Hey guys, it's sasha. I have a feeling that this video is not going to go down too well, because i want to share some thoughts on apple stock and, unlike pretty much, every single other video on apple stock. I don't have a prediction that is going to go to the moon. I've been looking at the numbers and i just don't share the kind of optimism that most other people seem to have with apple stock, and that puts me squarely against the very commonly accepted narrative.

Every youtube finance channel waxes lyrical about apple stock. Warren buffett has almost 50 percent of boxing hathaway sitting in apple stock and 24 out of 29. The wall street analyst on tip ranks rates the stock a buy, including four analysts who are in the top 100 out of the 16 000 analysts on there and exactly zero of those 29 analysts rate the stock sell. But then again, those types of ratings are not really designed as a five to ten year outlook on the stock and they tend to predict shorter term price movements because that's how their success is measured.

But anyway, it seems that everyone and their dog disagrees with me on this one, but i thought let me show you my workings anyway and share my thoughts and you can then make up your own mind based on your own analysis, apple presented. Their latest result about two weeks ago and everything in there looked pretty good revenue was 123.9 billion dollars up 11 year-on-year hitting a new record. Every division, except ipad, had record numbers iphones max and wearables were flying off. The shelves and services managed to earn 19.5 billion dollars, and that is all great, but the company may still be overvalued, even if everything inside the company is going really well.

That is possible and when i look at the numbers for apple, i just don't see it. So let me share some of my analysis and some of my thinking. First up just to try and break down the product mix. I went through apple's quarterly reports for the last four and a bit years and pulled their product specific data into this little table.

I've got the total revenue by product at the top and then the cost of sales below that. Unfortunately, cost of sales doesn't get split out by product, so you can only look at it as a product and services split. But underneath here i have a little chart for the revenue by product and you can see a few pretty handy stats in there now iphone is continuing to completely dominate apple's fortunes, as it has been for a few years now. Iphone sales were 52 of apple's total revenue, and, given that the bulk of the services revenue is also stuff that you buy on an iphone, the iphone is by far the dominating product for apple no surprises there.

You can also see that ipad's, wearables and macs are actually all roughly equal to each other. The wearables number does spike every christmas when people don't know what presents to get for their spouses and end up buying an apple watch. By the way, i have used apple's quarterly naming convention in all of this data, so apologies for that. I was going through dozens and dozens of their quarterly reports, and i didn't want to get my numbers mixed up and, unlike other companies, apple's decided that the last quarter of the year you know that quarter.

When you have christmas, that quarter is called q1 of the next year instead of q4. Like everybody else anyway, there is a popular school of thought for apple investors. That services is where the big bucks are going to be made over the next few years, because services are growing really fast and they also have high margins, and both of those things are true. You can see the chart here of the growth in services revenue as a year on year percentage and it has been going up.

Services have been growing at well over 20 percent recently, that is around double the overall company growth rate and the gross marginal association is also growing and growing reasonably fast. The graph here has a non-zero y-axis, so it's a little bit more extreme looking than in reality, but you can see that it is getting better and better and gross marginal services hit 72.4 percent in the last quarter, which is incredibly high even for a software business. But then look at this chart on the right here. This is the proportion of total profit that is coming from services and products, and the overall trend does indicate that services are making an increasingly large proportion of the total profit.

But there are two issues here that you need to consider. First, look at q2, 2020 onwards on these charts, iphone sales completely tanked in this period, and so did max and ipad services didn't really do anything because people continue buying apps and having their monthly subscriptions. So during that period they became a much bigger piece of the total pie, not because they did anything much, but it's because the other divisions sharply dropped. Now services dropped as a proportion of total profit, but that was because iphone sales in 2021 went completely through the roof.

The usual drop that we see between the two christmas quarters, the usual drop that we saw in between, was actually much better in 2021. It performed much better, it was higher than in any of the previous years. There may be a few different reasons here. The iphone 11 and iphone 12 models may have been a lot more popular than the predecessors, but it's also very likely that a portion of those sales were essentially deferred revenue from 2020..

Now, when the pandemic first hit, people were far less certain in their finances and their ability to keep their jobs and their ability to keep earning money. So many delayed major purchases like buying a new phone, and you can see that in the data here. There's this big drop in 2020 and you could argue that, because technology ages and breaks eventually a lot of the people that delayed the major purchases in 2020 did go out and buy a new phone in 2021. That would explain the very unusual three quarters where the dip performed way better than normal, and here at the bottom i actually plotted iphone sales growth as an increase compared to the same quarter a year ago.

So a year on year, growth rate - and you can clearly see this pattern in here - q1 2020, which is actually q4 2019 in real terms. The christmas season in 2019 is when iphone sales went up after dropping over the previous few quarters, but then that very same handset that did really well over christmas. That same model dropped right back down into negative growth through the rest of 2020 and then in 2021. Iphone growth completely exploded.

The new format of the iphone 12 probably helped, but look at the trend that rate of growth is going right back down in the most recent quarter. So definitely looks a lot like the delay in buying and the unwind from the pandemic had a temporary boost on iphone sales and we're now, through that one-off wave, we've gone past it and that wave is now gone. And that brings me to the other problem with the services revenue, and that is a lot less obvious. Services include things like apple care cloud and the app store all things that require iphones to complete the sales.

So although the services line is growing nicely, it is predicated on iphone sales and will naturally have a delayed effect. You go and sell a bunch of iphones and then over the following few months, people will buy apps sign up to apple arcade. All of that spent through services, and if you stop selling as many iphones, then that trend will naturally grow go down not immediately, but over time it will follow. Now i understand that they are optimizing.

The app store all the time - and i do appreciate that you can earn more and more per user as more apple customers buy more apps, spend more money feel more confident spending money in the app store, but the primary driver. At the end of the day of that, revenue is still going to be the preceding iphone sales, because that is the mode that is the medium through, which you make those purchases. Now, if you look at apple's overall revenue in a top down way, it hasn't really been setting the world a light in terms of growth. The company is extremely stable, it is very profitable and they pay dividends.

They buy back shares. All that stuff is great, but their revenues have only gone up on an average of nine percent per year over the last 10 years. That's not bad, but it's definitely not all that amazing or groundbreaking either if he excluded the bumper year in 2021, that growth rate was only 6.4 per year over the preceding nine years before that, and the issue with revenue line is that iphone sales are somewhat saturated. Now sure they could take a bigger chunk of the overall smartphone market, and maybe they could sell more phones, but apple holds at the moment about 15 to 16 of the global phone market, and a large part of the world is nowhere near to being able to Afford iphones so realistically, how high can that number go? Maybe it could double if all the stars aligned for apple over the next decade, but you're not looking at something like 50 growth per year.

So in my model i went and assumed a very optimistic rate of growth of 12 in 2022, coming down on the back of the bumper year in 2021 and then set a flat growth rate of 10 per year. After that, this is significantly above where growth has been for apple over the past decade, and today, apple is in a much more saturated and a much more mature position than there were in 2012. So actually, growth from here is going to be more difficult. Now sure they could launch the apple car or some other brand new product that we are not aware of, but we also know that the apple car project seems to not be going anywhere anytime soon.

Many of the senior leaders have recently left the project and at the moment there is just no evidence that apple has a groundbreaking new product category coming up at some point soon. So there's nothing really there to place any robust value onto, and i don't really like valuing hype, and then i take the existing costs and project them in the most logical way that i can cost of revenue has been coming down very very gradually over the last Few years and i'm giving apple the benefit of the doubt here, i've set the cost of revenue to be 57 in my model and continuing to bring it down from there. I then assumed that r d costs continue to grow like they have been on average and i've kept general expenses flat again. This might be a somewhat optimistic assumption, but let's just stick with it by the way you can get access to all of this analysis and this model, if you sign up to my patreon as a team member and all of the analysis, is in there, including access To this model and all the other models that are put together, if you don't want the models, you can still sign up as an espresso member and join the conversation and see all the price targets and join in the fun in the discord.

So i'll see you in there if you want to join anyway. Here is the output tab. It just takes the assumptions that we've just walked through and it just does the math and because of the relatively low rate of growth, i've actually set the long-term growth rate. Here to three and a half percent and the ebitda multiple to 17 in here, the multiple 17 might be a little bit on the optimistic side again, but let's just go with it, and these assumptions with a 10 discount rate, give me a target price of 110 Using the perpetual model or 146 dollars using the ebitda multiple, so let's say i pushed towards the higher of those two numbers and set the target price at 135 that is substantially below the 172 dollars.

That apple is trading at today. In fact, i would have had to set the growth rate to about 17 per year on average over the next six years. For me to just hit the current share price, and given so many stocks at the moment are on sale. I would want actually a reasonable upside in apple in order to invest not to just break even and to get to even a 50 level of upside.

I would need to increase my multiple to 20 and set the growth rate to 25 per year every year over the next six years, which the data just doesn't really support. So, for me, apple stock has a cell rating because of these reasons - and i do not hold a position if you disagree, i would really love to hear your thoughts in the comments. So please feel free to go and share in there and if you found this video useful, whether you agree or disagree, i would really appreciate if you could smash the like button for the youtube algorithm. Thank you so much for watching.

I really really appreciate it and, as always i'll see you guys later, you.