AAPL is down big since October - how much is it actually worth?

November 14, 2018

AAPL is down big since October – how much is it actually worth?

Apple Inc. (AAPL) is one of the biggest companies in the world; in August of this year, with the stock pushing nicely above $200 per share, they were the first company in the modern era to officially cross the $1 trillion dollar threshold. And over the last ten years, it is without a doubt one of the biggest performers throughout the course of the bull market. Along with its big tech brethren like Alphabet (GOOGL), Amazon (AMZN) and Microsoft (MSFT), AAPL has long been one of the companies that the rest of the market seems to have taken its cues from. So it can’t really be all that surprising that since the market hit its last peak in late September and then saw each of the major indices decline by about 10%, AAPL’s stock also took a beating; as of Tuesday’s close, the stock is down about 18% over the same period.

The beginning of this week saw the decline start to accelerate, as reports surfaced that seem to imply demand for the ubiquitous iPhone had begun to weaken. The market took that as a queue to starting selling the stock even more, reasoning that the company’s long pattern of earnings and profit growth may finally be reaching a peak and as such could act as a proxy indicator for the rest of the tech sector. That has pushed the stock down nearly 6% in just the last two days, leaving investors scratching their heads and analysts to debate whether the picture is really as bad as it seems.



The truth is that AAPL is a stock that I haven’t paid significant attention to in more than two years; not because I don’t like the company or their products, but simply because as a value-oriented investor it has been impossible to justify the stock’s incredible price increase. In late 2016, the stock was a little below $100 per share; but the last two years have seen that price more than double. That’s impressive if you’re a growth investor, and a lot of folks might point to that incredible performance and laugh at my contention that the company wasn’t worth the price the market was driving it to then. And that’s fine; if you were able to ride that increase and make money, I’m happy for you.

The problem I see is that if and when the end of this stock’s bullish run comes – and trust me, like all bull markets, it will – the market is going to start to push the stock back down to more reasonable price levels. AAPL is a company with some incredibly impressive fundamental measurements behind it, and its sheer size and influence, along with its history of innovation and leadership in the tech sector isn’t to be ignored; but it is also a stock that the market has priced far above its historical valuation metrics, including a Book Value that has declined more than 20% since the beginning of this year. That tells me that when the end comes, the drop is going to be steep, and it’s going to be painful. The stock’s decline in the last month may not be the beginning of the end; but be careful about buying into the “buy the dip” mindset with this stock right now; it is at an important crossroads right now, and the risk to the downside, I believe is much greater than the upside potential.

To me, AAPL may be one of the biggest value traps in the stock market right now, which means that it’s probably a stock to avoid for the time being. At which price, then could it actually be considered an attractive value? Let’s take a look.



Fundamental and Value Profile

Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players. The Company sells a range of related software, services, accessories, networking solutions, and third-party digital content and applications. The Company’s segments include the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. The Americas segment includes both North and South America. The Europe segment includes European countries, India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and the Asian countries not included in the Company’s other operating segments. Its products and services include iPhone, iPad, Mac, iPod, Apple Watch, Apple TV, a portfolio of consumer and professional software applications, iPhone OS (iOS), OS X and watchOS operating systems, iCloud, Apple Pay and a range of accessory, service and support offerings. AAPL has a current market cap of $912.3 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings increased 40.5%, while sales increased almost 20%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. The company’s Net Income versus Revenue has been rock solid over the last year as well as the last quarter, with both numbers coming in at an impressive 22.4%, which indicates their operating margins are very healthy.
  • Free Cash Flow: AAPL’s Free Cash Flow is strong, at more than $66 billion. That sounds incredible, and relative to most of other stocks, it really is; but when you factor in their size, it translates to a Free Cash Flow Yield of about 6.7%, which actually falls about in line with a lot of the other big tech companies, but is lower than you can find in most “growth” stocks. 
  • Debt to Equity: AAPL has a debt/equity ratio of .87, which is manageable despite its increase over the last couple of quarters. The company has $66.3 billion in cash and liquid assets, which means they they have plenty of liquidity, against $93.7 billion in total long-term debt.
  • Dividend: AAPL pays an annual dividend of $2.92 per share, which at its current price translates to a dividend yield of about 1.51%.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for AAPL is $21.80 per share. At the stock’s current price, that translates to a Price/Book Ratio of 8.81. If that seems high, it should; the stock’s historical average is only 5.45. I take that as a strong indication the stock remains significantly overvalued right now despite its decline over the last month. The argument the stock is overvalued is also supported by the fact that the stock is also trading more than 20% above its historical Price/Cash Flow ratio. A move to par with its historical averages would put the stock any where between $118 and $150 per share – which is big drop no matter how you cut it, but would still only make the stock fairly valued versus those averages. Where does the stock have to get to to start being considered undervalued? At a 20% discount to its historical Price/Book ratio, the stock would only be worth $95 per share, which is a little over 50% below the stock’s current price. That is the minimum price I would look for before I would be willing to take AAPL seriously as a good value-based play.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: AAPL actually stayed pretty steady through the early part of the year, while the rest of the market was tumbling through its first legitimate correction in about four years; but from the beginning of May to the end of September, the stock staged an impressive upward run, pushing from around $163 to its all-time high above $233 per share. The stock’s decline since that point now has it very near to important support based on pivot highs in May and June in the $188 range; if the stock drops below that level, it could easily drop enough to test its 52-week low prices in the $150 to $160 range.
  • Near-term Keys: I don’t think there is any way right now you can justify a short-term bullish trade; the only caveat to that would be to see the stock pivot off of support around $188 and start to push higher with strong buying volume. If you’re looking for a short-term, momentum-based trade, I think your best probability lies is waiting for the stock to drop below $188, to around $185, and then think about shorting the stock or working with put options, with an eye on a price target around $175 per share. The stock hasn’t seen the $95 range that I mentioned earlier as my minimum acceptable value price since mid-2016, and so if you want to take a value-oriented approach, this is a stock you’re probably going to leave off of any regular watchlist for the foreseeable future.