Is it time to take a bite of Apple?
08 September, 2015
Apple looks set release another iteration of its world leading products.
Yep tech geeks will be waiting with bated breath for Apple to unveil a new iPhone, a rumoured larger iPad and any other shiny baubles to spend their next pay cheque on. Being more of the finance geek than a tech geek I thought it might be an opportune time to consider Apple as an investment. To paint the scene the Apple share price peaked at $135 a few months ago and since then has fallen by 19% to around $109 per share.
Is this an opportunity do you think?
It's an interesting one. Whenever we look at a company we have three key questions in mind. Is this a quality company? What are its future prospects? And can we buy it at an attractive price?
On the face of it Apple looks like a quality company. Certainly its products are well designed and desirable to own. From an investment point of view, though, we define quality a little differently. We are looking for companies that have the ability to fend off competition and to earn attractive returns for shareholders in difficult as well as good economic times.
Technology companies often don't have these characteristics. Those of us who have been around for a while can reel off countless technology companies that seemed strong in their day only for new competition to put them out of business.
What seems to make Apple special is the interconnected ecosystem it offers its customers. At the hub of this is a unified operating system, iOS and the app store. The power of these two is that it makes owning the next Apple product a very straight forward decision for customers.
Apple isn't without its risks, with companies like Spotify attacking iTunes and strong Chinese competitors, but Apple looks like a quality business to me.
What about the outlook for the firm?
Again there are challenges here but they don't look insurmountable. Part of the rationale for the selloff in Apple shares was a contraction in the Chinese smart phone market and the well-publicised risks to Chinese economic growth. Apple generates around 27% of its sales from China so weakness there might be a problem. But as Australian investor Roger Montgomery pointed out recently this misses the longer term view. Chinese consumers are getting wealthier and more and more people are able to purchase premium products like an iPhone. China will remain a growth market for many years to come. Similarly US research house Canaccord Genuity estimates only 27% of current iPhone owners have upgraded to iPhone 6. There is a material upgrade opportunity about to unfold.
Apple shares look like pretty good value then?
Before we even delve in specific valuation metrics one of the most stunning facts about Apple is that has about $150 billion in cash in the bank. That's about enough to buy every company in the NZX 50 index, three times over.
Excluding the cash balance, Apple now trades free cash flow yield of over 9 per cent according to Factset numbers. That number measures Apple's cash profits over the value of the firm. So the company is awash with cash, is generating loads more every day and is trading on a PE ratio of just 11.8 times. That seems like good investment value to me.
Just to complete the picture I dropped my darn phone the other day so we can add at least one unit to the iPhone 6s sales forecast.