Hi I'm Jimmy in this video
we're looking at Apple's stock
ticker symbol AAPL
to see if we think that Apple stock
is a good buy at the current price.
We're gonna start by going through
some of the products and some of the
product segments and then we're
going to try to value the stock in a
somewhat unique way.
And also I'm super excited to
announce that this is the first
sponsored video I've ever done.
Now I've actually been approached
quite a few times to do different
sponsorships but frankly
the products they're pushing were a
bit. They were they were terrible
but the sponsor of this video
is actually the opposite of that.
They're a simple easy
to use free app that's
right in line with what we do in
this channel. So it's called borsa
earnings call and it's a free app
that lets us listen to earnings
calls on the go.
And just so we're on the same page
and earnings call is a quarterly
conference call where a company's
management team discusses
how the company performed in that
particular quarter.
And generally at the end of each of
these earnings calls management
will take questions from analysts
and I think that this can be a great
place to find interesting
information about any company that
will research.
So basically this app makes
listening to earnings calls as easy
as listening to a podcast.
And personally I like it because
I now use it to listen to earnings
calls my way to and from the office.
And to me this makes it much
simpler. I like listening to the
earnings calls because it
allows for me to hear the tone from
a management team.
And I think that that makes the
analysis all the more real what are
they excited about what are they
hesitant about.
What are they just rushing through
what does not matter too much to
them. I think that's easy to hear
when you can hear the tone since
it's free for us to download either
on Android or IOS.
To me it makes a lot of sense to use
to find links and description below
to both of those apps and
no matter what platform we're using
now this app came in particularly
handy with this apple analysis
and we'll see why when we get to the
valuation part of the analysis.
So let's dive quickly into each
segment and then we'll try to come
up with a fair value for Apple
stock. So let's start with the
iPhone segment which was the largest
segment back in 2013.
Now this is a chart for revenue just
for the iPhone division going back
to 2012.
So we could see back in 2015
while there was a nice jump thanks
to the release of the iPhone 6 s
then we saw in 2018 for
the first time they topped the 2015
numbers.
Now from a business perspective many
analysts are expecting the 2019
numbers to be below the 2018
numbers.
Now this is important for us to
consider because we want to try to
determine the potential growth
of iPhones.
So I think it might make sense
to try to look at some positives and
negatives for the iPhone market
and ultimately that impact on Apple
stock well iPhones
are expensive.
I think we can all say that but
iPhone users tend to be very
loyal. So what's happened is that
iPhone users have extended how
long they typically hold the average
phone. So back when phones were
largely subsidized by
the wireless carriers like Horizon
or AT&T Well it was much easier
for individual people to
upgrade their phone every time a new
iPhone came out.
Now with the way things are today
it costs individual users
much more money to buy new phones.
So ultimately what people are doing
is holding your phone longer and
then at some point upgrading
once their phone gets old enough.
In reaction to this longer upgrade
cycle Apple has started a
something called the Apple trading
program. So for example
if we had an older iPhone
let's say 6 as well instead
of selling it on a site
like Gazelle where we might get
let's say a hundred bucks for that
phone. Well now we can go straight
to Apple and for that very same
phone we get something like one
hundred and fifty dollars.
Now Apple is also
offering financing options.
When we were to upgrade our phones
to try to get more people to switch
over their phones.
So in theory that should keep
revenue continuing to grow.
And it's likely that we're going to
see a spike whenever a new
iPhone comes out that inspires
more people to upgrade that phone
sooner upgrade to that phone.
So now this brings to somebody
of the China market for iPhones.
So iPhone saw a solid jump
in the China market of about 42
percent in the month of July
compared to July of last year.
Now this jump came after a 35
percent drop in
the month of June in China.
So I would expect to consume to
see continued volatility in the
China market. IPhone sales
and big picture I think
that overall it seems to be heading
in the right direction although
again we can expect some volatility
there. OK now we're sliding over to
the next largest segment here
we're looking at services.
And when we jump over services
revenue well we can see that
services revenue has grown quite
impressively.
And I wouldn't be surprised
if we continue to see reasonable
growth rates just like this but
there are at least the next few
years so services include things
like the iTunes store which can be
accessed from computers iPhones
iPads Apple TV things like that.
Stream you can download music
TV shows movies podcast
things along those lines.
Now Apple arcade is right around
the corner from launching and I'm
guessing they're gonna have that
revenue go into this category.
And basically with Apple arcade
what we're going to do is we're
gonna have the ability to sign up
for a subscription fee.
And with that you could play all
of the games that Apple puts out
with no ads and no in
app purchases.
Sounds interesting.
And either way I think that that
could help spur this growth along
further than they have.
Apple TV plus which is similar
to Netflix and that's likely to
go into this whole category as well.
That's another subscription service
and I'm expecting that to be an
additional growth driver for
this segment.
This segment is looking good overall
okay. Back to the pie chart.
Now what we're jumping over to our
next largest category that's the Mac
category Well we jumped to Max
revenue.
Well here we might have guessed
at max revenue wouldn't look quite
as good as some of the other
segments. It's a much more mature
segment than some of the other
apples business lines.
Now they are still growing.
So that's a strong thing for
Apple. But again it's not really
doing a lot for their overall
company growth rate and for Apple
stock in general and for those
curious the Mac segment is where
they sell computers.
OK back to the pie chart.
Now we have the iPad segment
and the wearables segment and they
both account for about 7 percent of
2018.
So how about we start with the iPad
segment since that's the weaker of
the two.
This is the revenue going back to
2012 and we could see it's been
declining recently.
And it seems that people
as they're upgrading their phones
less people find it necessary to
jump over by an iPad as well.
But I think that
ultimately management is doing what
they can to turn turn this segment
around trying to offer different
incentives to get people to buy
them. But I also think it's
important that it's not like this is
going to go away.
I think that at some point this is
going to stabilize and
the iPod segment contributes
to let's say the services since
there aren't going to be on the
iTunes store the apple arcade
is going to be available on iPads.
So this is an important
mix in the entire apple
ecosystem.
Okay. Onto the wearables revenue.
So here we could see that
wearables has been ramping up
quite nicely in the past couple of
years.
This is where they sell things like
the air pods the Apple Watch the
home pod and then they have some
accessories that they sell as well.
Now you may remember at
the start of the video that I
mentioned that the sponsor of this
video was Borsa earnings
calls and that
that was important for this
particular video when it came to
valuation.
So let's shift our valuation work
with someone else listen to the June
Apple call on the app.
While Apple CEO Tim Cook
came out and said that the wearables
division thanks to its fantastic
growth was almost the size
of a Fortune 50 company
and that makes sense for us to
update this chart with the last
twelve months since they've already
completed the first three quarters
of 2019.
Well when I heard Tim Cook say this
I thought to myself well I wonder
what that company would be worth.
And I began to wonder if
it was possible for us to use a sum
of the parts valuation technique
for Apple stock based
on all of their individual product
segments.
So let's give it a go.
Okay. So we're gonna try to come up
with a weighted average price
to earnings ratio for Apple stock.
We're going to use the S&P 500 as a
sort of a benchmark for what
the PE should be.
Right now the S&P 500 is 19x
and then if we look at Apple's own
history well their historical PE
average is about 16x
so that could be useful as well.
So now when we look at the iPhone
division Well the iPhone division
has dominated revenue for
the past few years so
it makes sense based on the iPhone's
growth on the volatility
in that growth to try to
value it somewhere near the
overall market.
And since that their revenue
has dominated Apple's revenue
and Apple is only traded at an
average of 16x.
I don't think it can be quite as
high as the market in general.
So for me I think it makes sense to
apply in 18x multiple
to the iPhone segment assuming
that they were a standalone business
then for services.
Well that should be way better from
the market since growth is so much
better than the overall market.
Now Netflix has a very similar
competing product but they're
trading at like 100x right now.
I think it's more than 100x and
that's crazy. So we don't want to
use anything like that to me I
could easily make a case that a
conservative number for this
division given its growth would be
about twenty five X
also given the potential growth
of the new products that they're
coming out with I think twenty five
x could easily be made
as a conservative number.
It's also true for wearables.
If we look at the wearables revenue
and the wearables revenue growth
it's easy to say 25x is very
appropriate over there as well.
So let's do that one there.
Then for Mac.
Well I actually think that.
This is somewhat of a tricky one to
do. I think that the revenue is
going to continue to grow.
And given that Macs tend to be
premium products
I am assuming that their profit
margins are fairly good now.
Apple doesn't break down all the
profit margins as much as we could
use for this type of exercises.
But I think it's fairly obvious
that Macs are going to be amongst
their best margin producers.
That being said I think it would
make sense to use something
just shy of the 90
next to the stock market given
slower growth but better margins.
So if we would use 18 x there
I think that would be fair.
Now frankly using 18 x
here makes me hesitate on the
18 x that we're using for the
iPhones. Given the growth of
iPhones.
But if anything we could just
make the case that this is more
conservative.
IPhones aren't going to have as good
of margins as the Macs are.
So if anything it's a bit
conservative and I'm okay with being
conservative in this particular
scenario.
Then for iPad well here I think
it makes sense given their growth
concerns that they should
definitely be below the market and
that you're probably below Apple's
five year average as well.
So how about we make them 15
x now.
If we simply multiply the percentage
of them are there waiting by
the multiple that we chose.
So for iPhones just as an
example would be 56 percent
times 18 x and we
get ten point one X
then we do that for each of the
numbers add them up.
We ended up with a weighted average
PE of nineteen point six
X over the past 12 months.
Apple is earned about eleven
thousand seventy four cents
and if we multiply that by
CET nineteen point six X
Well we end up with a fair value of
about two hundred thirty dollars per
share. Now if we would switch over
to apples price chart.
Well that would imply that the fair
value is right up here.
But what do you think.
Do you think this is a good way to
value Apple stock.
Well we too conservative or too
aggressive with this method.
One hesitation that I had was
setting the p according
to the S&P 500 could be hazardous.
If we think that the S&P 500 is
going to pull back in some sort
of recession also
it I think it's appropriate
to look at Apple as business versus
the market in general and think do
we think Apple deserves to be
trading at a premium to the market.
Personally the nineteen point six
X seems to make a lot of sense to me
I'm surprised that Apple's is
trading at a discount to the market
in general but what do you think.
Do you think that makes most sense.
The other question is What do you
think of the borsa earnings calls
app.
Is it something you have to go over
and download. I get links to the
Apple app and to the Android app
in the description below.
Jump over support the sponsor.
Thank you very much for stick with
me all the way the end of the video.
See in the next video.
Thanks.