One of the most commonly reported financial metrics is a company's price relative to its all-time high. Successful companies find themselves setting this record on a regular basis, making investors wonder if they should buy at the high. At the time of this writing, Apple (AAPL +0.00%) is one of those companies, with shares trading around $180, just shy of its record $182. So should investors buy at the high? Let's take a closer look.
Image source: Getty Images.
Astounding growth at a massive scale
With a market cap approaching $3 trillion, Apple is still posting results that defy the long-held belief that growth must slow as companies get to be the size of Apple. In the first three quarters of 2021, Apple reported year-over-year revenue growth of 54%, 36%, and 29%, respectively. To put that in absolute dollars, over the first nine months of the year, Apple's revenue was over $282 billion.
The revenue came from every part of Apple's business as well. In Q3, every sales category had year-over-year growth above 20% with iPhone leading the way at 39%. Even better for the bottom line was the growth in the services category, which consists predominantly of high-margin subscription revenues. This category saw 27% growth, which was up significantly from the year prior when growth was 16%. These revenues also translate to improving profitability. In the last reported quarter, net income grew 62% and earnings per share increased from $0.73 to $1.24.
This profitability is making its way to shareholders as well. In the last reported quarter, Apple paid $3.6 billion in dividends and repurchased $20 billion in Apple stock.
Cash-generating machine
AAPL Free Cash Flow data by YCharts
As noted in the chart above, Apple has steadily increased its free cash flow over the past three years. Increasing revenues combined with improving margins have made Apple more and more profitable over time. For example, in 2019 Apple's gross margin percentage was 38% and operating expenses were 13% of overall income. In 2021 those metrics improved to 42% and 12% respectively. In the most recent quarter, the company had $191 billion in cash and marketable securities on its balance sheet. This cash generation gives Apple enormous freedom to invest in its existing products and explore new opportunities.
While Apple is notoriously tight-lipped on its future plans, there is no shortage of media reports suggesting the company is working on products in the augmented reality and automotive space. Time will tell if these rumors turn out to be true, but Apple does have a history of creating new product categories, and it clearly has the financial resources to pursue these new opportunities.
High price, but not expensive
Considering its revenue growth and cash generation, Apple is not especially expensive. At the time of this writing, Apple has a price-to-earnings (P/E) ratio of 32. When compared to a competitor, Alphabet (GOOG 0.21%) (NASDAQ: GOOGL), the valuation case gets stronger. While Alphabet has a slightly lower P/E ratio of 27, the slight premium in valuation for Apple comes with better revenue growth and free cash flow margins.
It's easy to see Apple's share price near its all-time high and wonder if now is the time to buy. However, a closer look reveals a cash-generating, revenue-growing powerhouse that's inexpensive, even relative to what its competition offers. For investors who believe Apple will continue to grow, innovate, and return value to shareholders, its current price should not be the reason to pass on this investment.
