Apple Inc

Fundamentals

##Symbol##AAPL

I've posted number of articles on the mega cap technology sector. You can read those here:

Why Now May Be Time to Buy Alibaba (BABA)
Why Google (GOOGL) Is Doing a Lot, and May Acquire Twitter
Why Amazon (AMZN) Is Growing More Powerful and More Dangerous
Why Intel (INTC) May be a Massive Growth Story

And several others if you peruse the archive (above). But, let's be honest, when we talk about technology, it's Apple, and then everybody else. And by everybody else, I literally mean just that. Of all technology companies in North America, Apple has the single best fundamentals. Here's a snippet from the star scan.


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Apple stock has hit a wall of late, down over the last three-months, though it is substantially outperforming the S&P 500 over the last year. But there's no doubt about it, sentiment has gotten a little negative. Apple Watch sales after the crazy release have plummeted (or so the news agencies are reporting). The huge up swing in revenue and earnings is being attributed not to any sort of great re-invention of the iPhone, but rather simply the pent-up demand for a bigger screen. While that demand was certainly larger than anyone anticipated, it will be satisfied (or has been satisfied) and that run will end. Keep in mind, Apple actually saw earnings decline between iPhone 4 and iPhone 6.

Bears will point to iPhone 5 and 5s sales trajectory and caution of a major slowdown. Bulls will point to Apple supplier and component makers which show still strong sales for the iPhone 6 and various upgrades.

More bearish sentiment focuses on the reality that Apple is just so huge, it would take a monumental success to even move the needle. Further, even Apple Music has received poor reviews and the company cannot diversify away from the iPhone. Bulls will argue that Apple Pay and Apple Music could make up as much as 20% of Apple's revenue per a note from Morgan Stanley (that's a huge number).

Bears will argue the Watch is a dud. Bulls will argue that Apple has a history of less than impressive launches with version one of products including the holy grail known as the iPhone. Bears will argue that Apple's P/E of ~16 is high for a hardware maker. Bulls will argue that Apple's P/E is well below the S&P 500 P/E of over 20 and that Apple is much more than a hardware maker -- it's a technology market maker and creator.

Measures of how large Apple’s market cap has grown are the flavor of the month on social media. Apple is larger than the GDP of over 100 countries. Apple’s market cap is larger than TARP. Apple’s market cap is 40% larger than the US defense budget. In fact, here's a wonderful chart that plots Net Income (TTM $millions) on the y-axis and Market Cap ($millions) on the x-axis for the largest companies in North America in all sectors. We can see how extraordinary AAPL's size has become.


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But the reality of how AAPL did it, is even more important. Apple had smaller earnings than both Microsoft and Google in 2007, then the iPhone released (June 2007) and Apple's earnings are now several fold the size of both of those companies. Since 2009, Apple has seen its market cap rise from ~$75 billion to ~$750 billion. No company has ever done that in any period of time.

It's not time to worry about Apple. It's not even close to time to worry about Apple. Apple creates want better than any firm ever, and then sells to that want better than any firm ever. It has created as strong a brand loyalty as any firm ever, and through the generations of products has an immense base of customers that continues to grow at double digits even at already staggeringly high numbers. 48,000 apps are downloaded by Apple users a minute. While the risk now is scale, don't be fooled by it. The Apple Watch, Apple Pay, the "Apple Car" and Apple TV are easily needle movers.

Let’s take a step back and look at revenue per employee for all of mega cap technology (market cap greater than $50B), below.


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Said simply, AAPL generates more revenue per employee than any mega cap technology company in North America, and it's not even close.

Technicals   |   Support: 124.53   |   Resistance: 128.11   

Swing Death Cross Alert: The short-term 10 day MA is now below 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.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.

EARNINGS ESTIMATES
Earnings Date	EPS	Revenue (Mean)	Revenue (Median)	Last Quarter (Actual)
2015-07-21	$1.78	$51,181.1 M	$50,875.0 M	$58,010.0 M	Provided by ZACKS

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Revenue (TTM US$ Millions)	212,164	176,035	169,104
Operating Margin (QTR)	1.460	1.42	1.40	RISING
Net Income (TTM US$ Millions)	47,808	37,707	39,672
Levered Free Cash Flow (TTM US$ Millions)	46,312	36,159	30,018	RISING
Research and Development (US$ Millions)	1,918	1,422	1,119
Research and Development Expense/Revenue	0.033	0.031	0.026	RISING

Stock Returns and Chart

AAPL is down -1.3% over the last three months and up +18.3% over the last six months. The stock price is up +33.7% 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).
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Now let's examine the visualizations of the critical financial measures.

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Revenue (TTM US$ Millions)	212,164	176,035	169,104

Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (in this case eight consecutive quarters).

Note that AAPL is growing revenue by 20.52% year-over-year. Any number over 20% has an added impact on the fundamental (star) rating. I also remind of the note prior which is true. A large part of Apple's revenue growth has been from pent-up demand from the larger iPhone. Don't expect 20% year-over-year growth in revenue. That's basically impossible for an extended period of time.

What do all these numbers mean?
AAPL's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

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


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METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Net Income (TTM US$ Millions)	47,808	37,707	39,672

Net Income (after tax profit) over the trailing twelve months (TTM) for AAPL is rising. For the most recent trailing-twelve-months (TTM) the company reported net income of $47.8 billion, which is the largest reported earnings ever. That's a 27% year-over-year change.

Net Income (TTM) (aka annual earnings) is trending higher meaning that annual earnings have increased for least five consecutive quarters. Again, that massive growth number simply must slow down, but that doesn't mean it's going to end.

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 rising 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)	46,312	36,159	30,018	RISING

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 up 28% year-over-year to a border line ridiculous $46.3 billion.

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



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METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Research and Development (US$ Millions)	1,918	1,422	1,119

Research and Development (US$ Millions) is trending higher meaning that for at least five consecutive quarters, it's been rising (in this case seven quarters). And, while Apple has seen R&D rise 35% year-over-year and 71% over two-years, the company still spends less money on R&D per dollar of operating expense than all but one mega tech firm.


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Now look at the companies in that chart and name the most recognized products. I'd start with iPhone, iPad and Apple Watch, each of which belongs to AAPL. One could argue that AAPL isn’t underspending on R&D it's just doing it better than everyone else.

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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Summary
Apple's huge growth in the last year has come less from revolution and more from evolution. The bearish thesis sits squarely on the shoulders of that reality, along with a true statement that Apple is so big, and that iPhone is so much of that size, that it's almost impossible for any product to move the needle in a meaningful way. The trajectory of iPhone 5 sales points to the inevitable drop in iPhone 6 sales. Throw in a slowing China, which for the first time ever was the largest sales region, and you get yourself a fair and reasonable argument.

The bullish thesis goes something like this:

AAPL has the largest revenue in all of technology, the largest earnings in the world, generates more revenue per employee than any mega technology firm and shows the largest earnings growth of the three company peer group. While the firm has easily the most recognizable brands, it spends less in R&D (scaled) than all but one of its mega cap peers. The company has a price to sales ratio that for a hardware maker is about "fair" (or even high) but for a technology market maker is low.

No other company in the world is better positioned to introduce new technology with essentially immediate demand, and no other company has changed technology as dramatically as Apple has in the recent past. The company has increased R&D spending by 70% in the last two-years, and the idea that the spending will bear no fruit is understandable, but it's simply never been true before. Version one of products tend to have tepid acceptance, but new products ultimately are smash (smash) hits. Apple Watch could be another such smash hit. If this is your thesis, then even if Apple stock moves sideways (or down) in the near-term, it could be time to believe in Apple again.