Apple: Huge Moat, but Valuation Leaves Little Upside

Apple (AAPL) is a multinational company that operates in the computer hardware, computer software, consumer electronics, and online services industries.

The company was formed about 45 years ago in 1976, and has since experienced significant growth. As of 2021, Apple had a total of 516 retail stores across the globe and more than 147,000 employees. Its headquarters are located in California and the company has launched nine different products until now, with several variations of each.

Reportedly, there are 1.65 billion Apple products currently in use around the world. What began as a personal computer producer and distributor company has now expanded into a world-renowned brand of gadgets and technologies. 

I am neutral on Apple despite it having a very strong moat, Wall Street analyst bullishness, and a very profitable business model. This is because AAPL trades a massive valuation multiple premium, and the average price target implies that the stock has little to no upside over the next year.

Strengths

Apple is considered the world’s most valuable company with the highest brand loyalty. It was the first publicly traded, U.S.-based company that was valued at $1 trillion in 2018, and it beat its own record in 2020 when it was valued at $2 trillion. This year, Apple briefly hit a market cap of $3 trillion.

The company has one of the strongest global footprints, with physical stores in 24 countries and online stores in approximately 100 countries. Its proprietary hardware, software, services, and applications also give it a unique edge over its competitors.

Strong advertising and marketing tactics have landed Apple the most loyal customers across the globe. Since its inception, Apple has come a long way, and the brand has created an unrivaled value in the market.

Recent Results

In Q4 2021, which ended in September, Apple increased its total net sales to $83.36 billion, compared to the previous year’s quarterly results, which showed total net sales of $64.7 billion. Total net sales for 2020 and 2021 reached $274.5 billion and $365.8 billion, respectively. Basic and diluted earnings per share in Q4 2021 were $1.25 and $1.24, respectively, taking the yearly numbers to $5.67 for both share types.

Looking at its balance sheet, its cash & cash equivalents decreased from $36 billion in 2020 to $34.93 billion in Q3 2021.   

Valuation Metrics

AAPL stock looks richly priced at the moment. Its forward enterprise value-to-EBITDA ratio is sky-high relative to its history at 22.8 times compared to its historical average of 13.7 times. Moreover, its forward price-to-normalized-earnings ratio is also very elevated at 30.21 times compared to its historical average of 20.41 times.

Wall Street’s Take

Turning to Wall Street, AAPL has earned a Strong Buy consensus rating based on 21 Buy ratings, four Hold ratings, and one Sell rating in the past three months. Additionally, the average Apple price target of $175.28 puts the upside potential at 1.8%.

Summary and Conclusions

Apple stock is backed by one of the strongest moats in the world as the Apple brand is the most powerful consumer electronics brand on the globe. As a result, the company generates very consistent and hefty profits from its products.

That said, the stock has been on an extended run lately, pushing the valuation far above historical averages. Furthermore, the average Wall Street analyst price target implies that the stock will not move much over the next year. As a result, investors might want to wait for a pullback before adding shares.

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