Apple Looks Attractive For a Renewed Rally

Stocks to buy

In equity markets, there are stocks that can be clearly differentiated as growth or dividend stocks. Apple (NASDAQ:AAPL) stock seems to be an exception.

Close-up of Apple (AAPL) retail store Logo in Honolulu at the Ala Moana Center. Advertising the latest generation of the ipad, iphones, and ipods with a Retina display.

Source: Eric Broder Van Dyke / Shutterstock.com

The company’s growth has been robust and there is visibility for sustained upside in dividends. AAPL stock therefore comes across as a hybrid stock that is worth holding in the long-term portfolio.

In the beginning of 2022, AAPL stock touched highs of $183. With the broad markets facing headwind of inflation and escalated geo-political tensions, the stock has been in a correction mode. I believe that current levels of $155 are good for accumulation.

Starting with the valuation, AAPL stock seems attractive at a forward price-earnings ratio of 25.1. With factors that include innovation, robust cash flow and dividend upside, the valuation is not stretched.

Of course, valuation and visibility for dividend upside is not the only reason to be bullish on AAPL stock. The company is likely to be more diversified in the coming years and emerging segments will boost top-line growth.

Strong Balance Sheet and Revenue Diversification

For Q1 2022, Apple reported operating cash flow of $47 billion. This would imply an annualized cash flow potential of $190 billion.

The company’s cash generation capability is a big reason to consider long-term exposure. Apple has ample financial flexibility to invest in innovation, acquisition, dividends and share repurchase.

If we look at Q1 2022 results, there are two important observations.

First, Apple reported total revenue of $123.9 billion. Of this, Americas and Europe contributed to 66% of the revenue. If we also exclude Greater China and Japan, only 8% of the revenue is from rest of Asia Pacific. There seems to be ample scope for revenue growth in emerging Asia (including Southeast Asia).

Further, the iPhone segment remains the cash cow. With accelerated adoption of 5G, iPhone sales are likely to remain strong. However, the wearable and services segment have been increasingly contributing to the total revenue. For Q1 2022, these segments accounted for 28% of the total revenue. Apple is already an industry leader in the wearable segment with a 28.8% market share. Similarly, the services segment has been a game changer for Apple. With more than 785 million paid subscriptions across the paid portfolio, the cash flow visibility has swelled.

There are multiple segments driving growth. Apple is likely to be more diversified in the next five years as it looks for innovation driven opportunities to utilize its cash.

Electric Vehicle Segment Can Accelerate Growth

Much has been speculated about Apple’s entry in the electric car segment. Considering the cash buffer, Apple is positioned to make some big investments.

It seems that Apple is focused on building a fully autonomous car that will be marketed as a very high-end model. Sources also indicate that Apple is targeting production in 2024 with next level battery technology.

The EV can be another revenue upside trigger in the next few years. Given the brand visibility, there likely to be limited investments in marketing. Importantly, the EV industry has multi-year tailwinds. The recent escalation in geo-political tensions has further underscored the need for swifter transition to electric vehicles.

On the flip side, the EV segment can possibly impact margins in the initial years. However, Tesla (NASDAQ:TSLA) has already shown that cash flows can be significant with operating leverage.

Concluding Views on AAPL Stock

In the near term, Apple’s revenue potential has been impacted to some extent due to the chip shortage. Investors also need to closely watch developments related to geopolitical frictions between the United States and China. There can be potential supply chain risks.

Overall, AAPL stock looks good for accumulation at current levels. I believe that the stock is worth considering for dividend investors as well as investors seeking growth stocks. The company’s cash buffer will continue to support innovation and sustained growth.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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