Apple: Extraordinary Longevity
Summary
- Evaluating qualitative aspects of Apple's business model that will continue to drive their success.
- A discounted cash flow analysis evaluating Apple's potential FY22 year-end intrinsic value.
- Evaluating Apple's dividend potential in correlation to its discounted cash flow analysis.
Introduction:
Apple, Inc. (NASDAQ:AAPL) provides an exceptional long-term investment opportunity for any investment portfolio. They have built a brand that is internationally recognized and has an extraordinarily loyal customer base. Their proprietary product line combined with their customer loyalty will increase sales among their product line from their phones to their watches. Apple has demonstrated the ability to implement solid price increases among their product line and still produce consistent sales. In addition, Apple’s cloud services has become a consistent and growing segment of their revenue stream. Apple still has an attractive quantitative evaluation, even at current market prices. With a consistently growing dividend, attractive quantitative analysis, and promising prospects, Apple is a great stock to add to anyone’s portfolio.
Qualitative Analysis:
The power of a brand is something that is hard to grasp. Apple has the most valuable brand of any publicly traded company on the planet according to Forbes, valued at $170B per its 2017 ranking. One of the most important, if not the most important, factor when investing in a company for the long-term, is investing in a company with an impenetrable moat. I think it’s safe to say that Apple has built quite a moat around their company with their extraordinary brand. Powerful brands such as Apple or Coca-Cola create customer loyalty. Genuine customer loyalty leads to customer base growth and recurring sales. I believe the power of Apple’s brand is capable of continuously generating a larger customer base and increasing revenue, dividends, and thus, shareholder equity. Apple’s brand and moat is the driving factor behind this analysis and why I believe they have the necessary tools to be an innovative leader in the tech industry for years to come.
(Image Source.)
While the proprietary nature behind Apple and their products could be viewed as a double-edge sword, I think it has proven to be successful for Apple and will likely continue to be that way. Apple may lose customers in regards to the fact that their phones, computers, tablets, and laptops only use their OS software and proprietary chargers. However, as stated previously, I believe that Apple’s loyal customer base has already adapted to the proprietary nature of Apple’s products. Apple’s smart technology has been known to be far and away the most user friendly products in the smart tech market. I believe their ease of use approach was a huge catalyst behind building their massive brand and loyal customer base. Their products are sleek and very simple, even for individuals that are first time users of smart phones and/or tablets. Apple’s simplicity alone has made their customers willing to pay a premium for their products individually, on top of being willing to buy Apple’s other premium priced products because they work best with Apple’s proprietary product line. I don’t think this business model would be able to work without having and extraordinarily loyal customer base. The fact that Apple has been able to execute successfully with such a proprietary business model and product line for so long, especially when competitor’s products are easily integrated, is a strong qualitative aspect of Apple’s business. After building a line of proprietary products for years, and building a massive customer base around those products, they have the leverage and ability to continue to operate the same way effectively down the road.
Apple has demonstrated the ability to implement impressive price increases within their product line without losing significant sales volume. While the first iPhone that launched in 2007 was priced at roughly $500, the following iPhone 3G that launched in 2008 was priced around the $300 range. From the iPhone 3G in 2008 to the iPhone X released in 2017, the price of iPhones has risen at a CAGR of approximately 14%. The iPhone X was the most expensive iPhone ever released to date and sold out in a matter of minutes. Apple has a holistic net margin of approximately 20%. If they continue to increase their iPhones price at the 14% rate as they have over the last decade, they will be increasing their profit on iPhone sales by a CAGR of 2.8%. Considering Apple’s iPhone sales consist of more than 50% of their revenue, this is a great aspect surrounding Apple and their ability to continue to increase their bottom line and shareholder equity.
(Image Source.)
Apple has also developed a consistent and growing revenue stream via their cloud services. As seen in the image above, iPhone revenue fluctuates quite a bit throughout the year. However, their services revenue remains consistent throughout the year. The growth of their services segment has also been impressive. From 1Q16 to 1Q17 Apple’s revenue from their services increased by 16.67%. From 2Q11 to 2Q17 their services revenue has increased by 250%. Apple’s services segment’s growth and consistency is something to acknowledge. It is now their second largest source of revenue and still appears to be growing at impressive rates. If Apple’s services segment keep up with this growth, it will generate a generous amount of revenue and shareholder equity. Their services will grow as long as their product sales grow, and as stated previously, I believe Apple is capable of growing sales and retaining loyal customers.
Quantitative Analysis:
The quantitative forecast will take into account the qualitative aspects of Apple addressed above. The discount rate that I will be using for the discounted cash flow analysis is the 10-Year Treasury note rate. Considering those rates are anticipated to rise my discount rate will be slightly higher than the 10-Year Treasury note, but still quite close. The current 10-Year Treasury note rate is 2.885%. I will use a 3.25% discount rate for this analysis. Many will likely believe that rate isn’t sufficient, however, I don’t believe higher discount rates are appropriate forms of risk mitigation. The discounted cash flow analysis will be ran on a five year basis calculating the FY22 year-end intrinsic value. Currently, Apple has trailing twelve month revenue of $239,176(in millions) and a net margin of 22.73%. I believe Apple will maintain a 21% net margin, thus, I will use that in this analysis. Over the past five years, Apple has grown revenue at a CAGR of 14%. I believe that rate is still achievable over the next five years and will use that rate in this analysis. With the 3.25% discount rate, Apple’s CAGR of revenue would be 10.75%. The data above would give Apple a FY22 year-end revenue of $398,507(in millions) and FY22 year-end net income of $83,686(in millions). This would give Apple a FY22 year-end EPS of $16.49. Apple currently has a P/E ratio of 18. I believe 18 is an appropriate P/E ratio for Apple, and will use it for this analysis. This would give Apple a FY22 year-end discounted cash flow intrinsic value of $296.82 per share, representing a 69.85% upside from its current market price of $175.03 per share. Apple’s asset value and power isn’t great enough to influence the discounted cash flow analysis value, thus, Apple’s FY22 year-end intrinsic value is $296.82 per share.
Current Market Price | $175.03 |
FY22 Year-End Intrinsic Value | $296.82 |
(Dalton H. 2018. MS Excel.)
Dividend Evaluation:
Considering Apple spends a lot on research and development, and are still growing at a relatively high rate, I don’t believe Apple will be increasing their payout ratio significantly over the next five years. They have consistently held a payout ratio of roughly .25 over the last several years, and I believe they will continue to payout roughly .25 of earnings over the next five years. Their current dividend is $2.52 per share annually paid in $.63 quarterly payments. Their current dividend yield is 1.44%. If Apple were to achieve my FY22 year-end EPS forecast of $16.49, purchasing shares at today’s market price of $175.03 would represent a five year forward dividend yield of 2.35%. That yield is derived from the implication that Apple will payout .25 of their FY22 year-end earnings of $16.49, representing FY22 year-end annual dividend payments of $4.12 per share. While Apple’s current dividend yield of 1.44% isn’t the most attractive dividend, a forward dividend yield of 2.35% isn’t anything to turn a nose up at. Apple’s dividend is safe, consistent, and has growth potential with earnings. Considering the tech industry is ever changing, I don’t know if Apple will ever have an extraordinarily high payout ratio, but I believe their earning potential could generate a generous dividend yield over time, even if they only payout .25 of their earnings. Overall, I like Apple’s dividend in the fact that it’s safe, has consistently grown for five years, and has potential.
Current Annual Dividend | $2.52 |
FY22 Year-End Potential Dividend | $4.12 |
(Dalton H. 2018. MS Excel.)
Conclusion:
In conclusion, Apple has the necessary tools and potential to demonstrate extraordinary longevity as a tech company and successful investment. They have built the most powerful and valuable brand in the World, created a product line so desirable their business has excelled and been dominant, even when their products are completely proprietary, have implemented firm product price increases and still generate favorable sales, and still have segments of their business growing generously after many years of incredible success. Apple’s profitability and growth paint an attractive picture for the future. They are poised to generate favorable earnings for investors that will translate to higher dividend payments and more shareholder equity. I feel quite confident that Apple has created a nearly impenetrable moat around their company and have proven such through their business model and success. Based on their discounted cash flow analysis, along with their incredible qualitative aspects, I believe Apple will achieve a FY22 year-end price target of $275-$295 per share with an annual dividend floating around the $4 per share mark as long as no significant market collapses occur.
This article was written by
Analyst’s Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (83)
and we've heard this for how many consecutive years now...???
As far as the cash who knows. Buyback would be best.