Question.2555 - “Is Apple overvalued”? and the format he wants it in. Possibly we can talk about their stock prices, product, etc?
Answer Below:
Apple Inc, the brain child of two high school friends, Steven Jobs and Stephen Wozniak found its niche as a prominent software and hardware company with innovation as their differentiation strategy in the highly competitive industry of technology. The company started its base in the garage with the task of manufacturing personal computers back in the year 1977 and got the deserved recognition in the same year thereby growing to employ around a thousand employees within the next three years. What started as a hustle of two youngsters actually turned out to be todays globally known American Multinational Corporation with a strong double digit growth even amidst the pandemic ("Apple Reports Fourth Quarter Results", 2021). This journey spans from personal computers to variety of software and includes remarkable innovations in both hardware and software sector, the need of which was not even known to the consumer. The growth of the corporation can be gauged by its splendid launches till date and includes M1 powered Macs to iPhone 13 which in a combined fashion have been setting new benchmarks of performance and is equipping customers to create and connect in newer unimaginable ways ("Apple Reports Fourth Quarter Results", 2021). All these efforts are pointed towards their commitment to their long term goal of being carbon neutral not only in their supply chain but also across the lifecycle of their products with the sole mission of building a more equitable future (Annual Reports on form 10K, 2021). Apple, as a brand, has turned successful by carefully positioning itself in the market and differentiating with the competitors in terms of their unique offerings. The unique offerings of the firm can be contributed to the commitment towards creativity in the firm. The firm never copied industry trends rather it broke the existing paradigms and paved way for its innovation. Instead of creating smartphones and mobile phones back in past, the company came up with a revolutionary product, iPhone, which defined the need of the customers even before their knowing it. Today, the firm enjoys a loyal base of customers from the sales of iPhone but just when the industry assumed that iPhone would be the major revenue earner for Apple, the firm diversified itself to other platforms leading to multiple cash flow avenues resulting in more profitability and translating to a strong market position. Currently, two sectors are turning out to be the growth engine of Apple leading to more sales and profit: services and wearables. Services include the App Store, AppleCare, iCloud, Apple Pay, Apple Music, Apple TV+ and Apple Arcade along with other offerings (Annual Reports on form 10K, 2021). Investors generally believe that stock market is efficient and believe that true value of a firm is factored into the stock prices with immediate effects. However, the fundamental analysis often puts forth the fact that most often wrongly valued stocks will be available in the market because investors as general public most often than not depend on their innate feelings instead of logic whilst investing. These feelings are guided more by prejudices and emotional connect of the consumer with the firm. However, stock investing requires analysis of financial data such as profit and loss account, balance sheet and cash flow statement to ascertain the company’s true worth. These data once consolidated are capable of gauging company’s performance on a year to year basis. This tool also helps in running a check on company’s health and compare it with the industry’s benchmark and prevailing competition and upcoming threats which would further define the action plan of the firm in the short run ("Key financial ratios you must look at before making investment", 2014). An analysis of the key ratios and determination of stock overvaluation or undervaluation leads to being aware of the stock and aids in taking informed decision. There are various ways to assess a stock to identify if the stock is overvalued or undervalued: ? Comparing the growth rate to P/E ratio ? Comparing the P/E ratio to competitors ? Price to book value ratio (Swan, 2021) 1. Calculating the price to earnings ratio of a stock and then comparing it to growth rate provides a fair idea on over or under valuation. P/E ratio if higher than growth rate the stock is overvalued. A stocks growth rate can be analyzed by gauging the change in earnings on a yearly basis. P/E ratio = Apple’s market price to its EPS. Market price of Apple (17/12/21) = $170.59. EPS of Apple Inc. = $5.61. So P/E ratio = 170.59/5.61= 30.4. In terms of growth, iPhone is the major revenue garnering product. However the percentage has decreased over the years and specifically in the last five years. Today revenue of iPhone contributes to only half of the total revenue. Apple has diversified its growth to other products such as Watch, AirPods, HomePod and Beats which in turn serve as an alternative to add more revenue to a single iPhone purchase. With the aim of increasing revenue the company launched iPhone with four models viz iPhone, Mini, Max and Pro. All these variants have different price points in order to target as many customers as possible thereby widening the customer base. Apple witnessed double digit growth on year to year basis from 2008 to 2015 but revenue stagnated thereafter. The consumers have extended the life cycle of the iPhone as they are comfortable holding to the phones for a longer than usual. The software upgrades of iPhone is available for longer than two years which helps in customers being able to use their phone for longer without feeling any urgency to upgrade to another smartphone (Team, 2021). At the same time in term of competition the iPhone recorded a steady decline of around 14percent owing to intense competition in China by competing brands like Xiaomi and Huawei. As per the financial results for fiscal year 2021, the change in revenue has been 29 percent year over year ("Apple Reports Fourth Quarter Results", 2021). The P/E ratio of Apple Inc. is higher than the growth thereby indicating that the stock of the firm is overvalued. 2. Comparing the P/E ratio of Apple with the P/E ratio of its competitor would ensure analysing the wider market and aids for broader frame of reference of valuation of specific stocks. Apple’s main competitors today is Samsung with 21.2% of the global market of smartphones. The P/E ratio of Samsung is 12.71 which is significantly lower compared to that of Apple (30.4), thereby indicating the overvaluation of the stock. 3. The price to book value ratio is often used as a tool to compare the firm’s market price to its book value. The price to book value ratio of less than one implies that stock is undervalued. The book value per share of Apple is $ 3.84. Thus, the price to book value ratio = 170.59/3.84= 44.4. Thus the price to book value ratio also signifies that the stock is overvalued. Not all analysis of a stock being overpriced is a bad news. Often at times, the industry and the economic environment of the firm dictates the investor sentiments and leads to higher prices of stocks. Apple has recently announced its plan to buy back shares. Buybacks are a strong and positive metric of company’s financials which in turn prove beneficial to the shareholders . A buyback improves the intrinsic value of the stock. Also it helps in indicating that the firm and its top management has strong confidence in their future business prospects leading to further trust and confidence in investor sentiments which gets translated to the stock price of Apple. However, the firm still has further challenges which need to be tackled in order to maintain the confidence and sentiment of the investors and top management. Apple is still lagging behind in the streaming section. It is imperative for the firm to tackle the parallel competition of streaming video content and excel from Netflix, Amazon Prime Video, Disney+ etc. Apple lacks in terms of huge content library which further gets impacted due to the pandemic leading to a room for a bolder move. However the core of the story and journey of the firm has not changed and might not change for a long time. At the core of the company, iPhone would still persist and the role shall remain undiminished even between the rise and growth of other profitable verticals for the company (Team, 2021). Even the trying times of pandemic could not reverse the fate of the company with a record sales even in distressing times. References Apple. (2021). Annual Reports on form 10K [Ebook]. Retrieved from https://s2.q4cdn.com/470004039/files/doc_financials/2021/q4/_10-K-2021-(As- Filed).pdf Apple Reports Fourth Quarter Results. (2021). Retrieved 17 December 2021, from https://www.apple.com/newsroom/2021/10/apple-reports-fourth-quarter-results/ Key financial ratios you must look at before making investment. (2014). Business Today. Retrieved from https://www.businesstoday.in/magazine/investment/story/key-financial- ratios-analyze-company-stock-investment-136370-2014-09-08 Swan, A. (2021). Five Powerful Ways To See If A Stock Is Overvalued. Retrieved 17 December 2021, from https://www.forbes.com/sites/andyswan/2018/09/21/five- powerful-ways-to-see-if-a-stock-is-overvalued/?sh=5dc8388b6abe Team, T. (2021). Apple Stock Holds Up Despite Supply Issues. Is It A Buy?. Retrieved 17 December 2021, from https://www.forbes.com/sites/greatspeculations/2021/11/05/apple- stock-holds-up-despite-supply-issues-is-it-a-buy/?sh=722a43a61ef9More Articles From Finance
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