Apple stock has created massive wealth for a lot of investors since its IPO in 1980.
Recently, Warren Buffett (one of the world’s most popular fund managers and also one of Apple’s largest investors) has been selling off its Apple shares.
Are Apple shares still worth investing in? Can it still generate attractive returns for investors?
Let’s dive further into Apple stock in this article.
The History of Apple Stock & Warren Buffett’s Shareholding
Most of you have heard of Apple which first broke into the mainstream when the iPod was introduced on 23 October 2001, and subsequently the real revolution for Apple kicked off when its first iPhone was released on 29 June 2007, marking the beginning of the smartphone era.
During that year itself, Apple stock recorded a gain of 129.6% due to the excitement surrounding the iPhone.
Looking back, Apple stock went public few decades ago on 12 December 1980 at $22.00 per share (split-adjusted share price of $0.10 given that its stock has split for 5 times since its IPO).
Prior to the 2000s, not many people knew much about this company. Among the early investors that saw Apple’s potential was Bill Gates (founder of Microsoft), which invested $150 million in Apple on 6 August 1997. During that time, Apple was on the verge of bankruptcy. The turnaround was dramatic, seeing how far Apple has come, eventually being the first company to reach a $3 trillion valuation.
Currently (as of May 2024), 45% of Warren Buffett’s $347 billion portfolio is in Apple stock, which is the largest holding within its portfolio.
For a long time, Warren Buffett did not invest in Apple despite Apple’s stellar business performance and strong financials. This was due to his investment philosophy which includes only buying stocks of companies that he personally understands, while acknowledging that technology stocks are not within his realm of business expertise.
Warren Buffett finally bought Apple stock in Q1 2016 after being convinced by his investment manager Todd Combs, and committed to an initial investment of $31 billion.
By the end of 2023, Warren Buffett’s investment fund (known as Berkshire Hathaway) owned about 6% of Apple.
Warren Buffett Sold Off Apple Shares
Although Warren Buffett’s popular quote is that “our favourite holding period is forever”, he decided to sell off about 116 million AAPL shares in Q1 2024 (which accounted for 13% of its total stake in Apple).
This is a reduction in its Apple shareholdings for the second quarter in a row.
Buffett cited tax reasons being among the primary factor behind its sell-off – “We don’t mind paying taxes at Berkshire. We are paying a 21-percent federal rate on the gains we’re taking in Apple and that rate was 35 percent not that long ago, and it’s been 52 percent in the past when I’ve been operating. They can change that percentage any year. I would say that with the present fiscal policies, I think that something has to give and I think that higher taxes are quite likely.”
This indicates that Buffett’s reason for selling off Apple stock now is to avoid paying higher future taxes on capital gains, should it choose to sell Apple later on when tax rates increase.
It can be seen as a cautionary move in advance of the United States’ upcoming elections on 5 November 2024.
Nonetheless, Buffett still favors Apple stock from a fundamental perspective, saying that it will still be Berkshire Hathaway’s largest holding and that Apple is superior over his other long-time favorites such as American Express (AXP) and Coca-Cola (KO) stocks.
Apple’s Track Record
In Aug 2018, Apple was the first public company to reach a $1 trillion dollar valuation.
In Aug 2020, Apple surpassed $2 trillion dollars in valuation.
In June 2023, Apple became the first company in the world to reach a $3 trillion dollar valuation.
All these highlight the amazing achievements of one of the world’s top companies.
However, 2024 took a turn as Apple recorded its worst quarterly performance relative to the S&P 500 Index since 2013, falling by around 9% in Q1 2024.
From its ranking as the most valuable company in the world, it gave up its #1 position to Microsoft.
Apple’s Financial Performance
I) Growth & Profitability
Apple has been growing its revenue over the past 10 years, although it has stalled lately with 2023 sales experiencing a decline.
It recorded a 10-year compound annual growth rate (CAGR) of 7.69%.
In terms of profitability, its has been growing profits alongside its sales, sustaining a net profit margin between 20%-25% for the past decade.
Q1 2024 Financial Highlights:
🟢 Revenue: $90.75B vs. $90.01B Est.
🟢 Earnings per share: $1.53 vs. $1.50 Est.
🔴 iPhone Revenue: $45.96B vs. $46.00B Est.
🟢 Services Revenue: $23.9B vs. $23.27B Est.
The slowdown in its performance in 2023 and Q1 2024 is attributed to declining iPhone sales in China, a result of:
i) higher-than-normal shipments by Apple in early 2023 following the pandemic; and
ii) stiffer competition from Chinese smartphone brands such as Huawei.
Revenue contribution from China (which accounts for around 20% of Apple’s global market share) decreased despite a rise in the number of new iPhone units sold in that region.
Fortunately, sales contribution from other regions is still positive.
Sales in Europe (Apple’s second-largest market) managed to record a positive growth of 10% over the past year.
Sales in Japan rose by 15% over the past year.
The bright side is that Apple’s Services segment (which includes Apple TV+, Apple Music, iCloud, Apple Arcarde App Store, Apple Pay etc) is doing better with continuous growth across quarters that keep beating records. This segment accounts for about 20% of Apple’s total sales.
The Services segment also has much higher gross margins than the Devices segment (70+% vs 40+%).
Services segment’s Quarterly Revenue:
Source: Statista
Apart from normal operations, Apple axed its electric-car project in February 2024, after spending a decade’s worth of resources on it.
This decision was made amid a slowdown in the electric vehicle industry, due to lower global sales due to toughening macroeconomic conditions and a lack of charging infrastructure.
II) Cash Flow Generation
Apple is a cash-rich company. It has been generating strong and increasing free cash flow over the years, enabling it to build up a large cash pile.
This is attributed to its high free cash flow margins (=Free Cash Flow/Sales) that hold between 20% to 30% across the past decade, allowing sales to be translated into cash flows for reinvestment in the business or to be paid out to reward shareholders.
Apple is the world’s largest cash-generating business. As at the end of Q1 2024, it is sitting on $166 billion of cash on its balance sheet.
It can either use this cash for reinvestment into the business, to pursue acquisitions, or reward shareholders.
The company has been investing heavily in research and development but it still has tons of excess cash.
Acquisition is also not a large avenue for Apple as well as the company’s innovative culture aligns with building instead of buying.
As such, most of its cash has been spent on dividends and share buybacks.
The graph below shows the consistently growing dividends paid to shareholders for the past decade, financed by internally generated funds.
III) Valuation
Source: Macrotrends
Apple stock price has been steadily increasing over the years, with a steep increase between 2019 until 2022 following strong growth in its EPS.
Its Price/Earnings ratio (P/E) is currently around 25x, having retraced from its high (33.5x) due to stalling earnings growth that caused a drop in share price.
With declining earnings, a P/E ratio of 25x and above may appear expensive. Prior to the year 2020, Apple was trading at P/E ratios of less than 20x.
Perhaps a better time for purchase of Apple stock would be when P/E drops below 20x, unless its growth outlook improves.
IV) Returns
In terms of returns, Apple investors made a lot of money if they invested early on.
A $1,000 amount invested in Apple since its IPO would have turned into $1.86 million as of 10 May 2024.
The graph below show the growth in its market capitalization over the past decade, with a steep increase from 2019 to 2020 when it reached a $2 trillion dollars in valuation.
Holding Apple stock from 1 Jan 2014 to 10 May 2024 would have given you an average annual return of around 17%, beating the S&P500 index.
The graph above also shows how Apple stock has outperformed the S&P500 ETF (SPY) over the past 5 years (309% vs 97% in gains).
Apart from capital gains, Apple’s management also rewards its shareholders with generous dividends and share buybacks.
Apple has been paying dividends every year since 1987.
Most recently during its Q2 2024 earnings release, Apple’s board of directors raised its quarterly dividend for the 12th year consecutively, with an increase of 4% to $0.25 per share.
However, it is to note that its dividend payout ratio has been decreasing over the years despite earnings growth. This indicates that while it still increases the dividends paid to shareholders, it is finding other more productive use of its cash.
For example, share buyback is another way for companies to utilise their spare cash.
Apple announced that it is allocating an additional $110 billion for share buyback, which is its largest ever.
Companies usually conduct share buybacks when they think their stock is undervalued, thus it may be a positive signal that Apple’s management thinks that Apple share should be worth higher than its current price.
Apple’s Growth Prospects
Apple has sizable market shares in various product lines, including smartphones, tablets and smartwatches.
The majority of Apple’s present success is attributed to its iPhone which was first introduced in 2007.
Apple has been relying on increasing revenues by coming up with new iPhone models and by monetising its user base with Apple digital services.
However, given the faltering iPhone sales, the key to sustained future growth may lie in diversification, whereby Apple would need to seek new products and services to generate more revenue.
Apple invested in an electric vehicle project back in 2014.
Back then, electric vehicles were still in the early stages of development and growth was rapid – it was a hot sector that attracted tons of investments.
However, unlike other companies like Tesla and BYD, Apple’s electric vehicle project failed to take off.
What are the other innovative avenues that can help to propel Apple to higher ground?
On 2 February 2024, Apple launched its first virtual/augmented reality headset – the Vision Pro. The virtual reality market is a fast-growing segment which is projected to increase at a compound annual growth rate of 42% until 2029.
Subsequently, in the first week of May 2024, Apple unveiled its latest iPad Pros which are equipped by an all-new M4 processor that offers a faster processing speed and updated graphics processing unit.
Artificial intelligence (AI) may also be the answer.
Apple’s management has mentioned that the company will make an AI-related announcement this year, which may be during the annual developers’ conference in June 2024.
It’s widely anticipated that Apple will unveil a suite of groundbreaking AI-driven features across its array of devices, which may provide some upside to Apple stock.
There have also been reports suggesting that Apple is engaging in discussions with both OpenAI and Google to enhance its AI capabilities.
Moreover, Apple has been diligently crafting its own proprietary AI model dubbed Ajax.
With the continuous development of large language models that make virtual assistants better and smarter, Apple may likely introduce a more intelligent version of Siri for iPhone users.
Given how other technology stocks have been soaring in price by riding on the AI wave, the AI theme may help to prop up Apple stock should it display promising AI developments for the future.
Apple’s Headwinds
Compared to other Big Tech stocks in the Magnificent 7 group, Apple has less attractive growth prospects.
Its heavy reliance on Chinese consumers has a significant impact on its sales. Should China’s economy deteriorate further leading to weaker consumer spending, or if China’s international trade regulations get tightened, this can severely affect Apple’s growth.
Apart from declining sales growth, Apple has been facing regulatory headwinds across the past few years.
Most recently, in March 2024, Apple received a strike by the US Justice Department whereby it was alleged for monopolization of the smartphone market.
Spotify also filed a lawsuit against Apple in Europe which led to Apple being fined roughly $2 billion dollars by the European Commission. This arises over complaints that Apple’s uncompetitive practices in the music streaming sector.
Summary
Should you invest in Apple stock? Here are some pros & cons.
Pros:
- Among the Top 2 companies in the world (competing with Microsoft)
- Largest market share in the global smartphone market
- Strong consumer brand loyalty
- Potential to grow its Services segment within its ecosystem
- Innovation in AI & VR capabilities
- Strong free cash flow generation
- Management that rewards shareholders with share buybacks and consistent dividends
Cons:
- Declining iPhone sales
- Regulatory concerns
- Less attractive growth prospects compared to other Big Tech stocks
✅ Interested to invest in Apple? Buy Apple stock here (AAPL)!
Open your FSMOne USD Savings & Investment Account
🚨 Hold on… there are many other better stocks with more attractive returns potential than Apple.
Interested to check them out? Click Here to Join The Investors Club.
✅ Want to discover Buy&Sell Stock Ideas & get the latest Market Insights from Professional Analysts globally?
Join Seeking Alpha premium investing club (20% off annual membership!)
– Useful Links –
✅ Sign up to TheFinancialFuse newsletter for Market News, Finance Insights & Investment Analysis:
Join TheFinancialFuse newsletter community
✅ Retire Early with My Rich Future’s Financial Budgeting Toolkit
Your Retirement Planning, Budgeting & Portfolio Management Toolkit
✅ Become a Professional Investor – Stock Investment Mastery Course:
Learn to Invest like a Professional Analyst | Fundamental Analysis, Charting Analysis & Portfolio Strategies
✅ How to Get Rich with Megatrends ebook (list of 30+ stocks):
Build a Winning Investment Portfolio with Trending Stocks of the Decade
✅ Open a Brokerage Account – Invest in Global Stocks, ETFs, Unit Trusts & more:
Open your FSMOne USD Savings & Investment Account
✅ Become a Crypto Investor & Trader – Cryptocurrency Mastery Course:
Learn to Make Money with Crypto | Blockchain Analysis, Charting Analysis & Portfolio Strategies
✅ Master Trading with The Trader’s Guide Ebook
Learn to be a Better Trader with Price Action Strategies
✅ Discover the Best Stock Ideas from Professional Analysts (20% off annual membership!):
Join Seeking Alpha premium investing club
Disclaimer: All the information provided in www.thefinancialfuse.com is for educational purposes only and should not be considered financial advice, thus the author(s) of this website are not responsible for any investment decision that you make. You are encouraged to do your own research and due diligence.
