600% Increase in 10 Years, Here’s Why Apple Stocks Are Still So Cheap

apple (AAPL -1.07%) It was one of the few major tech stocks that survived during Nasdaq Composite Alcohol market. However, even Apple has now fallen more than 20% from all-time highs, with its share price dropping 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 continued growth and profitability should continue for decades to come. Despite being one of the top-performing tech stocks, rising more than sixfold in the past 10 years, here’s why Apple stocks are still surprisingly cheap. And why now might finally be a good time to take a bite out of Apple stock.

Image source: Getty Images.

Apple drives profitability

Apple continues to develop its full line of consumer products while demonstrating unparalleled pricing power and customer loyalty. Its growth in aftermarket services has kept customers engaged and spending money even if they didn’t purchase the latest Apple technology. This growth has improved profitability even as the company’s revenues and profits are higher today than they were just five years ago.

Investors tend to gravitate toward technology companies, especially software companies, because they have high operating margins. Operating margin tells the investor how much operating profit is being made for every dollar of sales. Apple’s 12-month operating margin (TTM) is 30.9%, which means it gets about $0.31 on the dollar after operating, sales, general and administrative expenses, depreciation, amortization and other expenses are factored in.

AAPL Operating Margin (TTM) Chart

AAPL Operating Margin (TTM) data by YCharts

For context, a heavy software company like Microsoft With an operating margin of 42.6% while the business is high volume and low margin such as Costco Wholesale With an operating margin of only 3.5%.

As companies grow, it is sometimes difficult to maintain a high operating margin because larger companies have more overhead, personnel, and moving parts to worry about. Not for Apple. Operating margin is at an eight-year high. And having a high operating margin is one of the reasons why Apple makes a lot of profit even though its sales are lower, for example, than a company like Amazon.

Strong dividend growth and stock repurchases

Rarely can a stock produce incredibly huge returns and still not be overvalued. But Apple knows how to make money. Simple and clear. And the money he doesn’t use to reinvest in his business usually works to buy back shares.

There are many excellent Apple schemes. But my personal favorite is the 10-year chart that shows shares outstanding and Apple’s net income.

AAPL Hanging Stock Chart

AAPL shares premium data by YCharts

Apple’s TTM net income has increased by 154% over the past 10 years – topping $100 billion for the first time. No other US company has a net income of over $100 billion in TTM except Apple. However, what’s also impressive is that the number of shares outstanding to Apple has fallen by 38% over the past 10 years as Apple has constantly repurchased its shares to increase its earnings per share. And this effect on Apple’s assessment is significant.

Keep in mind that if Apple hasn’t repurchased any shares in the past 10 years, TTM earnings per share would be $3.89. But with far fewer shares outstanding, Apple’s current TTM dividend is $6.25 – giving it a $22.8 price-earnings ratio. If you hadn’t bought back any shares over the past 10 years, their P/P today would be 36.7 – which isn’t nearly as attractive and arguably would make Apple shares too expensive and not worth buying.

In other words, Apple makes so much profit and buys back so many of its shares that its valuation is still reasonable even though the stock has gone up a staggering 600% over the past 10 years.

An attractive combination of risk and reward

Apple falls into the moderate to low risk category with the moderate reward category. Small businesses are not likely to outperform rapid growth. But it is also unlikely to suffer a major pullback during the sell-off. This resilience was demonstrated during the market crash caused by the pandemic in the spring of 2020. It was demonstrated throughout 2021 and 2022 as Apple shares continued to outperform the Nasdaq Composite overall index thus far, something that cannot be said for other big tech companies like Amazon, ID padsAnd AdobeAnd sales forceAnd nvidia.

For investors looking for a company they can rely on that isn’t too expensive, now seems like a good time to cash in on Apple shares.

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