Apple: Crucial For Your Portfolio

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About: Apple Inc. (AAPL)
by: Michael Wiggins De Oliveira
Summary

The market turns fearful, and portfolios crash. How Apple can help you.

Financial position and capital return are discussed.

Ultimately, Apple is undervalued.

Executive Summary

Investing in Apple (AAPL) over the past year has been challenging, and presently its share price is unchanged over this time frame.

Elsewhere, particularly over the past month, the market bled red, testing investors.

Here, I explain why holding onto Apple will benefit your portfolio.

Focus On Facts

apple AAPL stock news store

(Source)

Apple is one of the most followed companies in the world. And as such, not only does it gather a huge amount of interest from investors, but it also gathers a significant amount of interest from financial media outlets.

And with so much uncertainty over President Donald Trump's pact or no pact with China, it becomes an easy stock to discuss all the minutiae which may aid or hinder Apple. However, the ultimate reality is that all this uncertainty boils down to just noise.

There is no question that the market over the past few months has been volatile. There is also no question that my portfolio has been hit badly. But then, it makes me think. Have I made any significant change to my portfolio? No, not really.

So the issue is likely to be systematic. Meaning that if my portfolio is suffering, it is quite highly possible that most investors will be suffering too. And until there is mass investor capitulation, share prices are likely to be volatile. But readers should hold tight and remember this is not a seller's market. This is very much a buyer's market.

Apple Lacks Of Innovation?

Moving on, during times of uncertainty, commentators often go back to their top talking points. How Apple has not come out with any new innovative products for a long time.

What these (shallow) commentators are missing is that it's not about selling consumers new products. It's more nuanced than that. It's about selling to consumers what they crave. And consumers simply can't get enough of streaming content, news and magazine subscriptions, and premium games. And this has been Apple's focus of late.

Now, let's unpick one of these services: streaming video. As a way of example, Netflix (NFLX) will probably finish 2020 having generated about $20 billion of revenue. Putting aside the (contentious) discussion of Netflix's cash burn. The fact is that Netflix's market cap is close to $150 billion. Implying that investors are happy to pay more than 9x its trailing revenue.

Case in point is that while it is unlikely that Apple's streaming video content could ever be worth this much by itself, it should still nevertheless be worth something. And I content that this potential is not being accounted for in Apple's $900 billion market cap valuation.

Printing Dollar Bills

Further, I'll admit that I'm not an Apple fanboy. I'm an investor. And what investors want to see is their company be highly cash generative and return large sums of capital to its shareholders.

Apple has a balance sheet with a net cash position of more than $113 billion. And investors talk about these numbers as if they are meaningless. That is a huge sum of capital. Do you care to know how much net cash Amazon (AMZN) carries on its balance sheet? $4 billion. (Note that this figure does not include any of its capital leases).

Thus, depending on where you lie on the argument, Amazon is either a meaningfully underpriced investment opportunity or on the opposite side of the argument. Incidentally, at Berkshire Hathaway's (BRK.A) (BRK.B) shareholder meeting, Warren Buffett was clear that he would not have personally made the Amazon investment. But we do know that Buffett sings hosannas about Apple. And why shouldn't he?

Apple has returned to shareholders just over $39 billion via repurchases and dividends in the past six months alone or more than 4% of its market cap. And in the past quarter, the company announced that it has been authorized to deploy a further $75 billion (approximately 8% of its market cap) for share repurchases alone. Thus, as the market turns volatile, how can Apple be seen as anything but a terrific investment?

Valuation - Large Margin Of Safety

Apple AAPL valuation stock

Source: Author's calculations, morningstar.com

As the table highlights, investors are happy to pay substantially more for Apple peers' cash flows. For instance, Amazon is priced at more than 27x to cash flow and Microsoft (MSFT) is valued at 21x its cash flows compared with just 13x for Apple. Netflix, on the other hand, remains a cash-burning business - thus offering investors no margin of safety.

Any way one appraises Apple, its stock is just cheap.

The Bottom Line

The market has been volatile of late. Investors broadly turn fearful and throw in the towel on their investments. However, readers who stayed invested in Apple through thick and thin will in time come to view Apple's valuation today as having been a strong bargain opportunity.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.