Apple: The industry giant is not worth its price (NASDAQ: AAPL)

Introduction

Apple Inc. (NASDAQ: AAPL) is an American multinational technology company best known for its iOS smartphones and macOS personal computers in the technology hardware, storage and peripherals industry. As shown in the chart below, AAPL stock has slightly outperformed the broader market year-to-date, losing up to 15.54% of its market value during a period when the SPY also fell 16.42%. Looking at the total return of the past 10 years, the stock has also returned significantly more to shareholders than SPY, with a staggering return of around 800% compared to SPY’s return of around 250%.

Despite this historic outperformance, I’m still not inclined to recommend a “BUY” for this stock due to Apple’s lagging financials, inadequate dividends, low intrinsic valuations on conservative measures, and more. Let’s dive into the main drivers of my assumptions on this bearish outlook.

Company activity

Apple, as a very mature company, has historically shown slow growth in financial metrics relative to the broader information technology sector, which has seen substantial growth on the heels of strong consumer demand. I’ve compiled the company’s historical revenue, EBITDA and normalized diluted EPS below. As a result, we can see that these metrics have been relatively mixed over the years, as evidenced by the 5-year average growth rate of around 8% in forecast revenue and forecast EBITDA. Forward-looking EPS growth has fared better, with a 5-year average growth rate nearly doubling to around 16%, but this is partly attributable to buyback programs and earnings inflation resulting from a reduction of the number of shares.

Such modest growth contributed to even apparent negative sentiment in Seeking Alpha’s D+ rankings on stock growth. Below are images with its difference in the medians of the information technology sector in terms of revenue, EBITDA and normalized diluted EPS.

Finally, there was significant insider selling activity. Over the past 4 years, insiders haven’t bought any of his shares and instead sold $810.145 million. I find this very concerning and it may highlight the lack of insider confidence within the company.

Inadequate dividends

In bear market conditions, I consider dividends to be the most important financial metric to watch because they can provide stable returns to investors even during market declines. Looking at Apple’s dividend history over the past 10 years, it hasn’t been great, to say the least. I analyzed the dividend on a more specific yield basis, and we can say that yields have fallen well below the yields offered by other technology companies in the sector.

For one thing, Apple’s forward dividend yield of 0.66% relative to its industry puts the company below the top 75% performer (second visual below). Not only is Apple’s futures yield significantly lower than SPY’s dividend yield of 1.55% year-to-date, but the benchmark treasury yield also offers a better yield than Apple’s. . For this reason, I don’t see this stock as being capable of delivering the baseline returns that are particularly important for navigating today’s uncertain market conditions.

Inventory valuation

Since Apple is a very mature company and its free cash flow (FCF) is growing at a steady rate, I decided to price the stock using the discounted cash flow (DCF) method with a more conservative and fair approach to yield more accurate result. I based my two models on the 5- and 10-year average decline in its outstanding shares with an adjustment for the historical decline in the number of shares to account for Apple’s historically large buyback programs. This resulted in 15,396.80 and 15,273.60 million shares, respectively, from a linear adjustment based on the historical Apple share count chart below. Therefore, the number of shares considered in this analysis is lower than the current outstanding diluted shares of the company’s shares.

Then I based these DCF models on Apple’s most recent leveraged FCF: $90.220 million. I then assumed a moderate FCF growth rate of 9.37% derived from the 10-year CAGR from 2012 to 2022 with a terminal growth rate of 2% to mimic constant growth with inflation. Finally, I used the highest discount rate using WACC to get 8%, again for a more conservative result. But, all of these assumptions together have resulted in Apple being expected to suffer a minimum decline of 24.7% from its last stock price. Although not shown below, we can assume that even using optimistic assumptions (such as a lower WACC and higher terminal growth rate), the results of the DCF models would have the stock price close to 0% upside – or, its current price.

Possible tailwinds to growth

From what I can see, the main catalysts for AAPL stock are new product launches under Tim Cook and the tailwind from the stock’s strong representation in various benchmarks. On the one hand, Apple, under the leadership of Tim Cook, 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 one on Tim Cook’s hits.

Additionally, Apple is well represented in various stock indices and exchange-traded funds (“ETFs”). This should naturally boost demand for AAPL shares as passive investments will continue to buy AAPL to maintain their target allocations. The passive style of investing is expected to be favored by investors by 2026 and will occur sooner if the bear market continues. Overweighting or over-indexing a stock is the idea that relates to how investors’ investment allocation is allocated to ETFs holding a percentage of the stock in the market, and how a high weighting for a stock in these ETFs would equate to a higher proportion of each dollar invested in the ETF in a particular security.

Specifically, as investors invest in ETFs, their investment is allocated with increasing representation to the various sectors and companies that make up those weightings in the portfolio. And as a company becomes more represented in an industry or in the market, the company would be bought up more accordingly based on its weightings. In a report by Invesco QQQ Trust (QQQ), we can see that Apple accounts for 13% of the NASDAQ tracking ETF (which is by far the largest ETF weighting) and also holds the largest stake in the S&P 500 by 6.55%. Apple should continue to benefit from this structure, with investors investing passively in ETFs.

Comparisons with competitors

The final part of my thesis is based on Apple’s competitive positioning and expensive valuation metrics relative to its peers. To visualize this, I’ve created a simple data table below with data from Yahoo Finance to compare Apple’s ranking against industry giants like Microsoft (MSFT), Alphabet (GOOG, GOOGL), Meta Platforms (META) and other competing companies. in the main product segments.

We can see that from this chart, Apple has a higher P/S and P/E valuation than most of its peers, with only Microsoft (one of the top ranked software stocks) having a more expensive valuation. These results show me that Apple commands a premium and costs more than its high-quality peers, and some of its peers may be a better value proposition at current valuation levels.

Company	Teleprinter	P/S	PER
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

Click to enlarge

Final Thoughts

In closing, I don’t believe AAPL stock is an optimal investment right now. Even though Apple is still an industry giant benefiting from Tim Cook’s passive investing and strategic shifts so far, financial stocks and dividends have risen at rates below industry averages, causing negative investor sentiment. This is even reflected in the fact that insiders have continuously sold a total of $810.145 million over the past 4 years. My two discounted cash flow models based on historical and conservative estimates in two different models calculating shares outstanding resulted in a 24.7% decline from current levels, showing that the stock is overvalued relative to my estimate. Apple’s valuation is also more expensive than its industry giant peers.

Following Apple’s first quarter 2023 earnings announcements or when the macroeconomic environment improves, I will reevaluate my thesis. For now, however, for all the reasons discussed above and more, I recommend a “SELL” on AAPL stock.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these actions.