Apple is one of the greatest companies in the world. It is renowned for its ecosystem, which creates a "stickiness" that keeps users within the Apple environment by seamlessly integrating hardware, software, and services. This interoperability encourages users to purchase multiple Apple products, enhancing overall value and convenience while also fostering strong brand loyalty. There is no doubt that Apple is a fantastic company, but is it also a good investment? And at what price? These are the questions we will explore in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Apple. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. Thus, I have no personal stake in Apple. If you want to purchase shares (or fractional shares) of Apple, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
The Business
Apple is a multinational technology company headquartered in California. Founded in 1976, it went public with its initial public offering (IPO) in 1980. Today, it is one of the largest holdings in the Dow Jones, S&P 500, and Nasdaq 100 indices. The company operates in two distinct business segments: products and services. Products include the iPhone, Mac, iPad, wearables, home devices, and accessories. Services encompass advertising, AppleCare, cloud services, digital content, and payment solutions. In fiscal 2024, products accounted for approximately 75% of Apple’s net sales, while services contributed 25%, highlighting the company’s ability to diversify its revenue streams. Apple’s business thrives on its strong brand and its ability to create a seamless ecosystem of interconnected devices and services. Consistently ranked as one of the most valuable brands globally, Apple’s reputation underscores its influence and customer loyalty. Once users adopt multiple Apple products, they become deeply integrated into the ecosystem, benefiting from features like seamless synchronization, continuity across devices, and a unified user experience. This integration creates a high switching cost, discouraging users from leaving the Apple ecosystem and driving repeat purchases of both hardware and services. Innovation is a cornerstone of Apple’s success. The company continually invests in developing cutting-edge technology, from advanced silicon chips powering its devices to exploring new product categories like spatial computing with Apple Vision Pro. This commitment to innovation enables Apple to stay ahead in a competitive industry while maintaining its reputation for high-quality and user-friendly products. By blending hardware, software, and services into a cohesive offering, Apple has built a strong moat. Its ecosystem not only fosters brand loyalty but also generates recurring revenue through services and high-margin hardware sales.
Management
Tim Cook is the CEO of Apple and a member of its Board of Directors. He joined Apple in 1998 at the invitation of Steve Jobs, initially serving as Senior Vice President for Worldwide Operations. Before stepping into the CEO role in August 2011, Tim Cook was Apple’s Chief Operating Officer, overseeing the company’s global supply chain, sales, and service operations. Under his leadership, Apple’s supply chain became a model of efficiency and flexibility, playing a crucial role in the company’s ability to scale rapidly. Tim Cook’s career prior to Apple includes roles at IBM, where he spent 12 years in manufacturing and distribution leadership, and Compaq, where he served as Vice President of Corporate Materials. He holds a Bachelor of Science in Industrial Engineering from Auburn University and an MBA from Duke University. Since becoming CEO, Tim Cook has transformed Apple into the world’s most valuable and profitable company. Under his leadership, Apple’s revenue and profit have more than doubled, and its market value has increased fivefold. Tim Cook’s strengths lie in his ability to manage complex global operations while maintaining Apple’s focus on innovation and excellence. Often described as charismatic and thoughtful, his leadership has earned Apple consistently high marks as one of the best tech companies to work for. Additionally, Tim Cook regularly receives high employee approval ratings, showcasing his ability to inspire and retain talent. Warren Buffett has praised Tim Cook as a fantastic manager, and his track record supports this sentiment. Tim Cook’s calm and strategic leadership has guided Apple through economic challenges, evolving consumer trends, and global competition, ensuring its continued dominance in the tech industry. While comparisons to Steve Jobs are inevitable, Tim Cook’s unique approach has solidified his legacy as one of the most successful CEOs of his generation. I believe that Tim Cook is among the best CEOs in the world, and I am very confident in his leadership of Apple moving forward.
The Numbers
The first metric we will examine is the return on invested capital (ROIC). We require a 10-year history, with all years showing figures above 10%. Apple delivers one of the best ROIC performances I have ever seen. The percentage has consistently exceeded the required 10% over the past decade, showcasing the company’s exceptional capital efficiency. The numbers since 2021 have been particularly remarkable, with ROIC exceeding 50% annually. While I am uncertain whether Apple can sustain growth rates at this level indefinitely, the fact that they have achieved it for the past four years suggests it may be a lasting trend. This is especially noteworthy given that Apple managed to achieve its highest ROIC in fiscal years 2022, 2023, and 2024 - years that were challenging for most companies due to macroeconomic headwinds. Apple has also emphasized its focus on operating income, efficiency, and margin improvements, which indicates that ROIC is likely to remain high moving forward. These factors underline Apple’s ability to generate strong returns on its investments.
The following numbers represent the book value + dividend. In my previous format, this was known as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. These numbers are somewhat puzzling because equity has been decreasing since 2017. However, there is an explanation for this: Apple has used low-cost debt to fund share buybacks. Apple has a strong balance sheet and took advantage of the opportunity to issue bonds at a low rate to enhance shareholder returns. This approach is reasonable, and as a result, I am not concerned about the decrease in equity since 2017. Equity grew in fiscal year 2023 but dropped again in fiscal year 2024. One reason for the decline in fiscal year 2024 was a one-time charge related to tax implications from an ongoing legal matter concerning state aid in Europe. Therefore, the decline in fiscal year 2024 does not concern me.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Apple has delivered positive free cash flow every year over the past decade. In fiscal year 2024, Apple achieved its second-highest free cash flow ever, which is very encouraging. Additionally, the levered free cash flow is the third-highest in the past decade and represents an increase from fiscal year 2023, further highlighting the company's strong performance. I expect the levered free cash flow margin to continue improving as services become a larger part of Apple's business. However, the free cash flow yield is at its lowest point in the past decade, suggesting that the shares are trading at a premium valuation. This is a point we will revisit later in the analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. This is calculated by dividing the total long-term debt by earnings. When evaluating Apple’s debt, I found that the company has a debt-to-earnings ratio of 0,91 years. This is well below the required three years, indicating that debt is not a concern for investors. In fact, Apple’s debt-to-earnings ratio has not exceeded two years over the past 20 years. Therefore, it is unlikely that debt will become a concern for Apple in the future.
Black Friday Special Offers on Seeking Alpha (Nov 18 - Dec 11):
For those serious about investing, now is the perfect time to upgrade your tools with these exclusive discounts - available only through these links. Choose the offer that suits you best:
Seeking Alpha Premium: Gain access to comprehensive financial data, expert analyses, market news, transcripts, and more to make informed investment decisions.
Black Friday Price: $209/year (originally $299) + 7-day free trial.
Alpha Picks: Get stock recommendations from a portfolio up +151,64% (vs. S&P 500's +53,42%) since July 2022.
Black Friday Price: $359/year (originally $499).
Alpha Picks + Premium Bundle: The ultimate investment package with a $289 discount!
Black Friday Price: $509/year (originally $798).
I use Seeking Alpha daily for its reliable insights, and these deals are a great opportunity to enhance your investment strategy. Act fast—offers end Dec 11!
Risks
Macroeconomic factors pose a significant risk to Apple due to its reliance on global markets and exposure to fluctuations in consumer spending and economic conditions. With a majority of its sales coming from outside the United States, Apple’s revenue is heavily influenced by global and regional economic health. Adverse conditions such as slow growth, recessions, inflation, and rising interest rates can undermine consumer confidence and spending, leading to reduced demand for Apple’s products and services. Given that Apple’s product lineup is often positioned as premium, economic downturns can disproportionately affect its sales as consumers prioritize essential expenditures over discretionary purchases like smartphones, computers, and accessories. Currency fluctuations present another significant challenge. For example, a stronger U.S. dollar makes Apple’s products more expensive in international markets, potentially reducing demand and pressuring profit margins. Conversely, a weaker dollar can increase costs in regions where Apple incurs expenses in foreign currencies, adding complexity to its pricing and profitability. Macroeconomic risks also extend to the broader ecosystem in which Apple operates. Declines in economic conditions can impact cellular network carriers and developers, two key components of Apple’s service and product integration. Financial instability or reduced investment among these partners could diminish the effectiveness of Apple’s ecosystem, indirectly affecting user experience and revenue from services like the App Store or Apple Music.
Competition represents a significant risk for Apple due to the highly competitive and rapidly evolving markets in which it operates. Apple’s success depends on its ability to continually introduce innovative products, services, and technologies. However, it faces intense pressure from competitors who frequently launch new offerings, aggressively cut prices, and imitate Apple’s product features. The markets for Apple’s products, including smartphones, personal computers, tablets, and wearables, are characterized by short product life cycles, evolving industry standards, and rapid technological advancements. This requires Apple not only to innovate but also to manage risks associated with new technologies, such as quality control and production challenges. Failure to meet these demands could lead to lost market share or diminished consumer confidence. Apple’s premium pricing strategy further increases its vulnerability in competitive markets. Many competitors offer similar products at lower prices, appealing to cost-conscious consumers and businesses. Some rivals, due to their cost structures or broader product portfolios, are able to sell products at minimal profit or even at a loss, intensifying pricing pressure on Apple. Additionally, Apple’s services face competition from established companies with significant resources and large customer bases, as well as from free or low-cost alternatives. For instance, some competitors provide digital content or applications at no cost, leveraging alternative business models that can undermine Apple’s revenue streams.
Antitrust represents a significant risk for Apple because the company operates in markets where its size, market influence, and business practices often attract regulatory scrutiny and legal challenges. These risks stem from allegations that Apple’s control over its ecosystem, including hardware, software, and services, provides it with an unfair competitive advantage, potentially violating antitrust laws. Apple’s dominance in certain markets, such as smartphones, digital payments, and app distribution, has drawn the attention of regulatory bodies in the U.S., the European Union, and other jurisdictions. For example, Apple’s App Store policies have been at the center of antitrust debates. Developers are required to use Apple’s in-app payment system, which incurs a commission fee often referred to as the “Apple tax.” This practice has led to lawsuits and complaints, with allegations that Apple unfairly restricts competition from alternative app marketplaces and imposes excessive fees on developers, ultimately raising costs for consumers. Apple also faces scrutiny over exclusive agreements, such as its partnership with Google to make Google Search the default engine on Apple devices. This arrangement, which reportedly generates substantial revenue for Apple, has been challenged as potentially anti-competitive, as it may limit opportunities for smaller competitors while consolidating the dominance of two major players. In the U.S., the Department of Justice has filed a high-profile antitrust lawsuit against Apple, alleging that the company leverages its control over the iPhone ecosystem to suppress competition. Similar concerns have been raised internationally, with the European Commission concluding that some of Apple’s practices abuse its dominant position in key markets. The consequences of these antitrust cases could be severe. Apple might face substantial fines, be required to alter its business practices, or lose significant revenue streams, such as its agreements with Google. These outcomes could materially impact Apple’s financial performance and its ability to maintain its ecosystem advantage.
Reasons to invest
Innovation and new product development are strong reasons to consider Apple as an investment, as the company continues to set industry standards and redefine technology across its product and service portfolio. Apple’s ability to introduce groundbreaking products and integrate advanced technologies underscores its commitment to staying at the forefront of the market. Apple has unveiled the revolutionary Apple Vision Pro, marking a major advancement in spatial computing. Vision Pro offers immersive experiences, showcasing Apple's potential to pioneer entirely new markets. Similarly, Apple Intelligence, the company’s generative AI platform, signals a new era for its ecosystem. The recent launch of the iPhone 16 and iPhone 16 Pro represents another leap in mobile technology, featuring industry-leading camera systems, extended battery life, and enhanced computational capabilities, which maintain Apple’s dominance in the smartphone market. Apple’s focus on the iPad as a key device for education, businesses, and creative professionals further reinforces its innovation-driven growth. By seamlessly combining hardware, software, and services into a unified ecosystem, Apple not only enhances customer satisfaction but also drives sustained growth in its installed base, which reached an all-time high across all product categories in 2024. What sets Apple apart is its long-term approach to innovation. The company not only introduces groundbreaking products but also anticipates future technological trends. This forward-thinking strategy positions Apple to remain a leader in the tech industry for years to come. By continuously advancing its technology while maintaining customer trust and loyalty, Apple is uniquely positioned to capitalize on emerging opportunities and drive long-term growth.
Apple's Services segment is a compelling reason to invest in the company, driven by its rapid growth, high profitability, and ability to leverage the vast installed base of Apple devices. One of the most appealing aspects of Apple’s Services is its recurring revenue model. With over 1 billion paid subscriptions - a figure that has more than doubled in just four years - Apple benefits from consistent and predictable income streams. Paid accounts and subscriptions continue to grow at double-digit rates, indicating robust demand for offerings such as Apple Music, Apple TV+, iCloud, and Apple Pay. This recurring revenue contributes to the stability of Apple’s financial performance, even during periods of economic uncertainty or slower hardware sales. The segment’s profitability is another significant advantage. With a gross margin of 74%, significantly higher than the 46% margin for Apple’s products, Services provide a substantial boost to overall margins. This profitability is supported by the scale of Apple’s ecosystem and the high engagement levels of its installed base. As Apple’s hardware customers increasingly subscribe to its services, the ecosystem fosters a virtuous cycle of customer retention and incremental revenue growth. Looking ahead, Apple’s Services revenue is expected to continue growing at double-digit rates, supported by the ongoing expansion of its installed base, higher customer engagement, and the addition of new features and services. As recurring revenue grows faster than transactional revenue, Apple’s Services segment becomes an increasingly stable and predictable component of its business.
Emerging markets represent a significant growth opportunity for Apple, making them a compelling reason to invest in the company. Markets such as China, India, and regions in the Middle East, Turkey, and Southeast Asia offer immense potential due to rising middle-class populations, increased disposable income, and growing demand for premium technology products. India stands out as one of Apple’s most promising markets. Although Apple currently holds a small market share in this rapidly growing economy, the company is making substantial investments to expand its presence. Tim Cook has emphasized India’s importance, citing the increasing number of people entering the middle class and improvements in the distribution network. These factors position India as a key long-term growth driver for the company. China, another critical market, continues to demonstrate long-term potential for Apple. While growth in China has faced challenges, Apple’s installed base of active devices has reached an all-time high in the region. The iPhone remains a top seller, securing the top two spots for smartphones in Urban China, according to Kantar. Additionally, Apple is successfully attracting new customers in China, with over 50% of Mac and iPad buyers and more than 75% of Apple Watch buyers being new to the product. These trends highlight Apple’s ability to expand its customer base even in a highly competitive market. Beyond India and China, Apple is experiencing robust growth in other emerging markets such as Turkey, Saudi Arabia, and the UAE. All-time revenue records in these regions reflect strong demand for Apple’s products and services. As these markets continue to develop economically, the demand for premium technology is expected to grow, providing Apple with significant opportunities to increase its market share.
If you trade stocks frequently, you can boost your results with VIP trading indicators. These tools are specifically designed to simplify your trading decisions and help you trade more profitably. Getting started is easy and affordable, with a cost of just $9. Plus, there’s a 30-day money-back guarantee, so if you don’t find value in the first 30 days, you can simply request a refund.
Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 6,08, which is from the fiscal year 2024. I have chosen a projected future EPS growth rate of 12% (Finbox expects EPS to grow by 11,8%). Additionally, I have selected a projected future price-to-earnings (P/E) ratio of 24, which is twice the growth rate. This decision is based on Apple's historically higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $112,03. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Apple at a price of $56,02 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 113.041, and capital expenditures were 8.702. I attempted to analyze their annual report to calculate the proportion of capital expenditures designated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 6.091 in our calculations. The tax provision was 29.749. We have 15.116,786 outstanding shares. Hence, the calculation will be as follows: (113.041 – 6.091 + 29.749) / 15.116,786 x 10 = $90,43 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Apple's free cash flow per share at $7,16 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is $96,63.
Conclusion
Apple is a great company with excellent management. It is arguably the company with the strongest moat in the world. The company has achieved an outstandingly high ROIC over the past four years and has consistently delivered a high levered free cash flow margin over the past decade. Macroeconomic factors are a risk for Apple because its reliance on global markets makes it vulnerable to fluctuations in consumer spending, economic downturns, and currency exchange rates. Competition is also a risk for Apple because it operates in highly dynamic markets where rivals aggressively innovate, cut prices, and imitate its products. Apple’s premium pricing and reliance on continual innovation make it vulnerable to competitors offering lower-cost alternatives or leveraging different business models, potentially eroding market share and revenue. Antitrust concerns present another risk for Apple because its dominant position in markets like smartphones, app distribution, and digital payments has drawn regulatory scrutiny and legal challenges, including allegations of unfair practices that limit competition. These cases could result in substantial fines, changes to its business model, or the loss of key revenue streams. Innovation and new products are key reasons to invest in Apple, as the company consistently sets industry standards with groundbreaking technologies. By combining cutting-edge hardware, software, and services, Apple drives customer satisfaction, expands its installed base, and positions itself for sustained growth. Apple's Services segment is another strong reason to invest, driven by its rapid growth, recurring revenue model, and high profitability, with a gross margin of 74%. With over 1 billion paid subscriptions growing at double-digit rates, Services provide consistent income, enhance customer retention, and contribute to the stability and predictability of Apple's overall financial performance. Emerging markets offer significant growth potential for Apple, driven by rising middle-class populations, increasing disposable income, and growing demand for premium products in regions like India, China, and the Middle East. I believe there are many things to like about Apple, and I would love to own shares in the company. I will buy shares at $135, which will give me a 25% discount on the intrinsic value of the Ten Cap price and an even larger discount on the Payback Time price.
My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.
I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.
Some of the greatest investors in the world believe in karma, and in order to receive, you will have to give. If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to ADEPAC. It is a charity I know firsthand and I know they do a great job and have very little money. If you have a few Euros to spare, please donate here by clicking on the PayPal icon. Even one or two Euros will make a difference. Thank you.
Comments