December 2017

We formally completed our tour of the FANG stocks last week with our review of Alphabet Inc. But before we depart entirely from this much-buzzed-about region of the market, I thought it only right to acknowledge the nearly-900-billion-pound elephant in the room, Apple Inc.

Nearing $900 billion in market cap, Apple Inc. has been the world’s most highly valued company for over four years, through seventeen straight quarters.

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Why Apple Inc. Wasn’t Invited to the FANG Party

Despite the stock’s aggressive appreciation in 2017 and its very public profile as a cultural influencer, Apple Inc. is not usually grouped in with the FANG stocks. Some finance writers have thrown around the term “FAANG,” making Apple Inc. the second “A,” but it didn’t seem to stick.

Why do you think that is?

I believe the key point of distinction separating Apple Inc. from Facebook, Amazon, Netflix, and Alphabet (Google), is that Apple is by all rights a value stock, and FANG stocks are not. The price-to-earnings (P/E) ratio for Apple Inc. is 18.73.

The lowest P/E offered by the FANG group is Facebook’s 33.3. Amazon and Netflix each have P/E’s as well, and way above 100. Apple is clearly focused on generating profits for its investors, whereas the FANG stocks are in a mad dash for growth and market share, using their capital not to return dividends but to invest and to expand and to explore to the utmost.

The story is told plainly in the income statements of Apple Inc. compared to those of the FANG stocks.

Looking over Apple’s last three years of profits, it’s clear that this is a company that seeks to generate about $50 billion in profits every year. As illustrated in the graphic below, no such profitability is the mainstay of any of the FANG stocks. Amazon and Netflix barely break even, while Facebook and Google (Alphabet) offer only a modest profit, a fraction of what Apple delivers.

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Apple Stock Analysis - Annual net income for Apple Inc. as of September 2017, 2016, and 2015 as compared to the annual net income of the FANG stocks during a similar period.

As closely as they can be compared. Apple’s financial reporting is released in September, while the financial reports of each of the FANGs is released in December.

It’s important to keep in mind that these discrepancies in profitability between Apple and the FANG stocks are by design.

Remember, unlike the FANGs, Apple has been around for a long while, over four decades. Founded in 1976, Apple went public in 1980. The Apple investor base is surely older across the board, and there is higher demand for dividend payouts. And dividend payouts require profits, so Apple is sure to deliver just that.

The FANG companies, by contrast, seek to spend and to invest as fast as possible, expanding their empires, whether it’s Amazon’s grocery foray via the Whole Foods acquisition, Facebook’s play on industry-leading virtual reality tech, Netflix’s put-up or shut-up $8 billion original content spend planned for 2018, or Alphabet’s dabbling in biotech and driverless cars.

The FANG stocks, backed by a growth-focused investor base, are preoccupied with cultivating cultural and technological empires, while Apple, the largest company in the known universe, simply seeks to lead the way—in everything, including (but not limited to) boring old value investment opportunities that offer stable dividends.

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A summary of the key metrics for our Apple stock analysis.

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Expanding Horizons

The old-fashioned pursuit of profitability does not necessarily need to trade off with innovative and aggressive approaches to growth. Apple Inc., in partnership with Steven Spielberg and others, will soon be crashing the original content scene with a planned investment of $1 billion in 2018—doesn’t look like much alongside Netflix’s gargantuan $8 billion spend, but $1 billion is still significant (it’s half of HBO’s original content budget).

Of course there are also a multitude of other growth and expansion initiatives in the works as well at Apple—new products from established lines are always in the pipeline, and Apple Inc.’s infrastructure and real estate investments (and considered investments) are regularly in the news.

Just as Apple Inc.’s annual profits seem to hover around $50 billion, its retained earnings (net income retained after paying out dividends) are similarly consistent, with a quarter-by-quarter average close to $100 billion. Check it out:

Apple Inc.’s Retained Earnings, Quarter by Quarter
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A record of Apple's earnings quarter by quarter.
The consistency of Apple Inc.’s financials inspires a lot of confidence in investors.

Even if the current 1.46 percent yield doesn’t seem like much of a return compared to the 2.3 to 2.35 percent available from the 10-year Treasury note, Apple Inc. has been known to raise its yield as high as 2.73 percent in recent years. Add in the chance for robust capital gains, and you can see why AAPL is such a popular stock among so many types of investors.

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Is Now a Good Time to Buy? My Take

Speaking of capital gains, the question remains, as it always does: is Apple Inc. a good buying opportunity at its current price?

With the stock seeming to reach new record highs every other day, is it too late to get in, or is the best yet to come?

Obviously, no one knows what the future may bring, but the success of the new iPhone X will certainly play a major role. Revenues from iPhone sales are essential to Apple’s overall year-by-year success in the marketplace. While demand for the latest and greatest model, the iPhone X, is high, there have been some supply-chain complications that have called into doubt Apple’s ability to make the most of its upcoming holiday sales quarter.

Yet, as The Motley Fool points out, the very scarcity of the iPhone X may lead the product to be seen as more desirable, limited, and exclusive, especially in more status-conscious countries, such as China and India.

Analysts are generally bullish.

Argus sets Apple’s target price at $210 per share, giving it room to grow. Argus cites strong sales from non-iPhone categories such as the Mac (computer) category, which generated 25 percent more revenue this fiscal year than it did in 2016. Argus asserts that higher sales in non-iPhone categories is evidence that iPhone ownership encourages consumers to look to Apple when shopping for other personal electronics, such as computers, tablets, and smart watches.

I would add to Argus’s analysis that in light of the newer entrants looking to shake up the smart phone arena (Google Pixel and Motorola Moto Z) ownership of non-iPhone Apple tech may lead consumers to give preference to Apple when selecting their new smartphone this holiday season.

Case in point, I’m not at all thrilled about paying $1,000 for an iPhone X.

For casual smartphone users like me, such a price point may come across as obnoxious and lead us to look elsewhere for our next smartphone purchase. But if there are other Apple devices in our orbits—and we are left to consider all the effort we’ve put into syncing our tablets, computers, and watches with our smartphones—then we may be more inclined to stay loyal to Apple as a matter of convenience. It’s also possible that the iPhone X is simply amazing and too good to pass up.

Time will tell.

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This article is a part of our ongoing series that explores a different stock or fund each week. The information contained herein should not be construed as ‘financial advice’ and is presented as the opinion of the author.

ClydeBank Media does not offer financial investment services and has no ties to any of the funds presented in this list. Please see our full financial disclaimer regarding the information contained within this stock analysis. Always consult your financial adviser before making investment decisions.