Should You Buy Apple?
Apple is rumored to release its first 5G enabled phone later this year sometime between September and November.
But, should you buy its stock before that happens?
Today, we’re going to find that out.
I’m sure you know its products and services, but just in case you don’t Apple sells…
• Apple TV+
• Music through iTunes.
And much more.
But it doesn’t just sell these products and services.
Its worked to create movements with these products.
After its initial founding in 1977 creating and manufacturing computers. It transformed its entire business and changed how we use phones, how we listen to music, and what we do on the go without a PC.
In short, Apple’s helped transform the entire world into what it is today where you have more technology in your pocket than what took man to the moon in the 1960’s.
This transformation from selling products to selling movements not only paid off with the world we now live in today… But also, in terms of the company’s value as well.
Back on August 2nd, 2020, Apple became the first company ever to surpass $1 trillion in market cap.
And as of this writing on July 23rd, 2020 it’s the largest company in the world based on market cap at $1.62 trillion.
But it wasn’t always easy.
The company was originally founded back in 1977 by Steve Jobs and Steve Wozniak.
It saw moderate success with selling computers.
But then the company went through enormous trouble…
It almost filed bankruptcy when its shares hit a split adjusted $0.23 cents per share in 1982.
EDITOR’S NOTE – Apple stock originally IPO’d for $22 per share in 1980. But since then its split its stock 4 times including the most recent one in 2014 that was a 7 for 1 split.
It fired Steve Jobs in 1985.
Years, later while it was still floundering it bought Steve Jobs back in 1996.
And this is when the transformation of Apple and the world truly began… When it introduced the original iPod.
This simple music playing device transformed how we listened to music and revitalized Apple. This device also began Apple’s transformation into the most valuable public company in the world.
The original iPod launched in 2001.
16 years after the company fired one of its original founders.
Since its original problems, Apple shares have been on a journey into the stratosphere.
If you bought $10,000 worth of Apple shares at its low point of $0.23 in 1982 that investment would now be worth $16,110,000 with Apple stock selling at $370.93 per share as of this writing… Not including dividends.
This is a return of 1,611X or 161,100% over 38 years.
Spectacular growth… Almost miraculous since it was near bankruptcy at the start of this transformation.
But this is all in the past…
Today I want to answer whether you should buy Apple stock today and hope for anything close to a 1,611X return over the next 38 years.
We’ll begin figuring this out by looking at its profitability and cash flow.
How Profitable is Apple?
Let’s do a quick rundown of Apple’s profitability and cash flow. Because profits and cash flow drive the long-term value and pricing of a stock over time.
I measure this in part by looking at two important metrics.
Operating profits and free cash flow/sales (FCF/Sales).
On an operating profit basis Apple’s produced an average operating profit margin of 28.9% per year every year over the last 10 years.
I look for any company to produce above 10% margins on a consistent basis to consider as an investment.
Its margin is 2.89X this minimum threshold.
What about its FCF/Sales?
Over the last 10 years Oracle’s FCF/Sales is 25.6% on average every year.
This is fantastic.
I look for companies to produce FCF/Sales at higher than 5% on a consistent basis. Apple also crushes this number too.
Both operating profit and free cash flow are important because they help show you the true profitability of the company.
The more profitable a company is the higher its value goes over time. And the more money it can spend on innovations and serving customers.
I estimate that far fewer than 5% of all public companies on Earth surpass my minimum thresholds for the 2 metrics above on a consistent basis… And Apple crushes them.
That puts it in the great operating company arena which is rare.
It well surpasses what I look for on a minimum profitability basis… But what about its valuation?
Apple Is Overvalued
As a conservative investor I want to recommend solid, safe, and relatively low risk investments to you.
Often those are achieved by high profit margins and low debt. But it’s also necessary to look at valuation too.
Because if you buy overvalued assets there is a lower margin of safety. Which means the investment is riskier.
I want to buy assets that are undervalued in a best-case scenario. And at worst fairly valued.
Because it’s one of the best companies in the world Apple falls into the overvalued category…
Its current P/E is 30.4.
Its current P/CF is 23.2.
And its forward P/E is 25.7.
I look for companies to sell at ratios below 20 on these metrics to consider the investment undervalued.
These show that Apple is overvalued today by a large margin. And because of this I don’t recommend buying its stock today.
Does, this mean you should sell of its stock today if you own some?
Does this mean its stock is going to crash badly?
Neither are true in Apple’s case.
I expect it to continue performing well in the years to come.
I expect the launch of its new 5G phone to further increase its already spectacular revenues, profits, and cash flows.
And I expect Apple to remain one of the best run companies in the world.
But as of right now I don’t recommend buying it because its overvalued based on its current numbers and metrics.
I don’t buy anything or recommend anyone buy anything on hopes of something happening in the future.
If you’re looking for a great potential stock investment look at Apple – BUT only when its valuation falls.
And if you’re looking for some other investment ideas make sure to check out some of our other recent articles below.
Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.