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Apple Is Popular but Overvalued

Apple Inc. (NASDAQ:AAPL) is one of the most recognizable brands on earth as well as one of the most popular stocks in the investor community. The company produces products such as the iPhone, iPad, Apple Watch and, most recently, Apple TV devices and Apple TV+ streaming services.

The iPhone collection represented the large product line at 49% of total revenues in the most recent quarter. Geographically, the company generates roughly 45% of its revenue from the Americas, with the remainder earned elsewhere in the world, particularly China, which represents over 17% of the companys revenues. Most of the Apple ecosystem is run on its own internally developed software and semiconductors.


Although the Apple iOS is gaining market share, the Android system still represents about 70% of global cell phone usage. However, in the U.S., the Apple iOS represents about 57% of all smartphone sales.

Apple is expected to generate global sales of $392 billion in the fiscal year ending September 2022. Apples market capitalization is a stunning $2.3 trillion and represents approximately 7.0% of the S&P 500 index. Recent negative news has gotten the stock down, causing some investors to see a value opportunity here, but I think Apple is still overvalued.

Current risks

A recent Bank of America (NYSE:BAC) Securities report identified current issues that may negatively impact Apple stock. These include a weaker iPhone 14 cycle as consumer spending slows down around the world, slower growth in the Services segment (particularly in the areas of the App Store and other licensing arrangements) and a decrease in gross profit levels in the near-term. The current report also mentioned a reversion to normalized levels for iPad an Mac sales that saw a Covid-19 pandemic boost as well as pressure on earnings from the stronger dollar.

Financial review

The company recently reported fiscal third-quarter results for the period ending June 2022. Revenues increased 1.8% to $82.9 billion and gross profits increased 1.7%. Operating income declined 4.3% to $23.1 billion.

Company management stated, Our June quarter results continued to demonstrate our ability to manage our business effectively despite the challenging operating environment. We set a June quarter revenue record and our installed base of active devices reached an all-time high in every geographic segment and product category.

As usual, Apple continues to generate high levels of free cash flow. For the nine-month period ending June 2022, the company generated $98.0 billion in operating cash flow and capital expenditures were $7.4 billion. With over $90 billion in free cash flow, the company used $65 billion to repurchase shares and $11 billion in dividend payments.

The company has a fortress balance sheet with cash and investments totaling $179 billion and total debt of $120 billion.

Valuation

Consensus analyst earnings per share estimates for the fiscal year ending September 2022 are $6.10, but for the following fiscal year ending September 2023, earnings per share are expected to decline to below $6.00 due to product cycles. The puts Apple stock trading at 23 times this year's earnings expectations and 24 times next year's. The forward enterprise-value-to-Ebitda ratio is in the range of 18 to 19.

Those valuations are too high for a company that manufactures high priced consumer items in my opinion. The average cost to purchase an iPhone is over $750, and although there is a widespread irrational loyalty by consumers, its still a luxury item.

The GuruFocus discounted cash flow calculator provides a fair value of $108 for Apple stock using $6.10 in EPS as the starting point and assuming a generous 10% long-term growth rate.

Apples below-average dividend yield is only 0.61% currently.

Guru trades

Gurus who have purchased Apple stock recently include Ken Fisher (Trades, Portfolio) and Private Capital (Trades, Portfolio). Gurus who have sold or reduced their Apple positions include the Parnassus Endeavor Fund (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio).

Conclusion

Apple's earnings will likely decline next year, so I don't think the stock deserves to be valued at high forward multiples like it currently is. Apple is no longer a growth stock but a consumer cyclical whose operating results will fluctuate with product cycles and economic cycles. As this fact is accepted by more investors, valuation levels will likely drift lower. I believe Apple would be fairly valued with a mid-teens price-earnings ratio, which would put the stock price closer to $100 per share.

This article first appeared on GuruFocus.