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Apple - Thank You Pandemic.

Mark Chapter 9 verse 35 states, "Sitting down, Jesus called the Twelve and said, anyone who wants to be first must be the very last, and the servant of all."


Jesus says multiple times that to follow God, one must pick up their cross, and just as above, must be last to be first. For me this means a couple of things. Most importantly, it is a guide for how I should view myself. I am a servant of God and that means placing my pride aside, and being ready and willing to serve God's kingdom. Second, it directly relates to societies mainstream culture, where many popular and successful elements are not what will lead to success from God's perspective.


For investing, I see some parallels here as we are in a very upside-down situation. All throughout humanity's history, there have been and will continue to be attempts at centralizing and controlling society through authoritative power. We are hopefully ending one of the periods with the pandemic. Big Tech is a direct appendage of this centralized control tactic and these companies have received a free pass from a valuation perspective as a result. But while they may be top performers, or "first" right now, mid- and long-term, this is not going to be the case.


So some headlines went as far as Apple, Inc. (AAPL) having its best quarter ever. We know how fickle and reactive Wallstreet is though. Apple is very overvalued today which will be easily provable below. And Apple, like most of Big Tech has the pandemic to thank for its current premium. Despite many world government policies attempting to prolong the pandemic in order to control society and collude with Big Tech, those days are coming to an end.


Apple currently sports a $2.7 trillion EV. The company currently trades 7 times EV/Revenue and 25 times OCF/share. Since 2019, Apple has grown Revenue an average of 18.5%. From 2011 through 2019, annualized Revenue growth performed at 11%. While Services and Wearables, Home and Accessories business segments have been some of the fastest growing, iPhone, iPad, and Mac still account for over 70% of total Revenue.


So why do I believe that Apple is overvalued? Since 2008 and even including 2019's elevated EV/Revenue multiple, Apple has averaged an EV/Revenue multiple below three times, or about 40% of where today's multiple sits. During this same period, Apple has sported an OCF/Share multiple at just below 11 times, or about 44% of where today's multiple is. Clearly Apple's pandemic-infused Revenue growth is the culprit for more than doubling its valuation level. The problem is, as the pandemic becomes endemic and subsides, Apple's Revenue growth will materially decline and valuation multiples will shrink back towards prior long-term averages.


In fact, I am modeling Apple to grow its Revenue over the mid-term by an annualized amount of 6%. OCF/Share is estimated to double this growth only due to share buybacks, which brings up another big issue I have with Apple aside from valuation - innovation and risk. Apple continues to talk up its EV ambitions, and yet the company is now spending less than 6% of Revenue on R&D. $23 billion may seem like a lot for R&D, but it is spread pretty thin for EV endeavors as Apple has a lot to invest in for its core business segments.


It is also important to note here that Apple has generated $274 billion in FCF over the past four full fiscal years since 2018. During this same time the company has spent nearly $360 billion on share buybacks and dividend payments. Nominal OCF has grown at an annualized rate of just below 11% since 2011, which has doubled to 22% since 2019 .Despite the increase in OCF performance of late, Apple has continued to spend more money than its FCF has earned, primarily to inflate GAAP results for Wallstreet.


I don't mind the Wallstreet shenanigans as this will fizzle out over time. But back to the EV topic and Apple's risk taking and innovational approach is contrarily risk averse. Apple could very well have competed aggressively, even through a vertical model to develop EVs. Instead, the company has attempted to use its brand as a selling point to gain a strong stake through partnerships, with all deals falling apart. I suspect that Apple's brand hasn't been good enough to slap on an EV to get a 50% cut of the vehicle sales.


All the while companies like Tesla, Inc. (TSLA), Lucid Group, Inc. (LCID), and Rivian Automotive, Inc. (RIVN) are investing tens of billions to attempt to lead the EV revolution over the decades to come. Even Ford Motor Company (F) has finally recognized that it will take massive capital to successfully lead the EV revolution.


Today, we live in a world where many want Big Tech companies to be larger than most countries, dictating freedoms, destroying competition and innovation, and never being questioned or broken up as monopolies. Never in human history has centralized power ever led to anything good. And while the pandemic has led to one of the most aggressive tactics to destroy freedom and capitalism, societies across the globe have refuted this confirming that centralized powers and socialism are not yet capable of ruling the day.


For Apple, the company is a direct extension of centralized control and power. My financial model for their mid-term growth of 6% is higher than analyst averages. My valuation multiples are even higher than Apple's historical averages as well. Even with continued elevated premium valuations, Apple's equity investment performance over the next five years or so will not likely eclipse 5-7%. When the market recognizes their slowing growth and lack of innovation, the only benefit shareholders may get from the company is the dividend payout.



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