Apple shares: Buy on the high side?

One of the most commonly reported financial metrics is a company’s price relative to its record high. Successful companies find themselves setting this record on a regular basis, causing investors to wonder if they should buy to the highest. In writing, Apple (NASDAQ: AAPL) is one of those companies, with stocks trading around $ 180, just shy of the record $ 182. So should investors buy to the highest? Let’s take a closer look.

Person on the couch using cell phone.

Image Source: Getty Images.

Stunning growth on a massive scale

With a market value approaching $ 3 trillion, Apple is still posting results that defy the long-standing belief that growth will slow as companies grow to the size of Apple. In the first three quarters of 2021, Apple reported year-on-year revenue growth of 54%, 36% and 29%, respectively. To put it in absolute dollars, Apple’s revenue over the first nine months of the year was over $ 282 billion.

The revenue also came from all parts of Apple’s business. In Q3, each sales category had year-over-year growth of over 20% with the iPhone leading by 39%. Even better for the bottom line was the growth in the service category, which predominantly consists of high-margin subscription revenues. This category experienced a growth of 27%, which was a significant increase compared to the previous year, when the growth was 16%. These revenues are also translated to improve profitability. In the last reported quarter, net income grew 62%, and earnings per. stock rose from $ 0.73 to $ 1.24.

This profitability is also on the way to shareholders. In the most recently reported quarter, Apple paid $ 3.6 billion in dividends and repurchased $ 20 billion in Apple shares.

Cash flow generating machine

Chart showing large increase in Apple's free cash flow since 2019.

AAPL free cash flow data of YCharts

As noted in the chart above, Apple has steadily increased its free cash flow over the past three years. Rising revenues combined with improved margins have made Apple more and more profitable over time. For example, Apple’s gross margin in 2019 was 38%, and operating expenses were 13% of total revenue. In 2021, these measurements were improved to 42% and 12%, respectively. In the most recent quarter, the company had $ 191 billion in cash and marketable securities on the balance sheet. This cash generation gives Apple tremendous freedom to invest in its existing products and explore new opportunities.

While Apple is notoriously wordy about its future plans, there is no shortage of media reports suggesting the company is working on products in augmented reality and space for cars. Time will tell if these rumors turn out to be true, but Apple has a history of creating new product categories, and it clearly has the financial resources to pursue these new opportunities.

High price but not expensive

Given its revenue growth and cash generation, Apple is not particularly expensive. At the time of writing, Apple has a price-to-earnings ratio (P / E) of 32. Compared to a competitor, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) the assessment case becomes stronger. While Alphabet has a slightly lower P / E ratio of 27, the small premium in the valuation for Apple comes with better revenue growth and free cash flow margins.

It’s easy to see Apple’s stock price close to the highest ever and wonder if it’s time to buy. But a closer look reveals a money-making, revenue-generating powerhouse that is inexpensive, even compared to what its competitors offer. For investors who believe that Apple will continue to grow, innovate and return value to shareholders, its current price should not be the reason to pass on this investment.

This article represents the opinion of the author, who may disagree with the “official” recommendation position for a Motley Fool premium advisory service. We are motley! Questioning an investment dissertation – even one of our own – helps us all think critically about investing and make decisions that help us become wiser, happier and richer.

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