Hypothetical question. How much is a business worth that does $120bn of revenue in a quarter , at a 40% profit margin. What if I told you earnings have been growing around 20% per year?
Well, “a lot” would be one answer. But clearly Apple (yes, you guessed it!) is already valued at “a lot” , and you can say it has been for a long time , yet it has continued higher and higher. Just as one example 18 months after hitting a $2trn market cap it passed the $3trn milestone, with the shares up 60% over that period.
With apple shares being valued where they are, it’s become almost impossible to “look smart” and be bullish on apple – so I tend to see so many negative takes , some simply naive knee jerks against such a high valuation , others more thoughtful. I think some of this knee jerk pushback against higher valuation is one reason why FAANG stocks have been under-owned (don’t be that person!)
It’s a big part of so many portfolios , particularly index tracking ones that maybe it pays to get beyond the familiar headlines just a little , which is why I thought it might be interesting to listen to the latest earnings call (using the brilliant Quartr app to make this easy). Here’s what I took away
Q4 2021- The everything record
120bn revenue quarter. During the quarter Apple hit a sales rate of more than a billion dollars per day.
It was a record quarter for revenues in pretty much every product division – iPhone , Mac , services (the one exception there was iPad).
Overall result was revenues up c10% , earnings 20%. That’s a pretty remarkable growth rate for the largest company in the world, and this isn’t a one off at all , Apple (and other FAANG stocks) have continued to grow at startup type rates as they have got bigger. It’s one reason why today’s mega-caps (you can’t really call them all “tech” stocks these days) have arguably the best fundamentals of any leading group of stocks , ever.
Apple’s overall margins were up slightly to c40%. That’s super high , obviously and a consistent feature of apple compared to all other device makers is just how much value they are able to capture themselves vs the components , and this isn’t showing any signs of changing even under current semiconductor supply pressures. If anything the margins are edging up slightly.
It’s a Services biz, within a devices biz, within a platform …
Apples’s services biz (app store, music, TV, cloud , payments etc) is now a c$80bn revenue biz. That’s equivalent to Netflix plus Spotify plus Visa plus Shopify. Stand-alone would surely be one of the biggest companies in the world or not far off – it’s close to the turnover of Facebook ($112bn) just by itself. And that’s at a profit margin of 70%. The devices (separate to services) business did $38bn of revenue in 2021, which for context is in the same ballpark as Tesla ($54bn).
Reading between the lines
It’s interesting the metric a company chooses to focus on beyond the pure accounting mesures of revenue and earnings which frequently do a bad job of capturing the real unit economics of a business, especially these days. Apple focus a lot on the installed base of devices – now a staggering 1.8bn globally. Maybe not surprising if they now see themselves more and more as a services business and each device adds to the addressable market, an ever expanding platform into which they can sell services at an EVEN HIGHER profit margin than the device itself.
On the call Apple execs are always keen to point out the proportion of sales that are new to apple – pushing back against critique that sales are driven just by upgrades.
The big question
The big question dropped at 35:54 minutes into the earnings call from Katie Huberty at Morgan Stanley: “what are you doing in the metaverse?”. “that’s a big question” says Tim Cook , with perhaps a hint of a smile detectable in his slight southern drawl: “we’re a company in the business of innovation … see a lot of potential in the space and investing accordingly.” 14,000 apps in the App Store supporting augmented reality.
The value of real options
The metaverse is one question but is only one of many options Apple has on potentially huge and gamechanging business lines in the future. And undervaluing real options I think is a key mistake the market has made in trying to value FAANG stocks over the last decade or so. We have come a long way since 2016 when the market priced apple close to a bog-standard widget manufacturer churning out devices but vulnerable to supply squeezes and periodic new product flops. I think the price earnings ratio is pretty irrelevant here a lot of the time, but a lot of people love it, so I note that Apple’s price earnings ratio has actually fallen quite substantially over the last couple of years.
Incidentally I think it’s fascinating how many options Apple has failed to capitalise on yet still be so successful (iTunes/ podcasts should have been Spotify , FaceTime should have been zoom , and loads more potential examples).
Anyway another clear area of focus now is HEALTH. Tim Cook spoke about receiving messages daily from people who went for a check up following an alert from their Apple Watch which saved their life, or where the watch alerted the emergency services where they couldn’t. Apple are just getting started in this space and while there are a lot more barriers than other areas, it’s yet another option on a huge market that investors have to try and value.
Apple has $200bn of cash on the balance sheet. That means they could buy the largest company in the UK purely with cash.
I haven’t even talking about things like Apple’s new M1 chip program (introducing its own Mac-specific chips for the first time).
So what to make of all this? I’m not trying simply to marvel at the sheer scale of apple here, or join the Apple stock fanclub. We know it’s big we know it’s successful. That’s why it’s a huge part of many portfolios already. Enough already. My takeaways:
Don’t buy into knee- jerk anti-Apple hype just because it’s breaking through arbitrary valuation levels. Yeah, we know it’s worth more than the whole UK stockmarket (still blows my mind that stat) but so what. Doesn’t tell you anything.
New valuation levels will continue to get broken. Would you bet against it being the first 10 trillion company within a decade? I wouldn’t. It’s bound to be the first ever company to break through all sorts of milestones.
Don’t buy into the “it’s all just the fed pumping it up” hype. Apple has a very small amount of debt, and a far bigger cash pile. It doesn’t rely on cheap money. It’s winning because it’s selling real stuff in the real world. It’s products are among the best selling of all time in so many different countries and it captures a huge amount of value in the process of selling them. Sure, discount rates do matter for equity valuations and for sure that has helped Apple’s stockprice. But the US 10 year rate is now over 1% higher than it was during mid 2020, yet Apple is close to new highs.
Look beyond country and sector definitions. Some global investors get nervous about the current US focus in global indices (above 60%) and the prominence of tech (notwithstanding that Google, Facebook and Amazon have rightly been counted outside the tech sector for a few years now). But Apple is a global company now. A minority of revenues come from the US now, it has top selling products in almost every region. It is almost unique amoung FAANG stocks in having a very strong presence in China. It’s not a US-company really in any meaingful sense that should worry investors. Ditto the tech point – you can see from what I’ve said above that Apple has huge parts of its business that aren’t really counted as tech.
We’re currently more-or-less in the midst of a tech crash, with something like 1 in 5 Nasdaq stocks down by 40% or more from their highs. Peloton is off 80%, Zoom more than 60%. Apple is close to its all time high. You should think of it as a global blue chip now, not a US tech stock.
Low yields on bond investments and the growth of passive will continue to place a bid under Apple stock, as well as the use of excess cash for buybacks. Every active manager underweight Apple who gets sold and transferred to passive is a buyer of Apple stock.
Revisit your thesis. Don’t get fobbed off by active asset managers with one of those knee anti-apple jerk views (“but it’s $3trn”, “but it’s iphone only!”, “look at the price earnings ratio”). Many active managers decided years ago they didn’t buy into the story for whatever reason and have just doubled down on an underweight (or zero weight) position every since, which has continued to hurt portfolios. You need to try and find a way to revisit that thesis and close the underweight if necessary.