Apple 4Q20 Earnings Analysis


Catalyst:


Normally, Apple would launch a new iPhone every September but with this disruption in the supply chain, the latest iPhones (iPhone 12, iPhone 12 Pro, iPhone 12 Mini, iPhone 12 Pro Max) were only launched on the 13th of October. Therefore, there was no new iPhone for the FY20 (apart from the iPhone SE). This is something that was already known by Wall Street. But the current uncertainties regarding rising cases of Covid-19 in the US and Europe and the US Presidential Elections made the earnings look worse than they are. The stock price of Apple fell by 5% the day following the earnings. However, over the long-term Apple is still a money producing machine, consistently generating over $60 billion in free cash flow a year. The new iPhones are the first 5G iPhones and many users would want to switch to the new network.


Financial Analysis:


In the fourth quarter of 2020, Apple reported $64 billion in revenues, which is about the same as last year for the same quarter. The net income of the company was $12.6 billion for the last quarter compared to $13.6 billion for 2019. Since Apple has been consistently buying back shares, EPS only fell from $0.76 to $0.74.


$26.4 billion of revenues came from iPhones, that is, 41% of the total. iPhone sales fell by 21%. Sales in all other categories increased. As for geographic segments, sales in Greater China are down by 28%. iPhones are very popular in China and without a new iPhone, the total sales did not fare well. Besides, as we can see from the chart below (Source: Seeking Alpha - Trading Places Research), Apple did not recover from the US-China Trade War. Apple was able to generate record sales for the September quarter in the following countries: The U.S., Canada, Brazil, Germany, France, Italy, Spain, Turkey, Russia, India, Korea, Thailand, Malaysia and Vietnam.


Apple is more than just iPhones. For FY 20, only 50% of sales came from iPhone, a record low since the launch of this flagship product. This figure in itself doesn’t imply diversification since they did not launch new iPhones but its sales in all other segments increased for the year, including a 25% increase in wearables and 16% increase in services. Paid subscriptions grew more than 35 million in the last quarter, and now Apple has 585 million paid subscriptions across all the services on their platform, up 135 million from just a year ago.


Apple continues to show a very strong balance sheet with now $191 billion in cash and cash equivalents and current liabilities of $105 billion with $98 billion in long-term debt. Apple can, therefore, keep buying back shares as they have been doing since 2013.


Valuation:



The Price to FCF ratio of Apple in 2016 was to 8. Right now, it is at 27, an increase of about 200%. The market cap of Apple also increased by about 200% as the FCF did not change much at around $60-70 billion a year. The stock price of Apple, however, gained over 300% as the company bought back 25% of shares. Buying back shares was a great idea in 2016 but at current valuations, it is not. Unfortunately, for Apple, this is the only way for them to continue growing the stock price. Apple has become too big to keep growing organically at the same rate as other tech stocks.


Conclusion:

Apple is a good stock to hold long-term but at current valuations, I will not recommend to buy more shares. Besides, the DOJ Antitrust probes on tech stocks and its correlation with the market (which is itself expensive) as the largest component of the S&P 500 is a stock make Apple susceptible to a market selloff. Apple is a Hold.





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