compress more. But alas, I suppose it’s simply the premium one must pay to own the largest company in the world…

Oh, also, when I created a valuation for Apple about a year ago during my time at Vanderbilt, I had a price target of $132. My whole class thought that I was a clown for giving Apple a sell rating, because since when does Apple's stock go down?

I thought that I was being optimistic.

Leverage

$132B of debt relative to $48B of cash. Short-term debt has been climbing steadily, though long-term debt has been largely stable; the increase in debt/equity and debt/capital is due to share buybacks reducing the book value of equity on their balance sheet.

Other Notable Attributes

Have I mentioned the new camera on the iPhone 35+ Max

Recommendation: She’s cute, but I’m looking for something more adventurous

If you’re a cash flow investor and like to play it safe, Apple could be a winner for you. They’re the largest company in the world and probably aren’t going anywhere anytime soon. The biggest leading indicator I have is my mom saying she wants to get rid of her Mac, iPhone, and two iPads; once that happens, it’s a sell. Until then, Apple’s a safe bet that will likely be spinning off lots of cash flow for the next few years.