Shahid Jamil
Although we believe in Apple (NASDAQ:AAPL) remains a very solid business, but there are increasing signs that it will struggle to outperform the market going forward. There’s no question that Apple’s shareholders have done a great job Over the last decade, it has more than tripled the S&P 500 (spy) will return, but we believe it is unlikely to significantly outperform the S&P 500 over the next decade.
The company already stopped disclosing numbers of devices such as iPhones and Macs a few years ago. Our interpretation is that growth means more and more reliance on raising prices rather than selling more devices. Both strategies can deliver significant revenue growth, but we believe higher prices will not deliver sustained growth given that at some point they start to have a significant impact on unit sales. In other words, consumers only pay that much before switching to another brand.
A big source of growth over the past few years has been its services business, which reached $19.2 billion in revenue and more than 900 million paid subscriptions in the September quarter.recently Financial results announcement Management even noted that it is already the size of a Fortune 50 company in itself and has nearly doubled in the last four years. However, its growth has slowed, with the business only growing around 5% year-over-year. With a negative foreign exchange impact of about 600 basis points, constant currency growth is closer to 11% for him, but even this growth isn’t all that impressive.
Meanwhile, revenues from the previously super-growth segments of wearables, home and accessories grew only about 10% year-over-year. iPad decreased 13% year-over-year. Overall, Apple achieved his $394 billion in revenue in his 2022 fiscal year. This equates to annual growth of approximately 8%, with slightly higher diluted earnings per share of approximately 9%. In addition to relatively disappointing growth, the company has decided not to provide earnings guidance for the next quarter.
The company’s growth has slowed and the wealth of valuations we examine in the analysis below suggests that unless the company can find new disruptive innovations that can move the needle, the company is very likely to underperform the market. I think it’s expensive. Ten years from now.
Finance
We don’t think there’s much room to improve Apple’s margins. The company even showed a downward trend in operating margins before the Covid crisis.
Apple ultimately benefited from Covid given that travel, restaurants and other recreational activities were pushed off the agenda and many people decided to spend their discretionary income on new devices such as new iPhones. This revenue increase resulted in operating leverage. This is the main reason why the profit margin improved.
We may experience some operating leverage in the future, but this may be offset by higher component costs and other inflationary effects.
growth
The impact of Covid can be seen very clearly in the earnings graph below, where it is also clear that growth has started to slow down significantly. In terms of flagship products, iPhone growth slowed to just 10% in the most recent quarter, compared to 39% overall growth in 2021.
Growth across the company has slowed significantly, with revenue growth in 2022 below the company’s 10-year average of less than 8%. Apple has had periods of slow growth in the past, but it can be argued that growth has only reignited. , you will have a lot of trouble moving the needle. In terms of inorganic growth, the company has already made a number of acquisitions, averaging around one per month during fiscal 2022.
And while there don’t seem to be any disruptive innovations in the pipeline, with the exception of Apple Car, they’re certainly important enough to contribute to growth in a meaningful way.
Apple Car or “Project Titan”
Our impression of Apple is that of a company that is very talented at delivering incremental innovation. Of course, it also has a history of disruptive innovation, perhaps best exemplified by the iPhone. Still, it’s been a long time since the company introduced an all-new, revolutionary device. rice field.
One potentially disruptive innovation that has caused a lot of hype is the Apple Car, also known as “Project Titan.” If successful, we believe this is the type of innovation that could actually allow Apple to rekindle growth and outpace the market.
Analyst Ming-Chi Kuo said: reputation As for revealing exactly what Apple’s product launch plans are, he said he wouldn’t be surprised if Apple didn’t launch a car after 2028, and it might not even be a competitive product. . that is become clear Apple has so far shown relatively little to show for this effort.
Balance sheet
At least Apple has a solid balance sheet that gives it the flexibility it needs to pursue interesting acquisitions and invest heavily in R&D. This is despite the huge amount of capital returned to shareholders through share buybacks.
Apple ended the quarter with $169 billion in cash and securities and $120 billion in total debt. As a result, net cash ended the quarter at $49 billion, and the company continues to progress towards its goal of becoming net cash neutral over time.
evaluation
If the initial valuation was low enough, Apple’s stock could well outperform the market, even if the company’s growth rate is relatively low. Unfortunately, the current valuation is relatively high, at 19x EV/EBITDA, well above its 10-year average of 12.7x.
The price/earnings ratio tells the same story, currently at around 24x, much more expensive than its 10-year average of around 18.8x. For comparison, 10 years ago stocks could be bought at about half the p/e ratio. Shareholders benefited greatly during the multiple expansions and growth of the company.
Other signs of tighter valuations now include dividend yields that are less than half of their 10-year averages, and net ordinary dividend yields (including dividend and buyback yields) that are below 10-year averages. about 2% below average. average.
Higher valuations may be justified if earnings growth is expected to accelerate. However, analysts have very low expectations for revenue growth over the next few years, as shown in the following table.
looking for alpha
risk
I think Apple is a very solid company, certainly with an impressive balance sheet and very good profit margins that mitigate risk. We believe the most important risk for Apple shareholders is a high initial valuation and slower growth, resulting in poor market performance.
There are also significant competitors that should not be completely ignored and can take market share away from the company. In particular, investors should consider Samsung Electronics (OTCPK:SSNLF), and Xiaomi (OTCPK:XIACY).
Conclusion
There are signs that Apple’s growth is slowing. New disruptive innovations will be needed to sustain high growth rates that outpace the market over the next decade. The Apple Car may be one such product, but so far the company doesn’t seem to have much to show for its efforts. In terms of valuations, the stock has traded at higher valuation multiples than it has averaged over the past decade, making it difficult for the company’s stock to sustain a significant market outperformance over the next decade.
