3 reasons to take another bite of apple
Apple AAPL is a stellar company that is a staple in most investors’ portfolios. A mega-cap giant, the company is known for offering investors big gains with minimal downsides along the way.
Year-to-date, Apple shares have shown a high mix of valuable defense against a few other tech leaders such as Microsoft MSFT and Alphabet GOOGL. Additionally, the company nearly traded in line with the S&P 500, further showing how strong stocks have been in a dismal 2022.
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Extending the period to last year, we continue to see how strong the company’s stock has been. Apple outperforms GOOGL, MSFT and the S&P 500, all by wide margins. I believe this performance proves how highly investors think of the company.
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The tech giant released its quarterly results after the bell rang yesterday, and the market didn’t react too well; shares closed around 3.6% on the day. Soaring energy prices, microchip shortages, COVID-19 lockdowns in China, and supply chain bottlenecks have all been headaches Apple has faced throughout 2022. Apple has chosen not to provide guidance moving forward due to the uncertainty of the pandemic.
Amidst all the red, I believe investors had an exceptional opportunity to acquire shares of one of the most reputable companies in the world. However, it is essential to move into any position in a market like this; no one really knows where the market is going, but we do know that the sellers have had the upper hand lately. Let’s look at three reasons why I think investors should take another bite out of Apple.
Dominance of the iPhone
Almost every time you see someone using a mobile device, usually the first guess is that it’s an iPhone. In fact, the flagship has become such a hit that it sometimes seems like there are no other viable options for consumers when looking for an upgrade. Simply put, it is one of the most widely used devices in the world.
Of course, they have other exciting devices including the iPad, Mac computers, AirPods, and Apple Watch, all of which have taken the world by storm. However, the iPhone is the company’s daily bread.
In yesterday’s quarterly report, Apple raked in $50.6 billion in iPhone sales, a new quarterly record that showed 5.5% growth over the year-ago quarter. Additionally, iPhone revenue jumped 40% year over year from 2020 to 2021.
In the first quarter of 2022, Apple launched its latest device model, the iPhone 13, which comes with much sought-after 5G connectivity. Apple says demand has been robust for the product, which bodes well for the upcoming annual release of the new iPhone (coming in the green color for the first time).
To me, it seems highly unlikely that anyone will dethrone the legendary device; Apple has too much of a hold on consumers with its cutting-edge features that people are always looking for. Moreover, mobile devices have established themselves as a must-have for anyone in the world looking to connect with others, so the mobile device market is not going anywhere.
M1 Ultra microchip
At the beginning of March this year, Apple unveiled its M1 Ultra chip, the world’s most powerful chip for a personal computer. The chip is expected to compete with Nvidia’s flagship NVDA RTX 3090 graphics card and Advanced Micro Device’s AMD Ryzen Threadripper 3990X processor. This announcement made waves in the industry and reminded the world that Apple can and will compete with the big dogs in almost everything.
It was a huge leap for the company; the M1 Ultra has UltraFusion – Apple’s new packaging architecture that uses and interconnects the die of two M1 Max chips to create a system-on-a-chip (called an SoC) that has insane levels of performance and capability. Plus, it delivers stellar computing power to the new Mac Studio while having the ability to maintain industry-leading performance per watt.
Consumers will have the choice of an M1 Ultra chip when purchasing Mac Studio. This all-new Mac desktop offers ridiculous performance and improved connectivity in a compact form factor, with the ability to turn any space into a studio.
It should be noted that the shortage of semiconductors will play spoilsport here and on all Apple products, for that matter. On the bright side, analysts expect the shortage to ease through the end of 2022 and continue through 2023. Mac sales totaled $10.4 billion in the quarter reported yesterday, and in overall, Mac revenue jumped 23% year-over-year from 2020 to 2021. The new M1 ultra will no doubt be a highly sought-after chip, fueling further growth in this segment.
Future P/E favorable to shareholders and decreasing
The volatile market we’ve been experiencing throughout 2022 has caused Apple’s forward earnings multiple to drop to an attractive level relative to the value of the past. Additionally, Apple is historically a very shareholder-friendly company.
AAPL’s current forward earnings multiple sits at 26.5X, nearly half of its 2020 high of 41.5X and significantly lower than the 2022 high of 31.2X. Over the past five years, the median 19.1X, making the current value a premium.
Apple has an annual dividend yield of 0.54%, with a very manageable payout rate of 15% of earnings. The tech giant has increased its dividend five times in the past five years, delivering a five-year annualized dividend growth rate of a solid 7.8%. Investors love dividends, and it only gets better when companies with this strength continually increase the dividend with a stable payout ratio.
In yesterday’s earnings release, Apple’s board declared a cash dividend of $0.23 per share, an increase of 5%. Additionally, the board also authorized a $90 billion increase to the existing share buyback program – a move very favorable to shareholders.
Apple ticks all the boxes for me: strong product demand, continuous innovation, an established market position with a firm grip, and the shareholder-friendly nature of the company. It’s hard to paint a picture of where Apple is headed in the short term due to existing supply chain issues and microchip shortages, but analysts see this as short-term noise that will soon dissipate. Apple is the market leader and should be for a long time.
Apple Inc. Price, Consensus and EPS Surprise
Apple Inc. price-consensus-eps-surprise-chart | Quote Apple Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.