It has been an incredible couple of years for shareholders of Apple (NASDAQ: AAPL). The Apple share price has more than doubled in the past two years. Over the past year alone it has grown 32%.
Critics point to a thin pipeline of future innovation and argue that the shares are overvalued. I reckon the shares can double again, although it may take longer than two years this time around. Here is why.
Business model over innovation pipeline
An unattractive product and service offering could hurt both revenues and profits. But I see the supposedly thin innovation pipeline as a red herring for two reasons. First, Apple always plays its cards close to its chest. The truth is no-one really knows what it might release in coming years.
Even more importantly, the lack of new products is actually the reason for Apple’s colossal financial success in my view. It has always had a lean portfolio, reducing supply chain complexity and customer confusion. Instead it focusses on making as much money as possible from a small number of products and services connected in a single ecosystem.
That helps explain why Apple’s revenue has grown at a compound annual growth rate of 8.9% over the past decade, and net income showed growth of 8.5%. Few companies can expand their product range massively without sacrificing profit margin. With its lean focus, Apple is able to grow revenues strongly but still increase earnings at almost the same rate. I think Apple will continue with this proven business model. That should help it boost earnings in coming years, supporting the share price.
Shareholder focus
Apple’s share buyback programme has reduced the number of shares in circulation. So over the past 10 years, while net income grew at a compounded annual rate of 8.5%, earnings per share put in an even better performance: 13.6%.
A big fan of Apple’s approach to buying back its own shares is shareholder Warren Buffett. As he put it in last year’s shareholders’ letter, Buffett’s Apple position “vividly illustrates the power of repurchases”. Despite selling some of his Apple stake, Buffett saw his shareholding grow from 5.2% to 5.4% of Apple purely because of share repurchases by the company.
If Apple overpays for its own shares, that could harm the company’s profitability. But so far, I think the programme has shown the company’s focus on shareholder returns. Higher earnings per share can drive share prices upwards, if a company’s price-to-earnings ratio remains constant. If Apple stays focused on shareholder value in coming years, I think its share price could keep rising.
The Apple share price looks attractive
Even after doubling, Apple’s price-to-earnings ratio of 28 is lower than other tech stocks like Amazon at 47 or Netflix at 36.
I do not think it is cheap, and indeed a tech stock crash could bring Apple crashing down with its peer group. But in the long term, Apple has proven again and again that it can grow both top and bottom lines. Last year, it reported the highest revenue and profit in its history, by a considerable distance.
Apple is a growth machine that continues to go from strength to strength. I think that can support ongoing increases in the Apple share price. I would consider buying it for my portfolio today, hoping it could double again in the next few years.
