Apple: A great stock to invest for the long term

Article Thesis

Apple Inc. (NASDAQ:AAPL) revealed on Thursday afternoon its most recent quarterly results. On all lines, the company performed above expectations, and profits were actually higher than expected. I feel strongly that the company is a good deal at these levels, and generally, the most recent quarterly results have strengthened my conviction that AAPL is a strong buy.

Headline Results Missed Estimates

The following screenshot captures the headline numbers from Apple’s most recent quarterly release (https://www.cnbc.com/2022/07/28/apple-aapl-earnings-q3-2022.html):

Apple exceeded expectations for both its sales, which came in at $83 billion, and its earnings per share, which came in at $1.20. That’s very amazing given the headwinds due to macro uncertainty.

The Good And Bad Points in More Detail

Let’s go over the reasons that led to exceptional Apple’s profits results, starting at the top of the earnings statement.

Revenue increased by 2% YoY, mostly as a result of the company’s strong core iPhone revenues. Sales of the iPhone experienced their growth despite warnings about supply chain constraints and inflation headwinds. This suggests to me that Apple has a significant competitive advantage over its rivals in the smartphone market.

Services saw a remarkable 12 percent YoY growth increase and are now the main growth driver. That is probably due to the business’s plan to capitalize on its big customer base leaning towards the richer class of society. Netflix and Spotify are only two examples of the fierce rivalry that the services business still faces. Despite the competition, growth has been phenomenal.

The gross margin increased by 0.65 percent year over year, which is excellent for a business of this size, as shown in the screenshot above. Analysts predicted some margin pressure, but Tim Cook and company managed to avoid the challenges.

The situation is not perfect. The war in Ukraine and a strong US currency have caused considerable margin pressure, which could have a big short-term impact in the upcoming quarters, nothing that Apple cannot overcome in the longer term. After the significant COVID-driven increase, Mac and iPad sales were also down year over year. Home and wearables also experienced some shrinkage. The impending fall launches will decide the stock price in the following quarters, and iPhone will continue to be the main growth driver.

Strong Shareholder Return Potential

This year, Apple has a full slate of items planned for release, so I anticipate that these will greatly boost the company’s earnings, particularly in the fourth quarter during the crucial Thanksgiving shopping season.

Apple has one of the most powerful pricing strategies; since 2007, the price of its best-selling product, the iPhone, has jumped by more than 80% while sales have soared an amazing 156 times.

Apple’s substantial cash reserves can be used to a variety of uses. The corporation pays a respectable dividend of 0.6 percent per share. Apple keeps investing in its stock repurchase program because it reduces regulatory and execution risk while increasing the proportion of the firm each share owns. The fact that Apple spent a lot on buybacks throughout the quarter suggests that management is in agreement. Apple expects to spend around $90 billion on buybacks on an annually basis, according to its earnings announcement. At such rate, the corporation can repurchase about 3.6 percent of its outstanding shares annually, which has a significant impact on the growth rate of its earnings and cash flow per share. The buybacks made by Apple are frequently cited as a major contributor to its impressive overall returns.

When we take into account Apple’s net cash position when valuing the company, we find that the shares are currently trading at 24.61x free cash flow (Q3 annualized). I think that this is appropriate. With a strong moat, growth tailwinds, high-potential business units like upcoming services and a potential VR product launch, and when we take into account Apple’s strong underlying business growth of 12 percent over the most recent period, Apple is trading at a net cash adjusted free cash flow yield of slightly more than 4.3 percent, which is a pretty attractive valuation for a company.

Takeaway

During the most recent quarter, not everything went well. The iPhone continues to be the largest revenue contributor, but higher margin services are quickly gaining momentum and beginning to contribute. There is a ton of untapped potential in the VR market, which Apple has yet to enter.

Given the outstanding track record and excellent top level management, AAPL’s earnings continued to expand despite significant obstacles, and the company is still a great investment over the long term. Given the aforementioned considerations and the 0.58 percent dividend yield, I think there is a strong likelihood that investors will continue to be impressed making it a great investment.