Do current fundamentals justify AAPL's valuation?

Introduction: AAPL is undervalued and a solid investment. I'm going to jump into why I believe this to be the case. We are going to look at AAPL's current valuation, recent earnings, and 7 key financial ratios. This is a fairly long analysis but if you're thinking of investing in AAPL then you should have a decent understanding of why you decided to make this investment. Anyway, enough with the intro, let's jump into the analysis. AAPL Summary: If you're not familiar with AAPL then here is a quick summary, feel free to jump past this part. “Apple Inc. designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide. It also sells various related services." AAPL Stock Recent Volume Comparison I'm usually more of a fundamental investor but I also think there are some technical indicators that help provide additional; content when making an investment, which is why we will look at recent volume. Comparing AAPL's most recent volume to their average monthly volume can help us derive some valuable insights. Firstly, AAPL's average volume over the past 2 trading days is sitting around 79.93M, which is lower than their average monthly trading volume of 94.25M. AAPL's low relative volume suggests that price movements are not expected to be as variable, which is unattractive for traders. This does not mean prices will not go up or down, but the movements/trends are likely to be less significant.) AAPL Valuation and Stock Rating Understanding the valuation of a stock is a useful check to see if the investment fundamentals are sound. I pulled the valuation and stock rating for a quick view to see if AAPL is considered undervalued or overvalued. Analysts of AAPL have given an overall rating of 5, on a rating scale between 1 and 5, with 1 being the worst and 5 being the best. This overall rating consists of 3 different ratings, PE, ROE and DCF which I'll get into below. PE Rating: Currently, analysts have given AAPL a PE rating of 5. This is the highest ranking and implies that the AAPL stock is currently undervalued. The PE rating factors in the trailing, current, and future PE Ratio of the AAPL stock. In the case of AAPL, analysts think that AAPL is undervalued given their P/E ratios, relative to the average P/E ratio of their peers. ROE Rating: Currently, AAPL has been given an ROE rating of 5 by analysts. This is the highest score one can achieve via an ROE rating. This indicates that AAPL's ROE is not only healthy, but better than their peers. AAPL's ROE score of 5 implies that they are currently profitable and are generating these profits in an efficient manner. A high rating such as AAPL's could also indicate that their management team is better at managing inventory, cash flows, and business operations better than the management teams of AAPL's peers. DCF Rating: We have saved the best (and most influential) rating for last. AAPL has been given a score of 5 based on the quality of their DCF model (and projections). The DCF model is very commonly used by investors to value securities and is the de facto measurement of a stocks value. As a result of this, a high level of importance is placed on the company's DCF models. With that being said, AAPL's score of 5 is very good, implying the outlook for AAPL is very positive, and their stock is currently undervalued. Based on these metrics we can see that AAPL seems to be undervalued and a solid investment. Considering these core metrics look good, I would be likely to take a position in AAPL. That being said, I want to look at some other metrics and factors. Recent and Upcoming AAPL Earnings Some people like to “play” earnings, but I tend to look at historical and upcoming AAPL earnings to analyze or re-analyze my investment. Typically, a beat will cause the price to jump, and a miss will lead to a drop, but we've seen a few cases recently where it's been the opposite. Either way, let's look at AAPL Historically, AAPL has beat their earnings 95% of the time. This track record is fantastic and allows us to assume that they will continue to beat estimates. Furthermore, their average earnings beat is 10.98%, which is a significant amount. AAPL's most recent earnings release came on Jan 26th, 2022, in which AAPL reported an EPS of $2.1, which was 11.11% better than their EPS estimate of $1.89. Using this information we can expect AAPL to beat their next earnings estimate of 1.43 by 10.98%, on Apr 27th, 2022. If this were the case AAPL's EPS would be 1.59 which is 13.57% higher than their Q2 2021 EPS of $1.40. This signifies that AAPL is on the right path, and is continuing to generate more revenues, and become more profitable. AAPL Stock Key Ratio Analysis There are 7 main financial ratios that we are going to look at today. These ratios can help us to get a general idea of the financial health of the AAPL stock before we choose to enter into (or add to) a position. These ratios can help us to understand the current state of Apple Inc.'s business, as well as what their future might look like. EPS: EPS is one of (if not) the most commonly used in finance. AAPL's EPS is currently 5.67, which means that for every outstanding share of AAPL they make $5.67 in net income (after tax). EPS figures can be manipulated by the company, as there are accounting practices that can be used to hide unfavourable expenses/figures, so don't look at this figure as the “be all end all” P/E Ratio: The P/E ratio is another very popular financial ratio that is used very commonly. This ratio is used in conjunction with EPS, as the P/E ratio is simply the price of the stock divided by its EPS. As a general rule of thumb (explained by Peter Lynch in his book “one up on wall street”), a company's P/E ratio should be roughly equal (or higher) to their growth rate. In the case of AAPL, they have a P/E ratio of 29.32, while their EPS growth rate (3Y) is 22.53%. Since their P/E ratio is somewhat close to their EPS growth rate, AAPL seems to be an alright (somewhat attractive) investment prospect. ROE: A company's ROE is the return a company can receive by projects/investments funded by their shareholder's equity (how well they can turn money into more money). A high ROE is typically favourable, unless it is unusually high, then you may have to do some further investigation. ROE's over 15% are considered to be good, and AAPL's ROE is currently at 144.12%. This is very high, which can lead to higher returns, however, there is also more risk in an investment into AAPL. Debt-to-Equity: A company's Debt-to-Equity ratio shows us how much debt a company is carrying relative to the amount of shareholder's equity they have. By taking a quick look at this figure we can determine if a company's debt levels are potentially risky and need further investigation into. If a company's D/E ratio is above 2.5, we may want to analyze their debt to determine if they will be able to pay it all back (avoiding defaults). AAPL's current D/E ratio is 4.56, and thus we will have to analyze their debt in more detail. Interest Coverage Ratio: This figure is often used in conjunction with the D/E ratio in order to determine if a company can handle their current level of debt. This metric shows us how well a company's earnings can be used to cover their debt obligations. A high Interest Coverage Ratio indicates that a company should have no problem paying off their debts, and a low coverage ratio may indicate future debt/insolvency problems. AAPL currently has an interest coverage ratio of 41.19, which means that their earnings cover their interest payments 41.19 times over. This indicates that AAPL should have no problem meeting their debt obligations (the worries from the D/E section should not be as concerning). EV/EBIT: The EV/EBIT ratio is like the P/E ratio in the sense that they are measures of the value that you are receiving for purchasing a stock at its current market price. Using the EV/EBIT ratio (rather than the P/E ratio) is beneficial as it factors in the company's debt. A lower EV/EBIT ratio indicates that the stock is close to its fair value, and potentially has more intrinsic value than other stocks. Currently, AAPL has an EV/EBIT ratio of 22.76, meaning that it will take 22.76 years in order for AAPL to generate enough income to reach their current enterprise value. This is high in general terms, however when looking at average Technology EV/EBIT ratios this is quite normal and indicates AAPL is close to their fair value. Operating Margin: A company's operating margin measures the profitability of the company's operations. This metric is most important when using it to compare to peers of a company. This is due to the fact that different industries have different level of profitability. However, if your company's operations are more profitable than your peers, you have an advantage and are a more attractive option. Currently, AAPL's operating margin is 29.78%, in comparison to the Consumer Electronics industry's average operating margin of 16.03%. This implies that AAPL's operations are more efficient/profitable than that of their peers, which creates a moat for AAPL. Why I Think AAPL is Undervalued/Overvalued Overall, I think that the AAPL stock is undervalued. This is due to AAPL overall stock grade being ranked a 5, their 95% track record of beating earnings, and the fact that all 7 of their key ratios are good (if not great). I think that all of these factors on their own are amazing, however when you look at them together it creates the perfect storm. The only downside is their volume seems to be a bit low right now, however, if it starts to pick up, we might start to see some upside in AAPL Thanks for taking the time to read my analysis, please follow me for the latest investment insights and leave a comment if you have any questions or disagree with my thoughts - always open to a good discussion!

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Do current fundamentals justify AAPL's valuation?

bullish

Introduction:

AAPL is undervalued and a solid investment. I'm going to jump into why I believe this to be the case. We are going to look at AAPL's current valuation, recent earnings, and 7 key financial ratios. This is a fairly long analysis but if you're thinking of investing in AAPL then you should have a decent understanding of why you decided to make this investment. Anyway, enough with the intro, let's jump into the analysis.

AAPL Summary:

If you're not familiar with AAPL then here is a quick summary, feel free to jump past this part.

“Apple Inc. designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide. It also sells various related services."

AAPL Stock Recent Volume Comparison

I'm usually more of a fundamental investor but I also think there are some technical indicators that help provide additional; content when making an investment, which is why we will look at recent volume.

Comparing AAPL's most recent volume to their average monthly volume can help us derive some valuable insights. Firstly, AAPL's average volume over the past 2 trading days is sitting around 79.93M, which is lower than their average monthly trading volume of 94.25M.

AAPL's low relative volume suggests that price movements are not expected to be as variable, which is unattractive for traders. This does not mean prices will not go up or down, but the movements/trends are likely to be less significant.)

AAPL Valuation and Stock Rating

Understanding the valuation of a stock is a useful check to see if the investment fundamentals are sound. I pulled the valuation and stock rating for a quick view to see if AAPL is considered undervalued or overvalued.

Analysts of AAPL have given an overall rating of 5, on a rating scale between 1 and 5, with 1 being the worst and 5 being the best. This overall rating consists of 3 different ratings, PE, ROE and DCF which I'll get into below.

PE Rating: Currently, analysts have given AAPL a PE rating of 5. This is the highest ranking and implies that the AAPL stock is currently undervalued. The PE rating factors in the trailing, current, and future PE Ratio of the AAPL stock. In the case of AAPL, analysts think that AAPL is undervalued given their P/E ratios, relative to the average P/E ratio of their peers.

ROE Rating: Currently, AAPL has been given an ROE rating of 5 by analysts. This is the highest score one can achieve via an ROE rating. This indicates that AAPL's ROE is not only healthy, but better than their peers. AAPL's ROE score of 5 implies that they are currently profitable and are generating these profits in an efficient manner. A high rating such as AAPL's could also indicate that their management team is better at managing inventory, cash flows, and business operations better than the management teams of AAPL's peers.

DCF Rating: We have saved the best (and most influential) rating for last. AAPL has been given a score of 5 based on the quality of their DCF model (and projections). The DCF model is very commonly used by investors to value securities and is the de facto measurement of a stocks value. As a result of this, a high level of importance is placed on the company's DCF models. With that being said, AAPL's score of 5 is very good, implying the outlook for AAPL is very positive, and their stock is currently undervalued.

Based on these metrics we can see that AAPL seems to be undervalued and a solid investment. Considering these core metrics look good, I would be likely to take a position in AAPL. That being said, I want to look at some other metrics and factors.

Recent and Upcoming AAPL Earnings

Some people like to “play” earnings, but I tend to look at historical and upcoming AAPL earnings to analyze or re-analyze my investment. Typically, a beat will cause the price to jump, and a miss will lead to a drop, but we've seen a few cases recently where it's been the opposite. Either way, let's look at AAPL

Historically, AAPL has beat their earnings 95% of the time. This track record is fantastic and allows us to assume that they will continue to beat estimates. Furthermore, their average earnings beat is 10.98%, which is a significant amount.

AAPL's most recent earnings release came on Jan 26th, 2022, in which AAPL reported an EPS of $2.1, which was 11.11% better than their EPS estimate of $1.89.

Using this information we can expect AAPL to beat their next earnings estimate of 1.43 by 10.98%, on Apr 27th, 2022. If this were the case AAPL's EPS would be 1.59 which is 13.57% higher than their Q2 2021 EPS of $1.40. This signifies that AAPL is on the right path, and is continuing to generate more revenues, and become more profitable.

AAPL Stock Key Ratio Analysis

There are 7 main financial ratios that we are going to look at today. These ratios can help us to get a general idea of the financial health of the AAPL stock before we choose to enter into (or add to) a position. These ratios can help us to understand the current state of Apple Inc.'s business, as well as what their future might look like.

  1. EPS: EPS is one of (if not) the most commonly used in finance. AAPL's EPS is currently 5.67, which means that for every outstanding share of AAPL they make $5.67 in net income (after tax). EPS figures can be manipulated by the company, as there are accounting practices that can be used to hide unfavourable expenses/figures, so don't look at this figure as the “be all end all”
  2. P/E Ratio: The P/E ratio is another very popular financial ratio that is used very commonly. This ratio is used in conjunction with EPS, as the P/E ratio is simply the price of the stock divided by its EPS. As a general rule of thumb (explained by Peter Lynch in his book “one up on wall street”), a company's P/E ratio should be roughly equal (or higher) to their growth rate. In the case of AAPL, they have a P/E ratio of 29.32, while their EPS growth rate (3Y) is 22.53%. Since their P/E ratio is somewhat close to their EPS growth rate, AAPL seems to be an alright (somewhat attractive) investment prospect.
  3. ROE: A company's ROE is the return a company can receive by projects/investments funded by their shareholder's equity (how well they can turn money into more money). A high ROE is typically favourable, unless it is unusually high, then you may have to do some further investigation. ROE's over 15% are considered to be good, and AAPL's ROE is currently at 144.12%. This is very high, which can lead to higher returns, however, there is also more risk in an investment into AAPL.
  4. Debt-to-Equity: A company's Debt-to-Equity ratio shows us how much debt a company is carrying relative to the amount of shareholder's equity they have. By taking a quick look at this figure we can determine if a company's debt levels are potentially risky and need further investigation into. If a company's D/E ratio is above 2.5, we may want to analyze their debt to determine if they will be able to pay it all back (avoiding defaults). AAPL's current D/E ratio is 4.56, and thus we will have to analyze their debt in more detail.
  5. Interest Coverage Ratio: This figure is often used in conjunction with the D/E ratio in order to determine if a company can handle their current level of debt. This metric shows us how well a company's earnings can be used to cover their debt obligations. A high Interest Coverage Ratio indicates that a company should have no problem paying off their debts, and a low coverage ratio may indicate future debt/insolvency problems. AAPL currently has an interest coverage ratio of 41.19, which means that their earnings cover their interest payments 41.19 times over. This indicates that AAPL should have no problem meeting their debt obligations (the worries from the D/E section should not be as concerning).
  6. EV/EBIT: The EV/EBIT ratio is like the P/E ratio in the sense that they are measures of the value that you are receiving for purchasing a stock at its current market price. Using the EV/EBIT ratio (rather than the P/E ratio) is beneficial as it factors in the company's debt. A lower EV/EBIT ratio indicates that the stock is close to its fair value, and potentially has more intrinsic value than other stocks. Currently, AAPL has an EV/EBIT ratio of 22.76, meaning that it will take 22.76 years in order for AAPL to generate enough income to reach their current enterprise value. This is high in general terms, however when looking at average Technology EV/EBIT ratios this is quite normal and indicates AAPL is close to their fair value.
  7. Operating Margin: A company's operating margin measures the profitability of the company's operations. This metric is most important when using it to compare to peers of a company. This is due to the fact that different industries have different level of profitability. However, if your company's operations are more profitable than your peers, you have an advantage and are a more attractive option. Currently, AAPL's operating margin is 29.78%, in comparison to the Consumer Electronics industry's average operating margin of 16.03%. This implies that AAPL's operations are more efficient/profitable than that of their peers, which creates a moat for AAPL.

Why I Think AAPL is Undervalued/Overvalued

Overall, I think that the AAPL stock is undervalued. This is due to AAPL overall stock grade being ranked a 5, their 95% track record of beating earnings, and the fact that all 7 of their key ratios are good (if not great). I think that all of these factors on their own are amazing, however when you look at them together it creates the perfect storm. The only downside is their volume seems to be a bit low right now, however, if it starts to pick up, we might start to see some upside in AAPL

Thanks for taking the time to read my analysis, please follow me for the latest investment insights and leave a comment if you have any questions or disagree with my thoughts - always open to a good discussion!

read-time
7 min
196.71
Target Price
8/ 10
Confidence
1-3 Years
Timeframe
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Earnings Release
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News
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