There’s nothing wrong with Apple Inc.


jainmatrix investments, apple

About Apple

This iconic American firm is an innovation powerhouse. It has created new products with such originality, usability and technology finesse that it has built new markets through these products.

  • The Macintosh showed that Apple had the streak of innovation decades ago (launch in 1984).
  • Tens of manufacturers struggled with Tablets for years, with no success. Apple launched iPad (launch 2010), with resounding success. Same is the case for iPods (launch 2001).
  • In the mobile market, its success is even more profound. In a crowded market, with many successful models and a number of fierce competitors, Apple launched iPhone (in 2007), a single model, with 2-3 variants, premium pricing, and a limited network alliance (in the USA). The top end of the market thus, exploded.
  • Its iTunes binds these products together beautifully with the application ecosystem, music, video and payment systems.
  • Steve Jobs, the Chairman and Founder of Apple is a legend for his leadership and focus; he took Apple on its pioneering path. We lost him in 2011, and Tim Cook took over as CEO of Apple.
  • In Sept 2012, Apple shares were $700, and market cap at $656 billion, making it by far the most valuable company in the world.

Cut to today

  • The Apple innovation machine continues relentlessly. The new iPhone 5 is better and is selling well. The iPad mini expands the market with premium features at a lower price point.
  • Revenues, EBITDA and EPS have grown at 54%, 68% and 72% CAGR respectively over the past 4 years. Markets like India are summarily dismissed as ‘not big enough’ to warrant corporate attention.

Apple Financials, JainMatrix Investments

Fig 1 – Apple Financials, JainMatrix Investments (click to expand)

  • However, the Apple share price is $430, down 36% in 5 months, and market cap is $404 billion.
  • The cash and cash equivalents on Apple;s balance sheet is $137 billion (about $146 per share). Last year profits were $42 billion.
  • PE of Apple is at a 5 year low of around 10x.

Apple PE, JainMatrix Investments

Fig 2: Apple PE, JainMatrix Investments (click to expand)

So, what’s gone wrong?

  • Apple apparently did not know what to do with its massive profits. And profits, unless shared with shareholders, or used in good capital investments, earn very little in a bank account.
  • However, things are now changing slightly. In March 2012, Apple announced a quarterly dividend policy; shareholders started receiving a quarterly dividend of $2.65 a share from July 1, 2012. Share buybacks began in the fiscal year starting Sept. 30 2012 and are slated to continue for over three years. Hence, Apple plans to return $45 billion to its shareholders through dividends and stock repurchases over the next three years.

And what’s the outlook for Apple at this point?

  • Excited by consumer euphoria, massive profits and a seemingly unstoppable share price rise some months back, the investor is now rattled by the big fall in stock price and uncertainty.
  • It does seem that the recent announcements of dividends and share buybacks have not sunk into the investor psyche yet.
  • At a PE of 10 times, the valuation is at a 5 year low. With revenues and profits growing by 54% and 72% a year, the outlook is rosy. The forward dividend yield is 2.3%.
  • With these new announcements, and the Apple management working in the right direction, Apple today is a buy.

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