Big-Tech Investment Series - Apple

I say then: Walk in the Spirit, and you shall not fulfill the lust of the flesh.

Galatians 5:16

For those new to Investor Cornerstone+, I start off each freemium blog with a bible verse and transition to the investment focus of the blog. Upfront are key takeaways for those interested in the quick high-points, throughout are more graphics and assessment for those who want to chew on more content, with final thoughts at the end for a nice blend of quick high-points and added stances.

Galatians 5:16 provides a good breakdown of the Christian life. As a Christian, I am to walk in the Spirit or simply put have a relationship with God based on what Jesus Christ has done for me. To do this, I must deny the lust of the flesh, or simply, my selfish desire to do what I want. When it comes to investing, psychology and emotions are so important as they can have a profound impact on investment decisions. Wisdom and conviction go together and often are required so that overactive and emotional tendencies can be mitigated, and management strategies can be optimized.

Big-Tech has become an essential part of our everyday life and concurrently, strongly engrained into most Wallstreet equity-based products whether ETFs or mutual funds. This has created a somewhat complex and potentially riskier situation for retail investors.

On the one hand, it may seem foolish to take any position opposing Big-Tech, but it’s important to recognize that there are legitimate valuation concerns for Big-Tech and depending on a retail investors objective, Big-Tech may not be suitable, notably for aggressive growth-and growth-oriented investors.

I define Big-Tech as FAANG-M which includes Meta Platforms, Inc. (META), Apple, Inc. (AAPL), Amazon, Inc. (AMZN), Netflix, Inc. (NFLX), Alphabet, Inc. (GOOG), and Microsoft Corp. (MSFT). Additionally, I also track FANGMAT, adding Tesla, Inc. (TSLA), and FANGMAT-N, adding NVIDIA, Corp. (NVDA).

For the first blog of this series, AAPL is in the spotlight.

Key Takeaways for Retail Investors

• AAPL is no longer a major innovator (research spend as a percentage of revenue is the lowest among Big-Tech at 8 percent and substantially lower than most growth-oriented businesses big or small).

• AAPL is predominantly dependent on U.S. markets for its revenues including both hardware and services.

• AAPL is losing market share continuously in China.

• Wallstreet continues to pump AAPL based on rosy expectations for newer segment opportunities, when the company clearly isn’t built for risk taking anymore.

• Valuation multiple contraction is a major concern that investors should be thinking about.

AAPL’s valuation clearly displays a pandemic-driven multiple expansion post-2019. The question retail investors want to answer is can AAPL's valuation be justified. As a reminder, I don't consider metrics aside from enterprise value to sales, and stock price to operating cash flow per share. Wallstreet's control over P/E ratios based on GAAP earnings is part of the game that retail investors are best suited avoiding.

AAPL’s revenue witnessed a surge during 2021 and since then has mirrored similar past periods where more modest to flat growth has been the result (2015 through 2020).

Year-over-year, or YoY revenue growth shows this very clearly as revenue growth has been below 10 percent three out of the past 12 years, including four years with sub-five percent growth or negative performance.

Even with the pandemic-driven revenue surge, AAPL’s operating cash flow margin has been flat since 2016, remaining below the all-time peak set during 2015.

And despite AAPL’s growth in dividends paid out (although paltry at around two percent annualized the past six years), the dividend yield currently sits near an all-time low.

Also of note is the dramatic decline in cash and investments as related to gross debt. AAPL still maintains a net cash position, but this has shrunk by just below 50 percent.

Stock buybacks have been the primary culprit as AAPL has continued to buyback close to $80 billion in stock or more the past eight years. This is another tool that Wallstreet utilizes to justify valuation levels for companies influencing stock prices. Just like the P/E ratio, retail investors are best suited avoiding this mindset and instead focusing on the pros and cons of stock buybacks, especially for a company like AAPL whose innovative stance is critical to their success.

Another way to look at it is to consider AAPL’s surplus or spend after free cash flow stemming from dividends and stock buybacks. Since 2018, AAPL has tended to generate a negative spend, which is a direct reason for the substantial decline in cash and investments. Despite AAPL's 30 and 26 percent operating and free cash flow margins, the company continues to see this cash burn.

Even though the stock buyback to R&D ratio has declined to just over three times for AAPL, most major innovators that are growth-oriented invest most of their cash into R&D and don't buyback stock at all, especially small and mid-cap companies. AAPL has increased its R&D spend as the company has realized its need to invest more to innovate, but the stock buybacks tied to Wallstreet's control serve as a handicap for AAPL to substantially increase these investments.

So again, the key question, can AAPL’s recent pandemic-driven valuation multiple expansion be justified after reviewing the company’s fundamentals? The evidence presented suggests no. But stock price valuation isn’t based on historical trends and expectations from Wallstreet can influence overvaluation for periods of time longer than what could be expected.

AAPL has been touted as the next big thing for digital payments, electric vehicles, or EVs, the metaverse, and most recently artificial intelligence, or AI. The fact that both EVs and the metaverse have not come to fruition and payments have been modestly successful is important as it sets precedent for AAPL's risk taking appetite and innovative potential aside from its core business. AI has been dominated by NVDA and aside from AAPL’s mainstay of leveraging its hardware business, AI opportunities may not be as robust, similar to prior next big thing expectations.

For those disagreeing with this stance, we need only look to AAPL’s core hard goods revenue as a percentage of the total which has remained near 70 percent since 2019. As a reminder core hard goods excludes wearables, home, and accessories which peaked during AAPL's fiscal year 2022 and has since declined by 10 percent. Most of AAPL's service revenue is connected and dependent upon its core hard goods and wearables, home, and accessories physical products and growth has been slowing recently. The past two years has witnessed 11 percent annualized revenue growth for the services segment versus the prior four years that saw 18 percent.

iPhone units sold is a great example of some of AAPL’s stagnation. Since 2015 units have been relatively flat. Investors need to recall that AAPL stopped disclosing their hardware units sold after 2017 as stagnation had already occurred. Of core hard goods revenue, iPhone sales reflected just below 80 percent. The iPhone is still the single biggest driver for a substantial majority of AAPL's revenue both for core hard goods and services. From a competitive standpoint, AAPL is near or at market saturation.

Final Thoughts

Key takeaways aside, investors who invested in AAPL earlier during the Steve Jobs era are in a prime position and simply milking each year’s investment return makes perfect sense. But newer and/or younger investors (especially those over the past five years) who think AAPL can generate double-digit returns for the foreseeable future, may find AAPL underperforming based on these expectations. AAPL is already down 9 percent to start 2025 and the stock price could still drop further towards $175 (23 percent lower than today's stock price) and still arguably be considered overvalued.

I've modeled AAPL over the next five-year period through my financial models and if and when AAPL's valuation multiples contract more towards historical averages, the stock price could return less than mid single digits through fiscal year 2029. With the paltry dividend yield, this puts investors in a potentially dead money situation, or in other words, low risk, low return scenario.

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