Apple: Owning It Today Isn’t Crazy

Summary:

• Apple’s recent run up to near-all time highs has got some investors worried about the valuation.
• Apple was only 6% off its all-time high at the time of this writing.
• The stock’s multiples are trending a little bit high, but it isn’t the worst valuation offender in big tech.
• I consider Apple a mild, low-conviction buy today; just slightly better than a ‘hold.’
• Warren Buffett appears to see Apple as worth buying below $150.

Apple’s (NASDAQ:AAPL) valuation has become a topic of contention in recent weeks. The stock, which at the time of this writing was only 6% off its all-time high, is widely thought to be overpriced. There are too many investors questioning Apple’s valuation for me to document all of them, but the following post comparing Apple to NVIDIA (NVDA) should get the bears’ basic idea across.

Basically, many investors think that Apple is trading at an irrationally high price, so much so that it merits being mentioned in the same breath as NVDA. That stock is notoriously expensive, trading at 25 times sales, 122 times operating cash flow, and 160 times GAAP earnings. For Apple to be mentioned in the same breath as NVIDIA seems to indicate that investors think it is seriously overpriced.

However, when we look at Apple’s own valuation multiples, we see that it is not particularly expensive. According to Seeking Alpha Quant, Apple currently trades at 28.5 times earnings, 7 times sales and 24 times operating cash flow. This is not a cheap valuation by any stretch of the imagination, but it’s not overly expensive either. Compared to the most expensive tech stocks out there, Apple is modestly valued.

Nevertheless, Apple is valued in such a way that it has to grow in order to be worth investing in. If you simply discount Apple’s trailing 12 month free cash flow per share ($6.06) at the current treasury yield (3.55%), you end up with a $170 price target, which implies no upside. If you include any sizable risk premium in the discount rate you get a price target below the current one. So, Apple has to grow and thrive in order to be worth the investment today.

Is it worth investing in today?

I would say it is a moderately good buy right now. My own cost basis on Apple is lower than the current price, and I’m not personally going to add at these levels, but I could think of many worse investments a person could make than AAPL. In the ensuing paragraphs I’ll explain why I feel that way about this stock.

Apple: the Valuation

As I already noted, Apple is approaching all time highs, which makes it only natural to think that it’s getting expensive. However, when we approach Apple’s valuation from a sector-relative angle, we can see that it’s only moderately expensive.

According to Seeking Alpha Quant, Apple’s earnings multiples are:

• P/E 28.5.

• Price/sales: 7.

• Price/book: 46.8.

• Price/operating cash flow: 24.3.

• Price to free cash flow: 27.4 (this multiple calculated by the author).

This is a pretty steep valuation, scoring an ‘F’ in Seeking Alpha’s Quant system. However, it’s only slightly pricier than the average for Apple’s peer companies. According to YCharts, the NASDAQ-100 has a 24.6 P/E ratio right now, making Apple only 15.5% more expensive than its peers. When we consider Apple’s formidable competitive position, it becomes clear that a small premium to its sector is justified in my view.

Competitive Position

One of the big things Apple has going for it right now is its competitive position. Apple enjoys a number of advantages over its competitors, including:

• One of the world’s most valuable brands, as rated by a number of different market research firms.

• A strong preference for iPhones among Generation Z–important because habits formed young tend to last.

• The majority share of smartphone app store revenue.

• #1 market share in tablets and smart watches.

• An integrated ecosystem that encourages people to buy multiple products instead of just one.

The “ecosystem” point is worth exploring in more detail. Apple’s products connect with one another via user accounts. If you have an iPhone, you’ll be asked for your Apple ID when you buy a new Mac, and all of your photos, contacts and other such items will be embedded in your mac. You can technically achieve this level of integration with a collection of Windows PCs and Alphabet (GOOG) (GOOGL) phones/tablets, but it takes longer, as not all of the services are integrated as one.

Because Apple products work so well together, users are subtly nudged in the direction of buying several of them. This ensures a high level of repeat sales and helps Apple retain users for its services.

Institutional and Insider Buying

Another factor worth looking at with respect to Apple stock is institutional buying and selling. A lot of big institutions own Apple stock, their buys and sells may tell us something about how ‘smart money’ feels about AAPL.

I will leave big asset managers like BlackRock (BLK) and Vanguard out of this discussion because their purchases are largely through passive index funds they run.

So, who is buying Apple?

One big buyer is Berkshire Hathaway (BRK.A) (BRK.B). Warren Buffett was known to be buying AAPL stock in the fourth quarter of 2022, when the stock price ranged from $128 to $150. So Buffett evidently thinks Apple is a buy below $150. There are no indications that he thinks it’s time to sell.

Li Lu, another famed value investor, continues holding Apple, with no sales reported.

Another big holder of Apple stock is of course its CEO, Tim Cook. Cook’s last reported sale was in 2021; the fact that he held all through 2022 and much of 2023 may be a vote of confidence in the company.

Risks and Challenges

As we’ve seen, Apple is a ‘moderately’ valued stock with a strong competitive position and significant institutional buying. The overall picture looks good. Nevertheless, there are some real risks and challenges for investors to keep in mind, including:

• Upcoming earnings. Apple is going to release earnings on May 4 and there have been some indications that they may come in a little soft. A research firm estimated that Mac sales fell 40% in the first quarter, and Foxconn’s business has been slowing down. The reaction to the Foxconn slowdown story may have been overdone: Apple is known to be diversifying its supply chain into India and Vietnam, so a Foxconn slow down is not an Apple slowdown. Nevertheless, the Mac sales slump news is hard to ignore. There could be some weakness in hardware sales in the upcoming release.

• Valuation. Earlier, I wrote that Apple’s valuation was ‘not crazy,’ and that holding the stock was therefore a pretty good idea. I still stand by that, but the stock is at such a high valuation right now that it may not be appropriate for all investors. If you adhere to a ‘deep value’ strategy, for example, Apple would not be appropriate for you to hold right now. It will likely work out well for shareholders in general, but for value portfolio managers, there is a ‘risk’ of overpaying for stock.

• Life after Tim Cook. Apple was an extremely fortunate company in the sense that it was run by two great CEOs in a row. Steve Jobs was one of the most celebrated entrepreneurs in history, and Tim Cook is widely praised for his skills in logistics and overall business strategy. Having Tim Cook on board is one of Apple’s biggest advantages. However, Cook is 62 years old now, and has signaled that he might not stay on at Apple for another decade. If he does not, then the company may suffer from weaker leadership going forward.

The Bottom Line

The bottom line about Apple stock is that it is a moderately good buy at today’s prices. It is not as good of a buy as it was back when it dipped to $128, but it isn’t the worst place you could invest money right now. To be sure, there are real risks facing the company and its investors. Suppliers are seeing their sales slowdown, the valuation is not cheap, and Tim Cook isn’t getting any younger. These are real risks and challenges that are worth keeping in mind.

Nevertheless, Apple is one of the best technology companies in America. It has a deeply interconnected ecosystem that offers users nearly everything they need from their technology, and it has one of the most valuable brands in the world. Younger consumers lean toward buying Apple products, which contributes to optimism that the company will remain strong in the coming decades. It’s hard to think of a company with a better competitive position than Apple. When you consider that fact along with the stock’s valuation, it ceases to look so expensive, and starts to look like a buy.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of AAPL, GOOG, BRK.B either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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