Expectations Cornerstone

Is it Worth Buying Apple Stock Today?

I want to touch on the topic of expectations, or as it’s often called, the “expectations treadmill.”

The graphs show historical data for two retail chains, Walmart and Target, from 1994-2005.

By 2005, Walmart’s sales were twice as much, and the return on invested capital (ROIC) was almost always significantly higher than Target’s. In other words, as an organization, Walmart was much better than Target during this period.

However, as shown in the second graph, Target shareholders made twice as much profit during the same period (as indicated by the TRS index – Total Shareholder Return, which includes dividends and stock price growth).

What’s the Issue?

The issue is that when a good company becomes very good, it creates expectations that are reflected in the stock price, and then it has to run tirelessly on the “treadmill” to meet those expectations. Maintaining high growth and ROIC continuously is difficult and mostly impossible.

On the other hand, an average company has more chances to exceed expectations because there are reserves for optimization in strategic decisions and operational management. Exceeding expectations leads to stock price growth…

Unfortunately, this is why often lower-qualified managers become more compensated than higher-qualified ones, as their bonus system is mostly tied to exceeding expectations (Call options).

Now, to Return to the Main Question: Is it Worth Buying Apple Stock Today?

If I had the correct answer to this question, I would probably already be a billionaire :), but I can touch on a few details.

Apple has maintained high operating margins for years, its ROIC is also very high, and it has excess cash…

You can’t fault the management in terms of profitability. However, by my calculations, to justify the current price, it needs to ensure an 8-9% long-term annual growth rate…

From 2013-2023, the average sales growth was 9.11%, but the growth rate volatility is very high. There were years with over 30% growth and also years with negative growth. For example, in the last fiscal year (09/2023), there was a 2.8% decline.

Source:
https://www.morningstar.com/stocks/xnas/aapl/valuation

https://finance.yahoo.com/quote/AAPL/

I think the current price (≈ $190) is within a fair value range, but fluctuations are expected…

According to most expert evaluations in the last two months, the fair value range is somewhere between $185 and $210.

In my portfolio, the weight of Apple stock is up to 10% today. In Buffett’s portfolio, it exceeds 50%.

I can’t advise you; it’s up to you to decide…

Sources for graphs and opinions:

Value: The Four Cornerstones of Corporate Finance
by McKinsey & Company Inc., Tim Koller, Richard Dobbs, Bill Huyett