Is Apple A Buy prior to the Split on 8/24/20?

Apple (APPL) has been in the news a lot recently between a congressional antitrust hearing, blowout earnings, and the most recent announcement of a stock split. With so much going on is Apple a Buy? Well, this post will focus on its earnings, the split, and if Apple is worth investing in.

A recent post on Invest Like Dad highlighted that Apple probably has little concern from the antitrust hearings but should be more concerned about Biden’s tax proposals if you want to read that post click here.

So Is Apple a Buy Before the Stock Split?

Apple announced on 7/31/20 that it would be doing a 4-for-1 stock split on 8/24/2020. The latest stock split is the 5th stock split that Apple has done. With Apple stock around the $400 price point, investors will have four shares of stock around $100 on 8/24 when the split is enacted.

  • Apple’s stock split history:
    • 1987 – 2-for-1 split
    • 2000 – 2-for-1 split
    • 2005 – 2-for-1 split
    • 2014 – 7-for-1 split
    • 2020 – 4-for-1 split

Fun fact that if someone had purchased Apple stock before the first stock split in 1987 that they would have 224 shares for every one share purchased after the August 2020 split.  

Apple continues to split its stock to try and keep the stock affordable for investors. While fractional shares make this less of an issue today, it could still provide more interest from individual investors who want to own full shares.

Studies of Stock Split

David Ikenberry conducted two different studies of companies who did stock splits in 1996 and 2003 and found that over the 1,000 stocks he reviewed, that the split stocks outperformed the market by 8% the year following the split. He then further concluded that the stock outperformed the market for the next three years following the split by 12%.

Q2 2020 Earnings

Apple had an impressive quarter and year so far, even with COVID-19 impacts. Below is Apple’s estimates vs. actuals:

  • EPS: $2.58 vs. $2.04 est.
  • Revenue: $59.69 billion vs. $52.25 billion est.
  • iPhone revenue: $26.42 billion vs. $22.37 billion est.
  • Services revenue: $13.16 billion vs. $13.18 billion est.

While that is awesome, let’s break down Apple’s financials doing some quick common size financial statement analysis. Here are some highlights comparing the first nine months of 2020 vs. the first nine months of 2019:

  • Revenue – YOY increased by 7.0%
    • iPhone
      • YOY increased by 2.1%
      • The percent of Apple Revenue – Dropped 3%
    • MAC
      • YOY increased by 4.5%
      • The percent of Apple Revenue – Dropped 1%
    • IPad
      • YOY increased by 1.8%
      • The percent of Apple Revenue – no change
    • Wearables, Home, and Accessories
      • YOY increased by 26.6%
      • The percent of Apple Revenue – Increased 2%
    • Services
      • YOY increased by 16%
      • The percent of Apple Revenue – Increased 2%

The numbers are fantastic for Apple with revenue up in all categories, and it is positive that revenues are shifting towards services as that is a highly profitable area for Apple.

Is Apply a buy?

Doing some analysis of its Statements of operations shows that there has been an improvement in lowering the cost of sales as well as increasing the gross margin. Another interesting fact was that Apple increased its R&D expenditure, which for a tech company is very important to have the most advanced technology.

COVID-19 Impact

Apple is benefiting from the pandemic as many of the devices and services that it provides are useful during the quarantine. One of the problems Apple has been facing is inventory shortages, which was seen most on the Mac and IPad. These spikes were suspected to be a direct relation to the work from home trend during COVID-19. Apple estimates that it probably gained some market share in the computer space thanks to the pandemic.

Apple also estimated that approximately 75% of Apple’s retail stores are open worldwide after closing earlier this year, and these stores have seen an uptick in users switching from android to Apple. The launch of the iPhone SE, which is a cheaper but still powerful iPhone, seems to be the reason for stealing market share.

Is Apple A buy?
Apple vs Andriod Star Wars Syle!

Bull Case

  • iPhone SE is providing intense penetration into the android market and could build loyalty for repeat sales.
  • iPhone & iOS have extreme customer loyalty, which translates to very high customer retention.
  • Innovative company – Apply Pay, Apple TV, Apple Watch, AirPods are all newer products that are driving revenue. Apple continues to focus on building the next product, which will drive growth.
  • Stock Split – More interest from retail investors, which could have a broader investor base to drive stock price.

Bear Case

  • Apple continues to maintain a premium price strategy to support gross margin, but this could limit sales as it is unaffordable for some consumers
  • Apple software bugs. Part of what makes Apple products so popular and consumers so loyal is that they run fast and are very secure. If Apple had a bad software release, it could damage this reputation.
  • Behind in AI! Google and Amazon seem to be ahead of Apple when it comes to AI, and it is most notable for Apple when it comes to Siri’s voice recognition.
  • Apple is priced well above its intrinsic value

Conclusion

While Apple is trading at a premium, it is a cash cow of a company that continues to be innovative to drive growth while still providing a dividend. While no one can tell you how a stock will perform, Apple is not a bad company to be invested in. Over the long term, it has proved over and over that it will find ways to grow.

There is nothing that makes me believe that will change, and a prolonged COVID-19 crisis will benefit the company. If you are concerned about the antitrust, Apple is the least concerning of the big tech companies, with Amazon and Facebook probably have the most issues.

Full Disclosure – I have initiated a small position in the company and will add to it if the price drops.

This post is my opinion, which is strictly for information & educational purposes only. The post is not intended to provide any investment advice. Please seek your own duly licensed professional for investment advice as they will be able to consider your situation. Please read my Terms & Conditions Page for a full disclaimer.

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