Trading On margin

Apple Keeps Its Portfolio Healthy – Potentially Recession Is Away

olga_d/iStock via Getty Images

Investment thesis

It is obvious that Apple Inc. (NASDAQ: AAPL) has been riding a massive rally, since bottoming out at $132.34 on June 13, 2022. The stock had posted an impressive 25.5% rally to $166.13 at the time of writing, with the potential to set another all-time high by September 2022, similar to 2021. This would be the perfect way to celebrate AAPL’s 15th anniversary of the launch of the iPhone, coinciding with the launch of the iPhone 14 Assuming a rather bullish stock price of $200 for APPL (based on Dan Ives’ price target), we would then see a magnificent 10-year total price return of 963.76%.

Even if the recession were to occur (if we are not there already), we are very confident in AAPL’s ability to weather the temporary headwinds. Although the stock plunged 37.8% in February and 47.2% in October 2008, it had recouped all losses by October 2009. Additionally, the company continued to show excellent revenue growth in year-over-year of 14.4% and net profit of 34.6%. in FY2019, then defying the recession. Therefore, there is absolutely no reason for us to sell now. This is unless one urgently needs the money.

AAPL demonstrates why it’s the world’s most valuable company

AAPL Revenue, Net Income, Net Income Margin, and Gross Margin

S&P Capital IQ

In the third quarter of 2022, AAPL recorded revenues of $82.96 billion and gross margins of 43.3%, representing year-on-year growth of 1.8%, respectively. Meanwhile, its profitability had unfortunately slowed with net income of $19.44 billion and net income margins of 23.4%, down -10.5% and -3.3 percentage points in year-on-year, respectively.

Nonetheless, it is critical to note that these margins still represent a notable improvement over fiscal year 2019 levels of 37.8% gross margins and 21.2% net margins. Thus, highlighting AAPL’s prowess in managing global supply chain and operating costs thus far. Wedbush Securities analyst Dan Ives said:

We would characterize this quarter as a major bullish statement on iPhone demand and Cupertino’s ability to handle a supply chain shortage in impressive performance…with a Top Gun Maverick-like feat. (Looking for Alpha)

Cash/equivalents AAPL, FCF and FCF margins

S&P Capital IQ

Therefore, it is no surprise that AAPL’s free cash flow (FCF) generation remained excellent, with an FCF of $20.79 billion and an FCF margin of 25.1% at FQ3′ 22. This represents an improvement of 9.4% and 1.8 percentage points year-on-year, compared to a year-on-year growth of 29.1% in FQ’21, although a decline of 1.3 points of percentage at the time. Again, the FCF margin still looks excellent compared to 22.6% in FY19.

In the meantime, if we were to examine AAPL’s war chest of $28.86 billion in cash and cash equivalents on its balance sheet, it’s evident that AAPL remains well funded for its upcoming AR/VR glasses and Apple Car in the future. future, the latter of which we discussed in depth in our previous analysis.

AAPL inventory

S&P Capital IQ

AAPL also remains well positioned for growth, given its strong inventory of $5.43 billion at FQ3’22, which would help accelerate its year-over-year revenue growth at FQ4’22 with the speculative launch of the iPhone 14 at the time. We expect its release to generate massive global interest, with analysts estimating a target shipment of 90 million units for the first wave. The sum is similar to that of the iPhone 13 released in September 2021, representing a 20% increase from pre-pandemic levels of 75 million.

In the meantime, we encourage you to read our previous article on AAPL which would help you better understand its market position and opportunities.

  • Can Apple be the new Tesla – Smartphone on Wheels by 2025?
  • What the end of the epic battle means for Apple and Google
  • Apple: What you need to know about its alleged subscription plans

AAPL continues to increase profitability

AAPL Projected Revenue and Net Profit

S&P Capital IQ

Over the next three years, AAPL is expected to experience revenue and net profit growth at a CAGR of 5.33% and 4.33%, respectively. For fiscal 2022, consensus estimates the company will report revenue of $392.46 and net revenue of $99.6 billion, representing a year-over-year increase of 7.2% and 5.2% , respectively. Additionally, AAPL management guided an acceleration in sales for FQ4’22 with stellar gross margins of between 41.5% and 42.5%.

Therefore, it is evident that AAPL’s revenue and net income growth has normalized from this year, compared to FY2021 growth of 33.3% and 64.8%, or an adjustment. Three-year CAGR of 14.6% and 21.71%, respectively. In contrast, the company is expected to experience a notable expansion in net profit margins, from 21.2% in fiscal 2019 to 25.9% in fiscal 2021 to an excellent 24 .8% by FY2025.

Even if we were to take an average FCF margin of 24.9%, AAPL is expected to earn $97.72 billion in FCF in fiscal 2022 and up to $112.1 billion by fiscal 2025. C This is the exact reason why market analysts and bulls always reward the stock with a higher valuation.

So is AAPL Stock a buySell ​​or Keep?

AAPL 5Y EV/Revenue and P/E Valuations

AAPL 5Y EV/Revenue and P/E Valuations

S&P Capital IQ

AAPL is currently trading at a Revenue EV/NTM of 6.21x and a P/E NTM of 26.83x, above its 5-year average of 4.52x and 21.6x, respectively. The stock is also trading at $166.13, just 9.1% off its 52-week high at $166.13 and at a 28.7% premium to its 52-week low at 129. $.04.

AAPL 5-Year Stock Price

AAPL 5-Year Stock Price

S&P Capital IQ

Therefore, despite the strong buy rating of consensus estimates with a price target of $185.05 and an upside of 11.39%, we believe otherwise. Long-term investors anticipating terrific retirements and well-funded trusts would be well advised to hold on to these gains, as they represent a 5-year total price return of 348.9% and a 10-year gain of 783.6 %. Assuming similar growth over the next decade, we could speculate a gain of over 1500%, if not more, over 20 years. Of course, the crystal ball is not always accurate. Therefore, it is also wise to keep your portfolio appropriately sized in case of unknowns, future risks and volatility.

In the meantime, those in need of quick cash can sell some of their existing holdings as AAPL looks ripe for the picking with handsome returns. However, remember to get back to reasonable lows as the stock remains a solid choice for long-term growth. On the other hand, for those looking to add, now is not the right time as the stock is trading at a premium. Wait for a significant retracement to come. Good luck.

Therefore, we assess AAPL action as a suspension. APPL long!