Apple (AAPL -1.22%) has been one of the few major tech stocks that have held up during the Nasdaq Composite bear market. Yet even Apple is now down over 20% from its all-time high as its share price dipped below $140 on Thursday for the first time since June 2021.
While it's true that Apple customers may be less inclined to upgrade their devices to the latest models during a recession, there's no denying that Apple's consistent growth and profitability should continue for decades to come. Despite being one of the better-performing tech stocks, up over sixfold in the last 10 years, here's why Apple stock is still surprisingly cheap. And why now may finally be a good time to take a bite out of Apple stock.
Image source: Getty Images.
Apple is driving profitability
Apple continues to grow its integrated suite of consumer products while demonstrating pricing power and unrivaled customer loyalty. Its growth in aftermarket services has kept customers engaged and spending money even if they aren't buying Apple's latest tech. That growth has led to improved profitability even as the company's revenue and earnings are magnitudes larger today than just five years ago.
Investors tend to gravitate toward tech companies, especially software companies because they have high operating margins. An operating margin tells an investor how much operating profit is being generated per dollar in sales. Apple's trailing-12-month (TTM) operating margin is 30.9%, meaning it is pocketing around $0.31 on the dollar after factoring in operating expenses, sales, general, and administrative expenses, depreciation and amortization, and other expenses.
AAPL Operating Margin (TTM) data by YCharts
For context, a much more software-heavy company like Microsoft has an operating margin of 42.6% whereas a high-volume, low-margin business such as Costco Wholesale has an operating margin of just 3.5%.
As companies grow, it is sometimes challenging to retain a high operating margin because larger companies have more overhead, employees, and moving parts to worry about. Not for Apple. Its operating margin is at an eight-year high. And having a high operating margin is one of the reasons why Apple generates so much profit despite having lower sales than, say, a company like Amazon.
The power of earnings growth and share repurchases
Seldom can a stock produce incredibly outsized returns and still not be overvalued. But Apple knows how to make money. Plain and simple. And what cash it doesn't use to reinvest in its business usually gets put to work buying back stock.
There are many excellent Apple charts. But my personal favorite is the 10-year chart showing shares outstanding and Apple's net income.
AAPL Shares Outstanding data by YCharts
Apple's TTM net income is up 154% over the last 10 years -- exceeding $100 billion for the first time. No other U.S. company has over $100 billion in TTM net income except for Apple. However, what's also impressive is that Apple's outstanding share count is down 38% over the last 10 years as Apple has continually repurchased its own stock to increase its earnings per share. And that impact on Apple's valuation is meaningful.
Consider that if Apple hadn't bought back any stock over the last 10 years, its TTM earnings per share would be $3.89. But because there are far fewer outstanding shares, Apple's present-day TTM earnings per share is $6.25 -- giving it a price-to-earnings ratio of a reasonable 22.8. If it hadn't repurchased any shares over the last 10 years, its P/E today would be 36.7 -- which is not nearly as attractive and arguably would make Apple stock overpriced and not worth buying.
Put another way, Apple is making so much profit and buying back so much of its stock that its valuation is still reasonable even though the stock is up an astounding 600% over the last 10 years.
An attractive blend of risk and potential reward
Apple falls into the moderate to low risk with moderate reward category. It's unlikely to outperform smaller companies with warp-speed growth. But it is also unlikely to suffer as large of drawdowns during a sell-off. That resilience was put on display during the spring 2020 pandemic-induced market crash. And it's been put on display throughout 2021 and 2022 as Apple stock continues to outperform the Nasdaq Composite year to date, something that can't be said for other large tech companies like Amazon, Meta Platforms, Adobe, Salesforce, and Nvidia.
For investors who are looking for a company they can count on that isn't overpriced, now looks like a good time to take a bite out of Apple stock.
