Rumours of an Apple electric car sent shares soaring last month, but upside potential could be limited.
- Apple delivered profits of US$57.4 billion in the last fiscal year, up from US$55.3 billion
- The share price hit an all time high after a 74% rally in 2020 since the start of the year
- Apple services including iCloud and Apple Pay increased by 16% to US$53.8 billion
- It’s now trading at 33 times forward earnings, suggesting the market has priced in significant growth
After solid execution in 2020, there’s a lot for Apple shareholders to be happy about. The big question for many investors is whether it’s too late to jump on the joy-wagon.
On the plus side, Apple (NASDAQ:AAPL) is poised to keep delivering strong results this year. Management anticipates that the company’s services will keep generating double-digit revenue growth. And the new 5G-enabled iPhone 12 is seeing strong early demand.
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In addition, the Mac maker can significantly expand its business over the long term. As an illustration, Apple is rumoured to produce electric vehicles by 2024.
However, the market appears to already be pricing in some quite good news going forward, with the stock price staying close to its all-time high following a 74% rally since the beginning of 2020.
So, is Apple stock still a buy?
Strong business and execution
Despite intermittent store closures and challenges in its supply chain thanks to the coronavirus pandemic, Apple posted solid results during its last fiscal year, ending on 26 September.
Revenue reached an all-time high at US$274.5 billion, up 6% year on year, as the company successfully diversified its business beyond its flagship iPhone product.
In particular, wearables – which include the Apple Watch and Airpods – grew by 25% to US$30.6 billion. And services (the App Store, iCloud, Apple Pay and more) increased by 16% to US$53.8 billion.
Looking forward, Apple’s services represent a significant growth opportunity as they leverage the company’s ecosystem. Indeed, users are more likely to purchase iPhones and other products to keep using the services they’ve gotten used to. And Apple will keep expanding its services to grow its user base. For instance, it should attract fitness practitioners with the new Apple Fitness+ service it announced in December.
As a result of its huge scale and pricing power, the company’s profitability remained elevated. During the last fiscal year, profits grew to US$57.4 billion, or 20.9% of revenue, up from US$55.3 billion in the prior year.
And with its prudent capital allocation decisions, the company maintained a rock-solid balance sheet. At the end of the last quarter, it accumulated US$191.8 billion of cash, cash equivalents and marketable securities compared to a total debt of US$112.4 billion.
That comfortable safety net allows the company to withstand any potentially prolonged recession and invest in research and development to keep innovating.
As an illustration, Apple is now producing its own central processing unit (CPU) to equip its Mac, instead of depending on Intel’s (NASDAQ:INTC) chips. That decision will allow the company to become more flexible with the technological evolution of its laptops by integrating its own hardware and software.
Plus, the recent Reuters report about Apple’s goal of producing electric vehicles by 2024 has yet to be confirmed. But with its important financial resources, the company can expand its footprint into huge and capital-intensive markets, such as the auto industry.
A buy or sell?
Apple’s impressive operational performance doesn’t necessarily translate into an attractive investment, though.
Indeed, following the company’s strong results over the last several quarters, the stock price surged by 74%. It’s now trading at 33 times forward earnings, which suggests that the market has already anticipated significant growth over the next many years.
Given the coronavirus-induced uncertainties, management hasn’t provided any guidance for the next quarter. But analysts expect earnings per share to grow by 25% and 4% in 2021 and 2022, respectively.
That growth associated with the company’s valuation indicates that stock price upside potential has become limited.
Thus, despite Apple’s strong business and execution, investors may be inclined to stay on the sidelines and wait for a pullback before considering buying Apple stock.
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