Apple (NASDAQ: AAPL)
QVI Research Report | Updated Coverage | August 2023
Summary
Apple is a dividend-paying large-cap stock in the information technology sector’s hardware, storage, and peripherals industry.
Apple designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide.
Although the company’s growth has been flat of late, its value proposition, profit margin, returns on equity and invested capital, and downside risks remain legacy.
In this updated research report, QVI reiterates its rating on AAPL in the Concentrated Portfolio.
When referencing this report, premium (paying) subscribers can access their Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on August 22, 2023, and intended for illustration only. If reading this in your email, consider viewing in the Substack App for a more inclusive experience.
Apple Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Apple, Inc. AAPL 0.00%↑ is a dividend-paying large-cap stock in the information technology sector’s hardware, storage, and peripherals industry. AAPL was added to the QVI Concentrated Portfolio on March 8, 2017, at a dividend- and split-adjusted $32.52 a share.
Apple Inc. designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide.
The company offers iPhone, a line of smartphones; Mac, a line of personal computers; iPad, a line of multi-purpose tablets; and wearables, home, and accessories comprising AirPods, Apple TV, Apple Watch, Beats products, and HomePod. It also provides AppleCare support and cloud services; and operates various platforms, including the App Store that allow customers to discover and download applications and digital content, such as books, music, video, games, and podcasts.
In addition, the company offers various services, such as Apple Arcade, a game subscription service; Apple Fitness+, a personalized fitness service; Apple Music, which offers users a curated listening experience with on-demand radio stations; Apple News+, a subscription news and magazine service; Apple TV+, which offers exclusive original content; Apple Card, a co-branded credit card; and Apple Pay, a cashless payment service, as well as licenses its intellectual property.
The company serves consumers, and small and mid-sized businesses; and the education, enterprise, and government markets. It distributes third-party applications for its products through the App Store. The company also sells its products through its retail and online stores, and direct sales force; and third-party cellular network carriers, wholesalers, retailers, and resellers.
Apple was incorporated in 1977 and is headquartered in Cupertino, California, USA.
QVI’s value proposition elevator pitch for Apple:
The reigning king of productivity hardware and services, whether business or personal, mobile, wearables, television, or desktop, each anchored by its unparalleled iOS ecosystem.
Performance vs. Sector and Market
The chart below illustrates AAPL’s performance against the Technology Select Sector SPDR® Fund ETF (NYSE: XLK) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since being added to the QVI Portfolios in March 2017.
For example, AAPL has dramatically outperformed its sector and the broader market in total return during the coverage timeframe, compounding as a 4+ bagger.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Apple’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the US Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Apple: Bullish.
AAPL Total Returns vs. XLK and SPY
Apple Inc (AAPL) Total Return: +440.70%
Technology Sel Sec SPDR ETF (XLK) TR: +243.60%
SPDR S&P 500 ETF Trust (SPY) Total Return: +107.90%
Since March 8, 2017 (as of August 22, 2023)Earn premium subscription rewards when referring friends, family, or colleagues to QVI:
AAPL Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
The chart below demonstrates that AAPL’s earnings yield traded below the QVI targeted floor at 3.36%. In addition, at 3.58%, AAPL’s free cash flow yield also traded under the threshold.
As inverse valuation multiples, the weighted shareholder yields suggest that AAPL trades at a premium value to earnings and free cash flow. QVI will further explore valuation multiples later in this report.
Dividend Yield
Apple offers a cursory forward dividend yield of 0.53%, supported by a conservative 15.63% payout ratio, thus indicating a dividend rate with plenty of room for additional annual increases.
AAPL yielded 2.95% from an annual payout of $0.96 on a split- and dividend-adjusted cost basis of $32.52 per share on March 8, 2017, the initial date of QVI’s real-time purchase of a slice of the company. Thus, the yield-on-cost basis was +242 basis points [bps] above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the Average of the three shareholder yields to measure how the stock compares to the prevailing yield of 4.30% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for AAPL was 2.49% or -184 bps below the 10-Year and 3.30% or -100 bps below the Treasury yield when using QVI’s yield-on-cost basis.
QVI’s shareholder yields rating for AAPL: Neutral.
AAPL Shareholder Yields
Apple Inc (AAPL) Price: $177.24
Apple Inc (AAPL) Earnings Yield: 3.36%
Apple Inc (AAPL) Free Cash Flow Yield: 3.58%
Apple Inc (AAPL) Dividend Yield: 0.53%
One-Year Trailing (as of August 22, 2023)Apple Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, Apple had a negative three-year annualized low-single-digit revenue growth of -1.40%, underperforming the +9.62% median growth of the information technology sector.
Farther down the income statement, Apple had a trailing three-year mid-double-digit net profit margin of 24.68%, far outperforming the sector’s median net margin of +2.01%
Returns on Equity and Invested Capital
Apple’s management produced a whopping trailing three-year return on equity or ROE of 164.50%, well above the targeted threshold and the sector’s median ROE of 0.62%.
Stock buyback programs often elevate ROE. For example, Apple’s board of directors spent nearly $573 billion on repurchases since 2012 and bought back another 18 billion thus far in 2023 despite declining revenues. However, are they buying back the shares at value prices on behalf of shareholders?
At 55.24%, Apple’s three-year return on invested capital, or ROIC, was well above the QVI threshold and outperformed the sector’s median ROIC of 2.37%, indicating that its senior executives are superior capital allocators.
In addition, Apple’s ROIC quintupled its weighted average cost of capital, or WACC, of 11.79%. (Source of WACC: GuruFocus).
Flat revenue growth, overshadowed by high sector-beating profit margins and returns on equity and invested capital, suggests that Apple’s management continues its long-tailed history of second-level performance in Cupertino.
QVI’s fundamentals rating for Apple: Bullish.
AAPL Returns on Management
Apple Inc (AAPL) Revenue Growth: -1.40%
Apple Inc (AAPL) Profit Margin: +24.68%
Apple Inc (AAPL) ROE: +164.50%
Apple Inc (AAPL) ROIC: +55.24%
Three-Year Trailing (as of August 22, 2023)AAPL Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Apple, Inc. (AAPL), including potential catalysts. So, let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have a beneficial long position through the direct ownership of common shares of AAPL in our family portfolio. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is the contributing editor of Quality Value Investing, and author of the international-selling book Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. His work has been featured on Seeking Alpha, TalkMarkets, ValueWalk, MSN Money, Yahoo Finance, QAV (Australia’s #1 Value Investing Podcast), Money Life with Chuck Jaffe, LifeBlood with George Grombacher, The Acquirer’s Multiple, Amazon.com, Barnes & Noble, Apple Books, the BookLife Prize, and Publisher’s Weekly. David received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
Bonus: Founding Subscribers of QVI on Substack are eligible to receive a personalized complimentary copy of the case laminate hardcover edition of the book from the author.