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Apple Inc. (AAPL) Trade Card™

Apple Inc. (AAPL)
151.89 -1.5 (-0.98%)
Sector: Information Technology
Published by Capital Market Laboratories on 2017-09-24

What does this rating mean?
STOCK RETURNS
3Mo: +3.8%   |   6Mo: +7.8%  |   12Mo: +34.8%

TECHNICAL RATING
10DMA: $157.9  |  50DMA: $157.0  |  200DMA: $142.3
What does this rating mean?

Fundamentals     

➜ AAPL generates $1.3109 in revenue for every $1 in expense, which is quite high and above the sector average of $1.04.

➜ AAPL generates $1.9 million in revenue per employee which is above the sector average of $400,000.

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The iPhone is nothing more than a luxury bauble that will appeal to a few gadget freaks. In terms of its impact on the industry, the iPhone is less relevant.
- Matthew Lynn Bloomberg, 2007


That exact ridiculous sentiment is still, today, echoed in today's media to the point of total absurdity.

Apple is humiliating Wall Street's analysts and the main stream media because both lack the lexicon to understand what's actually happening in technology, and that goes for Google, Facebook, Amazon, Microsoft and dozens of technology and biotechnology companies. But this reality is especially apparent when it comes to Apple and the firm is making a fool out of many analysts and journalists.

Wall St. has been hyper focused on iPhone sales, taking bits and pieces of information from suppliers, retailers and Apple itself to try to piece together a cogent estimate. Given that more than 60% of Apple's revenue comes from iPhone, that makes sense, but it also totally misses what Apple is doing for the future.

Here's a fact for you that you won't hear elsewhere. Apple's spending in research and development (R&D) is up 90% in the last two-years. Hello?



Apple is investing in a lot of innovation which I will discuss below, but one massive innovation has gone quietly unnoticed by main stream media. Long ago the company created its own chips 'A-chips' which have been a remarkable success. Here's a snippet from The Motley Fool:

Apple has invested very heavily in quietly poaching incredible chip engineers over the past few years, and its chips are even known to catch the whole industry off guard from time to time.

A-chips have completely taken off over the past few generations, not only in terms of sheer performance, but also more importantly in terms of sophistication and customization.For instance, A-chips now have secure enclaves embedded directly into them, which is where Touch ID data and other sensitive data is stored.
Source: The Motley Fool.


Here's a video analysis of Apple and why Wall Street simply can't get it right.



We write one story a day to uncover new opportunities and break news. Come on in: Get Our (Free) News Alerts Once a Day.

Friends, the iPhone is not a phone. It's the embodiment of a new language, a new vocabulary that Apple has brought to the social vernacular. iPhone is the control center, the digital extension of ourselves to grow the largest company in the world, with the largest earnings ever into an even larger colossus. It's not a phone, it's a 5oz., 2 billion transistor, networked, digital tool chest. And the truth of the matter is, Wall Street simply doesn't have the vocabulary to understand the new language Tim Cook and Apple are speaking.

When a person holds their iPhone in their hands, they aren't holding an upgraded Ericsson flip phone from 2003. They're holding their wallets. They're holding their keys. They're holding their TV remote. More iPhones means more of Apple in the middle of everything we do. Here's an image of the iPhone as a control center.



Further, Wall St. has been equally myopically focused on China since fully 50% of all of Apple's revenue growth and 61% of the increase in operating income came from China in the company's current fiscal year. In the most recent earnings report, Apple saw 99% growth year-over-year in China.

What's Really Going On
When Steve Jobs passed away the entire world was left with an emptiness, but Apple shareholders and analysts in particular were left to wonder what was next. We have been waiting for Tim Cook to put his stamp on Apple's corporate (outward) culture and we just got it. Apple has become combative, competitive, aggressive, savvy and attacking massive growth in all areas with reckless abandon.

If you're looking to the colossus that is Apple and why it is potentially at its most innovative stage ever... Here. We. Go.

Apple Will Diversify
In the very near future (but not this quarter), Apple will be diversifying its revenue stream. We're talking about Apple Watch, Apple Pay, Apple Music, Apple TV, iOS9 and the Apple Car. I don't think there's a single product mentioned above that hasn't already been doomed to failure by the main stream media. But, it's long been a media hobby to question Apple. It's also long been a good way to be dead wrong. Let's remember these product reviews:


Source: The Motley Fool


Here we go, step-by-step.

Don't Worry About China
Fully 50% of all of Apple's revenue growth and 61% of the increase in operating income came from China in the company's current fiscal year. There is a lot of angst surrounding China's stock market and economy and how it will impact sales of Apple's iPhones. Here are the reasons not to worry in the long-term and to allow for short-term gyrations to be just that, short-term.

1. All three China wireless providers reported their August subscriber numbers. China Mobile had its largest 4G user growth ever following its previous third best month in July. China Telecom is maintaining a fairly steady pace and China Unicom has seen three months of very strong combined 3G and 4G subscriber growth (Source: Forbes written by Chuck Jones.

2. China's middle class stood at 47 million people in 2010. By 2020, that number is expected to hit 472 million. Yes, that's right, nearly half a billion more people in the middle class. Here's that image.



Don't Worry About iPhone
iPhone sales broke every record conceivable last year, and for the calendar fourth quarter of 2014, Apple broke an all-time record for the largest profit ever by any company. While people were awed by the results, Wall St. couldn't help itself to then turn to the comparisons for this year versus last and how inconceivable it would be for the firm to repeat its success.

Guess what?... Apple is going to break that record again. Every quarter this year Apple has sold more iPhones than it did last year, and by rather staggering amounts. Last quarter Apple sold over 20% more iPhones than the same quarter last year. As Bastian said in the NeverEnding Story, "But that's impossible!"

Well, it's impossible if you listen to sources that don't understand technology beyond headlines and click bait. It's impossible if you believe Apple is a "phone company." Apple's iPhone is a home, it's not a phone (I know, I just created an E.T. pun there). Don't listen to the noise.

And by the way... Rumors have it that Apple will be releasing a 4 inch iPhone, with names varying from iPhone 6c, iPhone 7c to iPhone mini or iPhone Air. But all reports point to it being in a metal casing, not a cheaper plastic version of the device. Research suggests there is still substantial demand for a smaller iPhone and all the other handset makers have moved away from smaller phones. Apple is winning. Again.



Estimates for 2016 put this new, massively upgraded small iPhone at 20 million - 30 million units.

More... Sure? Apple reported a record number of Android converts last quarter. "Of the iPhones sold to existing smartphone owners, 30% had previously owned a handset powered by Alphabet's (Google) Android operating system" (Source: The Motely Fool).

Further, The Wall St. Journal's Miriam Gottfried reported on Sep. 10th, 2015 that Apple will begin financing iPhone sales directly to consumers with no carrier-affiliation requirement. All an iPhone user would have to do to switch carriers is get a new SIM card (Source: WSJ). This could mean more frequent upgrades for iPhone customers.

Yes, Apple is going to take over control of iPhone sales itself, including financing, and whether that affects this quarter or next is nothing but noise -- this is a huge move, and means more money to Apple.

Apple Music
We'll start small and get gigantic. On October 20th, 2015 Tim Cook revealed the early results of Apple Music. The service now has 6.5 million paid subscribers with another 8.5 million users who are still in their three-month free trial period. As a comparison, Spotify has 20 million subscribers (Source: Fortune).

Remember, when Apple enters an industry that exists it totally blows it up. Before Apple entered the smart phone realm, in the full year of 2006, worldwide smart phone deliveries totalled 64 million units (Source: http://www.canalys.com/). By 2014, 1.2 billion smart phones were sold (a 20-fold increase in total market size) (Source: TechCrunch). Further, Apple sold 74.6 million iPhones in one quarter last holiday season, larger than the entire worldwide smartphone industry in 2006.

Apple isn't looking for 20 million Music subscribers, it's looking for some massive multiplier and we have every reason to believe it will get it.

Apple Pay
Let's go form tiny to absurdly large. The mobile payment segment of technology will be enormous. It already stands at an expected $8.7 billion for 2015 and is expected to grow to $27 billion by 2016.

"Average spending per user is forecast to surge to $1,231 [from $376 in 2015] in 2017, when an estimated 50 million shoppers — 20% of all mobile phone users — will tap or wave their mobile phones on payment systems installed at the point-of-sale."
Source: IBD


The largest banks are not only aware, but in bold support of the shift to mobile payment. To the extent that a mobile platform like Apple's increases payment volumes, the banks are ecstatic. Almost every major bank in the world is now an explicit partner to Apple Pay and most have happily agreed to cut transaction costs. In fact, here's a snippet from Bank of America:

"[Bank of America is] convinced of growth that measures fully 200 fold in just seven years. By the year 2022, the mobile payments growth will reach a combined total of around $3 trillion."
Source: Investor Place


This is not a small adjunct, this is an entire business line. Apple Pay works with the iPhone, and yeah, there are a few iPhones out there.

Apple TV
Tim Cook also just reported that Apple will begin taking orders for the new Apple TV on October 26 and that it will start shipping the product later that week (Source: Fortune).

A review of Apple TV from WSJ has such a good title, that I'll just leave right here: Apple TV Review: A Giant iPhone for Your Living Room. And a quote:

"Think of Apple’s fourth-generation box as a way to turn your TV into a giant iPhone."


Barron's reported on Global Equities Research's Trip Chowdhry when he said that the Apple TV platform "provides strong indication" that Apple TV will come with its own software development kit and its own app store, i.e. its own Apple TV ecosystem. And there's the problem for Netflix, he argues, since in this ecosystem Netflix would be just another app, or a "second-class citizen." (Source: New Apple TV Platform Is Bad News For Netflix: Global Equities).

iOS9
Before we get into the Apple Car and Apple Watch, let's get a little techy for the purpose of getting a lot smarter.

Tim Cook just made a stunning move that is a violent attack on the entire mobile advertising world and especially an attack on Google. This may be the biggest single change to Apple's vision since the introduction of the iPod over a decade ago. Google's mobile advertising is instantaneously in dire straits and further, Google search is now under attack. Here's a chart of Apple's revenue (in the blue bars) and net income (in the orange line) for the last 15+ years. That recent spike is from the iPhone 6 rage.



Here's what just happened:
Apple released iOS9 and in that operating system users can implement ad-blocking apps that prevent mobile advertisements from appearing in the Safari browser. We can say instantaneously that 20% of Google's advertising business is now in dire straits. Note that Facebook ads are driven inside the Facebook app, so this is a non-issue for them.

Ah, but there's more... Apple didn't just set out to kill Google's mobile revenue, it decided to go ahead and take it for itself. Check this out from Benzinga:

This week Apple unveiled the Apple News app [which] does allow advertising, and publishers who sell their own ad space are able to keep 100 percent of their revenue. Apple takes a 30 percent cut of the ad space it sells on its own. Apple News has already made an impression on several big publishers like New York Magazine and The Washington Post, which are both expected to announce their distribution plans on the app on Thursday.
Source: Benzinga Pro


And yet one more piece. With websites and ads now living inside the iOS9 ecosystem, search will be done through the iOS search. Yes, Apple has now entered search as well.

Apple has instantly entered the advertising the world. A quarter ago, it didn't even have an advertising arm.

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Apple Car
September 21st the Wall St. Journal reported: "Apple Inc. is accelerating efforts to build an electric car, designating it internally as a "committed project" and setting a target ship date for 2019, according to people familiar with the matter" (Source: WSJ).

The self-driving car market will take a few years to materialize, but if you're looking for another "iPhone" size product, this is it, possibly several-fold over.

Apple Watch
Apple has been pretty hush-hush about the Watch. In fact, Tim Cook openly said "We are not announcing the numbers," during a session at the Wall Street Journal Digital Live Conference (Source: International Business Times).

Estimates range from 2.5 million to 6 million (which is a wild range), but let us keep two things in mind. First, this from Mashable:

"It took Apple 74 days to sell one million iPhones. It took 28 days to sell one million iPads."
Source: Mashable


Expectations are that Apple sold one million watches in its first day. Keep in mind that long list of reviews I presented earlier. The iPhone and iPad were considered by many to be flops, especially after the sales numbers came out. Remember that version one of Apple products are never the bet, it's the next versions that tend to show rip roaring growth.

Apple Watch is one of the few products that could have a substantial impact on Apple revenue and earnings this year and Wall St. has yet again, discounted it to essentially zero. Here's a headline for you. "Wall St. was wrong about the Apple Watch." That will be posted in about a year, and the publisher will be every major news service in the world.

Conclusion
Wall St. wants you focused on the immediate-term. It wants you focused on this quarter, right now, with hyper focus and no vision. It does this because it does not have the vocabulary to understand technology, nor does main stream media. The iPhone is not a phone, it's Apple's living and breathing facility for the rest of its products.

For all those concerned about Apple's future heed the advice we shared two months ago, and don't focus on the day-to-day gyrations:


Doubting Apple is OK, but doubting Apple because of obvious statements like "it's a phone company" or "Apple Watch is garbage" is low brow and misses everything. Friends, this is chess not checkers. Apple is ahead of us (all of us), not behind us.
Source: Apple and Google Are at War to Own the Future.


Technicals   |   Support: 148.73   |   Resistance: 161.5   

Golden Cross Alert: The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

AAPL has a two bull (low rated) technical rating because it's trading below both its 10-day (short-term) and its 50-day (medium-term) moving averages. We do note that the stock is trading above the long-term 200-day moving average.


Earnings Estimates
Earnings Date
2017-10-24
EPS
$1.86
Revenue (Mean)
$
Revenue (Median)
$
Last Quarter (Actual)
$45.41 billion


Fundamentals Rating Summary


Metric Current 1yr Ago 2yr Ago Direction
Revenue (TTM US$ Millions)Rising 223,507 220,288 224,337 Rising

Operating Margin (QTR)Falling 1.31 1.31 1.40 Falling

Net Income (TTM US$ Millions)Falling 46,651 47,797 50,737 Falling

Levered Free Cash Flow (TTM US$ Millions)Falling 44,287 45,436 51,659 Falling

Research and Development (US$ Millions)
Rising
2,937 2,560 2,034
Rising

Research and Development Expense/RevenueRising 0.065 0.060 0.041 Rising




Stock Returns and Chart


AAPL is up +3.8% over the last three months and up +7.8% over the last six months. The stock price is up +34.8% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).

Note: You can change time horizons by clicking the or buttons near the bottom of the chart. You can examine a one minute day trading chart by clicking the at the top left corner of the chart.

Click here to interact with this stock chart


Now let's examine the visualizations of the critical financial measures.


Enter Symbol


METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 223,507220,288224,337Rising

Revenue over the trailing twelve months (TTM) for AAPL is rising. For the most recent (annual) period the company reported $223.51 billion from $220.29 billion a year ago, or a 1.5% change. The two-year change in revenue (TTM) is $-830 million (a -0.4% change).

What do all these numbers mean?
AAPL's fundamental rating was affected these results:
1. The one-year change was positive (but no extra points were given for the a large percentage increase).
2. The two-year change was negative, so some points were lost.

Let's look at Revenue (TTM US$ Millions) in the chart below.


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Enter Symbol



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Operating Revenues/Operating Expense 1.311.311.40Falling

Operating Revenues/Operating Expense
Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter AAPL showed a ratio of 1.31.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.31. In the last year we can see operating margins are decreasing but are greater than 1.0 for the most recent period.

AAPL's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was negative (lowers the rating a little bit).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.


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Revenue per Employee


Before we turn to earnings and cash flow analysis, let's look at a different view of revenue on a scatter plot with peers for some perspective.

On the x-axis we equal space the companies and on the y-axis we plot revenue per employee (TTM) in $millions. For this chart, the upper right hand corner is "best" and the lower left hand corner is "worst." The company with the top revenue per employee is marked in green.

AAPL 's value is $1.9 million million per employee (find it on the y-axis).



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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Net Income (TTM US$ Millions) 46,65147,79750,737Falling

Net Income (after tax profit) over the trailing twelve months (TTM) for AAPL is falling. For the most recent trailing-twelve-months (TTM) the company reported net income of $46,651 (million). That's a decrease in the most recent year from $47,797 (million) or a -2.40% change and a decrease from two-years ago of -8.05%.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the falling bars from a year ago (four quarters ago).


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Levered Free Cash Flow (TTM US$ Millions) 44,28745,43651,659Falling

Levered Free Cash Flow (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For AAPL the metric is falling (it was $45,436 million last year). For the most recent trailing-twelve-months the company reported Levered Free Cash Flow (TTM US$ Millions) of $44,287 million. That's a decrease in the most recent year from $45,436 million or a -2.53% drop.

This cash metric is down $-7,372 million from $51,659 million two-years ago.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time. Note the falling bars from a year ago (four quarters ago).


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Research and Development (US$ Millions) 2,9372,5602,034
Rising

Research and Development (US$ Millions) in the most recent quarter for AAPL was $2,937 million. R&D is rising (14.73%) from last year's value of $2,560 million. Further, we can see that R&D today relative to two-years ago is increasing (44.40%) from $2,034 million.

R&D per dollar of revenue for the latest quarter is $0.065. Last year this measure was $0.060 (it's falling).

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars. Note the rising bars from one-year ago.


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