Summary
- Apple Inc.'s financials are historically growing at below industry average rates; Seeking Alpha ranks growth at a "D+".
- Apple insiders have significantly sold $810.145 million, possibly confirming damaging headwinds ahead.
- The poor dividend yield ranks below the industry, SPY, and treasury rates.
- My 2 DCF models resulted in a baseline 24.7% downside for Apple from current levels under conservative assumptions.
- Tim Cook and Apple's high representation in various benchmark can be catalysts for growth, but is this enough?
Introduction
Apple Inc. (NASDAQ: AAPL) is an American multinational technology company most known for its iOS smartphones and MacOS personal computers in the Technology Hardware, Storage and Peripherals Industry . As seen in the graph below, AAPL stock has slightly outperformed the broader market year-to-date, losing as much as 15.54% of its market value during a period when the SPY also declined by 16.42%. When looking at the total return of the past 10 years, the stock has also significantly returned more to shareholders than SPY, garnishing a staggering ~800% return compared to SPY’s return of ~250%.
Despite this historical outperformance, I’m still not inclined to recommend a “BUY” for this stock because of Apple’s lagging financials, inadequate dividends, low intrinsic valuations under conservative measures, and more. Let’s dive into the primary drivers for my assumptions on this bearish outlook.
Company Activity
Apple, as a very mature company, historically has shown slow growth in financial metrics compared to the broader Information Technology sector, which has been growing substantially on the heels of high consumer demand. I compiled the history of the company’s Revenue, EBITDA, and Normalized Diluted EPS below. As a result, we can see that these metrics have been relatively mixed over the years, visible in the ~8% 5-Year average growth rate in Forward Revenue and Forward EBITDA. Forward EPS growth has fared better, with a near double ~16% 5-Year average growth rate, but this is partly attributable to the buyback programs and inflation of earnings as a result of a reduction in share count.
Such modest growth has contributed to the negative sentiment even apparent in Seeking Alpha’s D+ grade ranking on stock growth. Below are images with its difference in the Information Technology sector medians in Revenue, EBITDA, and Normalized Diluted EPS.
Seeking Alpha Seeking Alpha Seeking Alpha
Finally, there has been significant insider selling activity. In the past 4 years, insiders have not bought any of its stock at all, and instead sold $810.145 million. I find this to be significantly concerning, and it may shed light on poor insider confidence within the company.
MarketBeat
Inadequate Dividends
In bear market conditions, I consider dividends to be the more important financial metric to look out for, as it can provide stable returns for investors even in times of market decline. Looking into Apple's dividend history over the past 10 years, it has not been great, to say the least. I analyzed the dividend on a more specific yield basis, and we can tell that the yields have been declining far below the yields offered by other technology companies in the sector.
For one, Apple’s 0.66% forward dividend yield compared to its industry places the company short of the top 75% (second visual below). Apple’s forward yield not only is significantly worse than SPY’s dividend yield of 1.55% year-to-date , but also the baseline treasury yield offers a better yield than that of Apple. Because of this, I do not see this stock as being capable of providing the baseline returns that are especially important in navigating uncertain market conditions that we see today.
Apple's Historical Yield (WallStreetZen) WallStreetZen Shaded regions indicate recessions (MacroTrends)
Stock Valuation
Given that Apple is a very mature company and has been growing its free cash flow ((FCF)) at a steady pace, I decided to value the stock using the Discounted Cash Flow ((DCF)) method with a more conservative and fair approach to yield a more accurate result. I based my two models on the 5 and 10-year average decline of its shares outstanding with an adjustment for historical share count decrease to account for Apple’s historically large buyback programs. This resulted in 15,396.80 and 15,273.60M shares, respectively, from a linear adjustment based the historical chart of Apple’s share count below. Hence, the number of shares assumed in this analysis is lower than current diluted shares outstanding of the company’s stock.
Apple's Shares Outstanding (MacroTrends)
Next, I based these DCF models on Apple’s most recent levered FCF : $90,220 million. I then assumed a moderate 9.37% FCF growth rate derived from the 2012 to 2022 10 year CAGR with a 2% terminal growth rate to mimic consistent growth with inflation. Finally, I used the highest discount rate using the WACC to result in 8%, again for a more conservative result. But, all of these assumptions together resulted in the fact that Apple is due for a bare minimum of a 24.7% downside from its most recent stock price. Though not shown below, we can assume that even when using optimistic assumptions (such as a lower WACC and a larger terminal growth rate), the results of the DCF models would have the stock price nearing a 0% upside - or, its current price.
5-Year Shares (Google Sheets) 10-Year Shares (Google Sheets)
Possible Growth Tailwinds
From what I can see, the biggest catalysts for AAPL stock are the new product launches under the leadership of Tim Cook and the tailwind from the stock's high representation in various benchmark indices. For one, Apple under the leadership of Tim Cook has launched new products, shifting Apple’s hardware-based business model to a subscriber-based business model, and more. More information can be found in articles like this on Tim Cook’s successes .
In addition, Apple is well represented in various market indices and exchange-traded funds ("ETFs"). This should naturally boost demand for AAPL stock given that passive investments will continue to buy AAPL to maintain their target allocations. The passive investing style is likely to be favored by investors by 2026 and will happen sooner if the bear market continues. Overrepresentation or over-indexing a stock is the idea that relates to how investors' investment allocation gets allocated to ETFs owning a percentage of the stocks in the market, and how a high weight for a stock in these ETFs would equate to a higher proportion of every dollar invested in the ETF to a particular stock.
More specifically, as investors invest in ETFs, their investment gets allocated with increasing representation to the varying sectors and companies that make up those weightings in the portfolio. And as a company becomes a greater representation in a sector or the market, the company would be bought up more as a result based on its weightings. In a report conducted by the Invesco QQQ Trust (QQQ) we can see that Apple makes up 13% of the NASDAQ tracking ETF (which is by far the biggest weighting in the ETF) and also has the largest ownership in the S&P 500 of 6.55% . Apple is likely to continue benefiting from this structure as investors passively invest into ETFs.
Invesco QQQ Trust Invesco QQQ Trust Report ETF
Competitor Comparisons
The last part of my thesis is based on Apple’s competitive positioning and expensive valuation metrics compared to its peers. To visualize this, I created a simple data table below with data from Yahoo Finance to compare how Apple ranks comparable to industry giants like Microsoft ( MSFT ), Alphabet ( GOOG , GOOGL), Meta Platforms (META), and other companies that are competitors in major product segments.
We can see that from this table, Apple has a greater P/S and P/E valuation compared to most of its peers, with only Microsoft ( a top ranked Software Stock ) having a more expensive valuation. These results show me that Apple is commanding a premium and is expensive than its high-quality peers, and some of its peers may be a better value proposition at current valuation levels.
Company | Ticker | P/S | P/E |
Apple | APPL | 5.75 | 22.57 |
Microsoft | MSFT | 8.47 | 24.04 |
Alphabet | GOOG | 4.52 | 17.67 |
Meta | META | 2.65 | 14.27 |
Intel (INTC) | INTC | 1.80 | 14.6 |
Samsung (SSNNF, SSNLF) | 005930 | 1.14 | 15.08 |
Sony (SONY, SNEJF) | SONY | 1.39 | 14.75 |
Final Thoughts
To conclude, I do not believe that AAPL stock is an optimal investment at this time. Even though Apple is still an industry giant benefitting from passive investing and Tim Cook’s strategic changes thus far, financials and dividends have been growing at below the industry average rates, causing negative investor sentiments. This is even reflected in insiders continually selling a total of $810.145 million over the past 4 years. My two Discounted Cash Flow models under historical and conservative estimates in two different models calculating shares outstanding resulted in a 24.7% downside from current levels, showing that the stock is overvalued from my estimation. Apple’s valuation is also more expensive than its industry giant peers.
Following Apple’s 2023 fiscal year Q1 earnings announcements or when the macroeconomic environment improves, I will reassess my thesis. For now, however, for all the reasons discussed above and more, I recommend a “SELL” on AAPL stock.
For further details see:
Apple: Industry Giant Not Worth The Price