Hey YouTube I'm Jimmy in his video.
I'm going to walk through my analysis of Apple
ticker symbol AAPL.
This video continues a series
where we go through all 30 stocks
in the Dow Jones Industrial Average.
This is the third video in that series so
far. We completed 3M
and American Express.
If you haven't gotten a chance to see those videos
there's a link in the description below
and you can see them there.
Once again the goal
with this series is to try to identify
which companies are best from an investment
standpoint.
And at the end of this year we're going to do
a video summarizing the companies
and trying to identify which companies
we see we think are most appealing
and start putting them together into
a longer term portfolio.
So if investing is something you do
or something that you want to do then hit the subscribe
button. Don't forget it the bell
said get notifications whenever we publish
new videos
OK let's get started.
So we all know what Apple does.
They have their own operating system they have their
software the hardware they make
their own computers phones iPod's
Apple TV Apple Watch they've
Apple Pay and things like that.
But I think what is most important about Apple
is whatever Apple does
they tend to do it very well.
Their customers tend to be very loyal
and usually they're willing to pay good
money for high quality products.
Now from an investment standpoint I think it's important
to look at a company's business
and try to understand where it will
be in the next five
or 10 years.
And when we look at Apple.
Well to me it seems rather obvious
there likely to be right where they're
at right now a leader in technology
and product development
and I'm guessing that
they will still make computers
and smartphones
and whatever else comes around the corner.
Over the next decade
and they're likely to be really good at it.
Point being I'm not terribly concerned
about the long term sustainability
of Apple's core business.
So now the real question is what is Apple
worth today.
Here's a chart of Apple.
And as you can see it's been
awesome since the start of 2018
they're up 32 percent over the past
year. They're up 42 percent
over the past two years their total return
is more than 121 percent.
OK so now what.
Well in a few days on September 12th
Apple's hosting their new product launch event.
Now I'm trying to look at this from an investing
standpoint not from a consumer's perspective.
So they're expected to launch
three new iPhone's.
The largest is the OLED
display iPhone X.
I think it's six and a half inches
and they're expecting to price it somewhere between 900
and let's say eleven hundred dollars.
Then the smaller OLED
phones the iPhone XS.
And I think it's close to retail somewhere between
800 like 950.
Then there's more baseline LCD
display model which is supposed
to retail for somewhere between 600
800 now.
Pricing of course is going to depend
on how much storage the phone has.
Now the rumors that Apple's new phones
are going to launch
with their largest capacity yet
at 512 gigabytes.
Now this has a potential that impact the memory
market as Apples
products specifically iPhone's
use so much memory.
And this could have a meaningful impact on the supply
and demand balance for the memory
market for many years.
And this could affect companies like Micron
and other providers of NAND
memory.
But we're gonna come back to that in
another video when we do an analysis on
those companies.
OK. So we know what the new Apple event are going to launch
new products.
We know in addition to the new iPhone's they
are also expected to upgrade
the Apple Watch
and the iPad Pro.
Things like that.
This is right in line with all the rumors that have been out there
now pricing for this is an important
part of what
us investors should consider.
So here's how we can look at it from an investing
standpoint.
OK. Let's pretend that their new iPhone
X is priced at let's say a thousand
fifty dollars.
Well the research that I've done so far
looks like it's going to cost them about
650 dollars to make that phone.
Compare that to the cost of the old iPhone
X which was close to the 600
all level.
Well if the phone cost 650
and then you're left
with gross margins of about 38 percent
assuming they can sell for a thousand fifty.
But if they were selling it for instead let's
say 950 well those same
38 percent margins fall to about 32
percent. Now that's a big difference.
Now if you take the combination
of all their products over the past few quarters
they've grossed about 38
percent.
So I expect that from an investing standpoint
to try to aim somewhere at that level.
Another important point if I were trying to model out
what the launch of this type of product
are all their products could do to
our earnings.
Well it's not actually the price
at a price that we're using.
What you need is the average sale price
since the iPhone would
come with multiple memory sizes.
Each of them with different price points.
So we take the average sale price subtract
the average phone cost
and what we end up with is gross profit.
And in theory what you could do
is apply this to other products.
Project that out how many is how much sales
are they going to expect even if sales are flat
it would be relatively simple to come up
with what would revenue look like what profit
would look like
and what would the impact be on earnings per share.
Okay now let's try to make our way towards coming
up with the value for Apple stock.
So if you currently own Apple stock
or if you've been researching it consider buying
it then you might have seen
some news that came out recently.
So recently Apple
wrote a letter to the United
States trade representative
basically what they said was
they said that a bunch of their products like the Apple Watch
and their air pods
will be affected by the newest tariffs
that have been announced by the government.
Now the reason I bring this up here is because of the way
Tariffs fundamentally work.
Right now there's an additional proposed
tariff of about two hundred sixty seven billion
dollars on Chinese imports.
This is on top of the 200 billion dollars from
before
but since American companies that
pay that tariff well then
that will hurt American companies
earnings.
The idea behind a tariff in general
is that the companies like Apple
won't want to pay that tariff
and ideally they'll switch their buying from
a foreign company like a Chinese manufacturer
over to an American company.
The issue is is that if Apple were to move
the manufacturing to the U.S.
Well what would that do for the cost of
the product.
It would likely raise the product from
what it currently is now
and that would reduce gross margins
assuming they didn't pass that on to the consumer.
From a purely investment standpoint
this is a negative.
Investors are typically after
higher revenue
and higher margins.
Now this hasn't happened yet
and as you may have noticed iPhone's are
not on their list of products
that could be be potentially impacted.
But I think it's important to keep
the concept that some of their costs
may go off because of tariffs
and that could impact earnings per share
going forward.
Okay so let's try to come up
with a fair value for Apple right
now. Apple stock is trading at about 220
dollars a share
and that's about sixteen times
next year's earnings per share.
The S&P 500 is trading at almost
18 times next year's earnings.
At first glance it seemed unusual
that Apple would be trading at a discount relative
to the market.
Considering how good
of a company we know Apple to be
so I dove in a bit further now
Generally there's
three places you could find a good PE
multiple to use when coming up
with valuation.
First you can compare the PE multiple
to that of the market.
See how it does see if it holds up.
Second you can compare the PE multiple
to the PE multiple of peers
or third you can use a PE multiple
to its own historical P E multiple
comparing the company to its own PE
is important
and often underutilized because
people might do something like they look at the
S&P 500.
They say Oh okay that's where it should be where they look
at peers and say okay I'll just use that
but there may be a reason
that that particular company is trading at a discount
to earnings or peers
or whatever it might be.
So if you look at its own history
you might see historically how is it
done relative to peers in
Apples case. It's a tricky thing because
they have great margins.
They have grown revenue
and compounded annual growth rate of almost
8 percent.
And both of those numbers are fantastic
but they are humongous
and the law of large numbers
shows it's tougher to grow
large companies for a long period of time
than it is to grow small companies.
So this in mind here's a chart of
the past five years of Apple's
forward PE ratio.
So as you can see back here Apple
stock was trading at about 11 times
earnings which back then
from about here to here.
And as you could see the PE ratio
has moved all around over the past
five years as the prices change
as earnings projections have changed.
With this chart it looks like Apple
may be overvalued based on its
own historical average.
Now that doesn't necessarily mean that
perhaps Apple isn't creating a new range
right now that it could be trading in what's safe for the
next five years maybe in the next five
years. We're going to look at this again
and we're going to say hey now they're
trading between 16
and 17 maybe that's the average somewhere in that
area.
So now where does that put apples fair value.
Well let's imagine that we did use the
market's 18 times next year's
earnings. Well they'll put their price
their fair value the price target at about right
there. Now that's tricky
to do because they would be violating their own historical
average
but once again they have a better growth
profile than a lot of the S&P
500.
So it would be difficult to argue against that.
So that leaves us where does apple fall
in or the potential of our ideal portfolio.
Now this may end up being one of those companies that we
have to include even if the valuation
doesn't seem ideal simply because
of the quality of the business itself.
If the stock pulled back I would love
it. I would jump at the chance
to have Apple pull back here.
But historically they've
done very well. They've grown
very well. As we illustrated before
with how much they've grown even year to date
plus I think it's important to point out
that on September 12th they
have their event
and historically they've done very well
their stock is usually done very well
after these events over the next month
or two afterwards.
So overall I'm a big apple fan.
I like their business.
I would love it if their stock price fell.
But even at the current price I would
expect them to probably make
our ideal portfolio.
unless we have some compelling case
as we uncover other companies.
But the question is What do you think of Apple
stock. Do you like it here.
What is your research showing you.
Let me know what you think in the comments below
and if you've made it this far in that video
hit the subscribe button.
I would really appreciate it
and I appreciate you sticking around all the
way to the end and I'll see in the next video. Thanks