Can Apple Keep Meeting Its High Expectations?

With shares of Apple Inc. (NASDAQ:AAPL) trading at around $403.79, is AAPL an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Apple has become an enigma to many investors. Let’s get to the basics right off the bat. Apple is a cash-rich company, which means there is always a lot of potential for growth. Apple also sports one of the strongest brand names in the world. That being the case, why has the stock performed poorly as of late?

Expectations are too high. Through incredible and historic innovations over the past decade, Apple changed the technology landscape. In a way, it changed the world. Are there new products set for launch? Yes. But let’s be honest. In regards to “groundbreaking”, they don’t hold a candle to what Apple has delivered in the past. However, that doesn’t mean the stock is a bad option here. Let’s delve a little deeper.

Apple just beat expectations on earnings and revenue. EPS came in at $10.09 versus an average expectation of $10.07. Revenue came in at $43.6 billion versus an average expectation of $42.3 billion. However, Apple lowered its revenue for forecast for the current quarter to between $33.5 billion and $35.5 billion. The original expectation was for $38.2 billion.

These types of numbers are important for most companies, and they’re important here, but what investors and analysts were really looking for was innovation. Instead, they received news that there will be some amazing new hardware and services introduced in the fall throughout 2014. That surely wasn’t enough to create excitement. Investors and analysts also received news that the share buyback program would be expanded to $60 billion from $10 billion, and that the dividend would be increased 15 percent. Once again, this would usually be seen as excellent news. However, in Apple’s case, it’s seen as an attempt to cover up a lack of innovation, which would be necessary to keep growth sustainable.

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Once again, on a fundamental basis, Apple is a thoroughbred. Below is a chart comparing basic fundamentals for Apple, Google Inc. (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT). These three companies differ in size. Apple has a market cap of $377.54 billion, Google has a market cap of $269.25 billion, and Microsoft has a market cap of $258.57 billion.

AAPL

GOOG

MSFT

Trailing   P/E

9.11

24.38

15.98

Forward P/E

8.20

15.18

9.99

Profit Margin

25.35%

20.92%

21.58%

ROE

38.41%

16.36%

22.58%

Operating Cash Flow

$56.73 Billion

$16.56 Billion

$30.61 Billion

Dividend Yield

2.70%

N/A

3.00%

Short Position

2.10%

1.80%

1.40%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Apple couldn’t possibly be any better. Debt management is superb.

Debt-To-Equity

Cash

Long-Term Debt

AAPL

0.00

$39.82 Billion

$0

GOOG

0.10

$50.10 Billion

$7.38 Billion

MSFT

0.19

$74.48 Billion

$14.76 Billion

 

T = Technicals on the Stock Chart Are Weak   

Apple experienced a great run over a three-year time frame, but the past year has left a lot to be desired. The stock has broken through support, and it seems to now be trapped in the vicious cycle.

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1 Month

Year-To-Date

1 Year

3 Year

AAPL

-12.90%

-23.96%

-28.59%

50.75%

GOOG

0.58%

15.22%

36.38%

49.55%

MSFT

9.73%

17.02%

-0.59%

8.28%

 

At $403.79, Apple is trading below all its averages.

50-Day   SMA

437.86

100-Day   SMA

475.00

200-Day   SMA

550.42

 

E = Earnings Have Been Impressive             

Revenue and earnings have consistently improved on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

37.49

42.90

65.22

108.25

156.51

Diluted   EPS ($)

6.78

9.08

15.15

27.68

44.15

 

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings. However, revenue and earnings have declined on a sequential basis.

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   billions

39.19

35.02

35.97

54.51

43.60

Diluted   EPS ($)

12.30

9.32

8.66

13.81

10.09

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

In this difficult economic environment, only companies staying ahead of the curve will have a chance to thrive. The technology sector is all about innovation, and that’s the case now more than at any point in the past simply because there is so much competition. Companies that fail to innovate will be forced to lower prices for current products and services.

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Conclusion

Apple’s numbers look great, but what’s exciting? What’s the new product that’s going to drive growth and get investors excited again? What’s going to make Apple’s numbers look even better? Remember, growth is like crack to investors. If investors (and traders) can’t get their fix via Apple, then they will get their fix somewhere else.

The bottom line is that Apple is one of the most financially sound companies on the planet. The problem is that investors (or people in general) always want more. Right now, whether Apple can deliver more is up for debate. Therefore, Apple is a WAIT AND SEE.

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