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.
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.
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.