One of the largest companies in the world is Apple, the leader in consumer electronics. The company has a variety of electronic devices that consumers can access through its services business. Apple Music, iCloud, Apple Care, and Apple TV+ are some of the services that are included. The company is rumored to be working on developing an electric vehicle, as well as possibly changing its business model to increase recurring revenues.
In this article, I will explain why I’m neutral on AAPL stock.
The Q2 results were strong.
The fiscal Q2 results for AAPL were quite strong, with revenue up 9% year-over-year, driven by 6% growth in the iPhone business, 15% growth in Mac sales, 17% growth in services, and the remainder of its business grew by 12% The continued strong growth in the iPhone business shows the company’s ability to innovate and create exciting new features while retaining substantial pricing power. The company had a very successful launch of its new M1 powered MacBook Pro and now boasts over 825 million paid members of its services business, representing 40 million in growth from just the previous quarter.
Uncertain outlook
Apple’s track record, formidable brand power, scale, and technological prowess boosting competitive advantages are all very impressive, but the near term outlook is less clear. Supply chain issues, a severe chip shortage, and COVID-19’s economic related headwinds in its Chinese business are just some of the challenges the company is facing. Apple halted sales in Russia after the invasion of Ukraine.
Analysts still expect revenue, earnings per share, and earnings per share growth to continue over the next half decade, but they are likely to be at a softer rate than they were previously experienced by the company. It is more difficult to drive revenues higher when the base of the company is so large. AAPL looks like it will continue to do well, but is unlikely to crush the market as it has in the past.
The stock price might be better.
Although the business is one of the best in the world thanks to its competitive advantages, the stock price looks less compelling than the underlying business.
The forward dividend yield is 0.7% despite decent but not great expectations for growth over the next half decade. The earnings per share growth rate, plus current yield, is only 8%, with the vast majority of that sum coming from growth, making the total return proposition fairly subdued here. On top of that, the price to normalized earnings ratio of 22.87x is well above its 10 year average of 16.91x and slightly above its five year average of 21.25x, indicating that the stock could be overvalued.
Wall Street analysts seem to be bullish on the stock. According to Wall Street analysts, AAPL has a Strong Buy consensus based on 20 Buy ratings, six Hold ratings and zero Sell ratings in the past three months. The upside potential is put at 37.22% by the average analyst price target for AAPL.
Summary andConclusions
Over the course of a year, AAPL has generated fantastic returns for shareholders, while revolutionizing consumer electronics and communications technology. The stock is an excellent dividend grower, and is also buying back shares.
While its services business is driving much of its growth right now, the numerous challenges facing the business at the moment combined with its stretched valuation multiple mean that total returns for the foreseeable future may be lackluster.
The company is one of the best in the world and its stock is very difficult to bet against. The valuation looks stretched at the moment, so investors might want to wait for a decline in the share price before buying more shares.
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Disclosure is read full.