Apple’s Stock Faces Challenges Despite Strong Company Fundamentals
While Apple (NASDAQ: AAPL) remains a prominent company, it may not be a wise stock investment. It’s important to clarify that this isn’t simply about Warren Buffett’s decision to sell Apple shares; rather, it’s grounded in hard numbers that present a less favorable narrative than Apple enthusiasts usually support.
Apple is recognized for its innovation, brand loyalty, high margins, and substantial cash reserves. However, as an investment, with a P/E ratio nearing 35 and minimal growth or yields, Apple increasingly appears to be a nostalgia play lacking in value generation. These aspects contribute to our High-Quality portfolio, which has consistently outperformed the S&P 500, achieving over 91% returns since inception.
Julian O’hayon (@anckor) on Unsplash
High Valuation, Low Returns: An Investment Dilemma
Given a P/E ratio close to 35, one would typically expect:
- Rapid, sustainable growth, or
- Strong yields, either via dividends or cash flows.
Unfortunately, Apple offers neither.
- In the last 12 months, revenue growth was only 2.6%.
- The three-year average annual growth rate is even lower at 1.5%.
This performance indicates a mature company masquerading as a growth stock.
When it comes to yields, the situation is also disappointing:
- Free cash flow yield: <3% based on approximately $100 billion in annual free cash flow against a market cap exceeding $3.35 trillion. For comparison, Adobe provides a 5.5% yield, Altria offers an 8.5% yield, and WRB boasts a 12.5% free cash flow yield.
- Dividend yield? There is none for those looking for income.
In light of this, one might ask: why hold Apple stock?
Outstanding Company but an Unfavorable Investment
To clarify, Apple as a business excels in numerous aspects:
- Top-tier margins: Operating margin >30%
- Strong cash flow: Free cash flow margin around 25%
- Unmatched customer loyalty
- Significant ecosystem lock-in
- Robust balance sheet with extensive cash reserves
However, investment isn’t solely about acquiring exemplary companies; it’s crucial to buy them at the right price. Currently, at 35x earnings without growth prospects, minimal yields, and no dividends, Apple resembles a low-yield bond with the volatility typical of tech stocks. Since early 2021, the stock has shown negligible returns while demonstrating annualized volatility greater than 1.5 times that of SPY.
Is there room for Apple to succeed as a swing trade? Definitely. It is liquid, widely followed, and responds favorably to macroeconomic news and earnings reports. However, as a long-term, income-generating asset aimed at wealth accumulation, we remain skeptical.
In our ongoing effort to assess stocks, we filter out those we believe have hit their peak potential, effectively maintaining and rebalancing our High Quality (HQ) Portfolio. This portfolio, comprising 30 stocks, has a solid record of outperforming the S&P 500 over a four-year period. What’s the reason? HQ Portfolio stocks generally provide better returns with reduced risk compared to the benchmark, minimizing market fluctuations as reflected in HQ Portfolio performance metrics.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
