Apple is no longer low-hanging fruit, is it still worth a bite?
Welcome to Stock Takes, my thrice-monthly take on an individual stock. I look at the big picture, unlike Wall Street analysts who are geared to earnings, and the media that focuses more on news value.
Apple Inc. (NASDAQ: AAPL), has been the apple of investors’ eyes for many years. That’s why investors were surprised that Warren Buffett’s Berkshire Hathaway sold about 50% of its Apple holdings in the second quarter, paring down its holdings to 400 million shares. This had some investors second guessing whether they should continue to hold on to the stock.
When I last looked into the stock back in 2013, Apple was still growing, but at a sedate pace. I wrote that readers could consider buying the stock. Since then, the stock has risen from about $16 in February 2013 to its August 14, 2024 close of about $221 (after adjusting for a 7-for-1 stock split in 2014 and a 4-for-1 split in 2020), making for a whopping return of more than 1250%.
Apple is no longer low-hanging fruit though, raising the question of whether it is still worth buying at its current price. Also, the government has been raising antitrust issues relating to Apple, as well as other technology giants.
Looking to benefit from AI integration
Like other major Silicon Valley technology companies, Apple is looking to benefit by integrating Artificial Intelligence into its product offerings. For its fiscal year 2024 third quarter ended June 29, 2024, the company reported “record revenue” of $85.8 billion, up 5% from the 2023 third quarter. Earnings per share rose 11% to $1.40 over the year.
The company also reported that its “installed base of active devices reached a new all-time high in all geographic segments, thanks to very high levels of customer satisfaction and loyalty.” At its Worldwide Developers Conference in the second quarter, the company reported updates to its software platforms, including Apple Intelligence a “breakthrough personal intelligence system that puts powerful, private generative AI models at the core of iPhone, iPad, and Mac.”
On Apple’s third quarter earnings call with analysts, CEO Tim Cook noted that the company had quarterly record revenues in many countries and also saw record revenues, up 14% to more than $24 billion, in its services segment (including advertising, the App Store and cloud services), with double-digit growth in paid subscriptions. The company expanded its iPhone “tap to pay” feature to new markets such as Japan, Canada, Italy and Germany. Apple also opened its first retail location in Malaysia, continuing its expansion into emerging markets.
Apple’s iPhone segment reported revenue of about $39 billion, down 1% after foreign currency conversion. Its Mac segment revenues were about $7 billion, up 2% from the corresponding 2023 period. All Macs that have come out since 2020, featuring an M chip, have the capacity to integrate Apple Intelligence. For its iPad segment, revenues rose 24% to about $7.2 billion, with the launch of the 11-inch and 13-inch iPad Air, and the new iPad Pro, all of which can integrate Apple Intelligence.
And the company’s “wearables, home and accessories” segment, which includes Apple Watch, saw a 2% drop off in sales to about $8 billion, as sales of wearables were down coming off previous successful AirPod and watch launches.
Apple Intelligence, built on years of investment in AI and machine learning, “will transform how users interact with technology, from Writing Tools to help you express yourself to Image Playground which gives you the ability to create fun images and communicate in new ways, to powerful tools for summarizing and prioritizing notifications,” according to Cook.
With Apple Intelligence, “Siri also becomes more natural, more useful and more personal than ever.” And Apple is integrating Chat GPT into the iPhone, Mac and iPad, so that users can “draw on a broad base of world knowledge.” Apple will continue to make “significant investments” in Apple Intelligence technology and continue to innovate in order to “unlock its full potential.” Apple is launching the technology in a staggered way, with features such as foreign languages as well as Chat GPT being added later this year.
Is Apple engaging in monopolistic practices?
While Apple continues to enjoy high levels of consumer satisfaction and is looking forward to more growth with AI integration, it faces some regulatory threats. For one, the U.S. Department of Justice, along with several state and district attorneys general, launched a case against Apple earlier this year for “monopolizing smart phone markets.”
According to Attorney General Merrick B. Garland, “We allege that Apple has maintained monopoly power in the smartphone market, not simply by staying ahead of the competition on the merits, but by violating federal antitrust law. If left unchallenged, Apple will only continue to strengthen its smartphone monopoly.”
Among other issues, the case accuses Apple of “blocking innovative super apps” and “suppressing mobile cloud streaming services.” The case also cites Apple’s behavior in “excluding cross-platform messaging apps” and “diminishing the functionality of non-Apple smart watches.” And the DOJ also cites Apple’s “limiting third-party digital wallets” on its system.
Moreover, the government alleges that “Apple has every incentive to extend and expand its course of conduct to acquire and maintain power over next-frontier devices and technologies.”
Apple has responded by asking for the government to dismiss the case. According to Apple, if the government wins its case, it would “harm innovation and risk depriving consumers of the private, safe, and secure experience that differentiates iPhone from every other option in the marketplace.” And there has been some commentary that the government doesn’t have a strong case against Apple.
Apple could also take a hit from the positive ruling for the Department of Justice in a similar antitrust case it brought against Google. In that ruling earlier in August, it was found that Google ran afoul of antitrust law by maintaining a search monopoly. While Google will appeal this ruling, it could have fallouts for Apple too considering it has an agreement in place since 2002 with the search giant to make Google the default search engine across Apple’s devices. Google pays Apple 36% of the search revenue it gets from the deal. This is an estimated $20 billion in 2022, which made up about 5% of the company’s total revenue for that year.
Apple is also facing regulatory scrutiny in Europe, under the European Union’s Digital Markets Act. As a result, Apple was forced to change its App Store policies to allow developers to more easily communicate with customers within their apps.
On the company’s earnings call, Apple CFO Luca Maestri noted, “We are on an ongoing basis discussing with the European Commission how to ensure full compliance with the DMA. It is obviously early stage, but in general, our results for the services business and for the App Store have been pretty good until now.” He added that for a frame of reference, “the percentage of revenue that we generate from the European Union on the App Store is about 7% of the total.”
Apple has faced additional European scrutiny about not allowing competitors access to the iPhone’s system for contactless digital wallet payments, effectively giving its own Apple Pay mobile wallet an advantage. As a result, Apple has been forced to make concessions and allow other digital wallet providers and developers access to its iPhone payment system so that Apple Pay is not automatically the default digital wallet for iPhones in the European Economic Area. And the European commission is also looking into Apple’s terms for allowing third-party apps and app stores on its systems.
Multiple other risks
Apple also faces multiple other risks. For instance, in Ireland, it could be forced to pay back some income tax concessions the government granted the company if the European Commission prevails in a case against Apple.
There are limited sources of supply as well as competition for some components Apple uses in its products, and the company may have to deal with unavailability or erratic access to components. And Apple outsources its manufacturing to multiple overseas locations in Asia. If the government, as Trump’s protectionist trade policy proposes, starts imposing tariffs and other trade barriers, there could be negative fallouts for Apple’s supply chain and operations.
And Apple is subject to various data protection and data privacy laws and also has to follow the payment card industry data security standards. According to Apple, “Apple Intelligence is built on a foundation of privacy, both through on-device processing that does not collect users' data and through private cloud compute, a groundbreaking new approach to using the cloud while protecting users' information powered by Apple silicon.”
Also, it is subject to foreign currency exchange risk since it has operations in multiple countries, and resorts to hedging strategies to tackle this risk. The company also hedges its interest rate risk exposure.
There is also intense price competition from other smart phone and computer manufacturers, as well as pressure to constantly innovate. According to Apple, it “faces significant competition as competitors imitate the company’s product features and applications within their products, or collaborate to offer integrated solutions that are more competitive than those they currently offer.”
Is Apple still worth a bite?
Looking into the company’s financials, Apple’s current ratio of 0.95 at the end of the third quarter is not strong enough, considering that its current assets do not fully cover its current liabilities. Its debt-to-equity ratio came in at 1.52 times, indicating it has not taken on too much debt. For the full fiscal year ended September 2023, the company had a high inventory turnover of more than 37, indicating that its sought-after products sell fast.
The company reported a good gross margin of about 46% for the third quarter. It anticipates a similar gross margin for its fourth quarter, with the foreign exchange conversion factor continuing to be a headwind for the firm.
The company’s book value per share as of the third quarter is $4.36, making for a hefty price-to-book value of more than 50 times. And its earnings per share of $6.56 for the previous 12 months makes for a high price-to-earnings ratio of about 34 times. The company paid out a $0.25 dividend for the third quarter, which it intends to increase going forward, and had an annual dividend yield of about 0.45% for the last year. Apple also supports its shares through stock repurchases, and has available more than $110 billion for stock repurchases.
It looks like the company still has opportunities to grow in emerging markets and consumers continue to be enamored of its products. While the antitrust inquiry against the company could have a negative impact, that could take years to play out. In the meantime, Apple looks to still be worth a bite.
P.S.Want me to look into a particular stock? Reach out to stocktakes1@gmail.com and I’ll consider your suggestion.
Note: I do not own any individual Apple stock and I do not intend to take a position in the stock within five days of publication of this article. This write up is my unbiased opinion and not intended as financial advice. All investments carry risks and you should talk to a financial advisor to learn about the suitability of an investment for your portfolio. I did not receive any compensation for this piece that influenced my views.