The client is a male of 55 years who is currently employed as a civil servant. The client’s investment in the stock is based on the need to improve on their retirement savings. The client is married to a wife who is currently in business and who has limited retirement savings. The client is risk-averse, given the importance of retirement savings. Investment in Apple Inc. stocks would help provide the required balance between expected return and the associated risks.
The current Price for Apple Inc. is $316.85, which is relatively low as compared to other technology companies such as Alphabet Inc. whose current stock price is 1410.42 (Yahoo Finance, 2020). Over the past years, the price of Apple Inc. shares has nearly doubled. The prices increased from $170.27 to a maximum of $327.85, which is equivalent to 92.55%. The annual dividend per stock is $3.28, with a dividend yield of 1.04%. The future growth of Apple Inc.’s share is mostly dependent on the company’s market performance in the future. Apple Inc. remains a leader in the technology industry with the most popular products, including iPhones, iPads, and wearables ( Apple Inc. 2019). The company is a leader in innovation and technology, such as artificial intelligence and software services provider. The development of new products such as iPhone SE (2020) launched on 15th April 2020 is expected to increase sales. The first quarter of the year 2020 recorded 19% growth in profits and a $4.99 growth in share prices while the company’s revenue grew by 9% higher than the projected 4% growth ( Apple Inc. 2019). Apple Inc. has a vast loyal customer base among the global middle and high-income groups. The loyal consumers are always willing to purchase the company’s products and services at a premium in return for the unique experiences. Despite the economic impacts of Covid-19 Apple Inc. that have disrupted global supply chains and levels of income, demand for Apple Inc. products and services would be expected to remain relatively high. Apple Inc. is expected to recover rapidly in the aftermath of the pandemic.
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The P/E ratio for Apple Inc. is moderately high at 25.05, suggesting that investors would expect to pay $25.05 for every single dollar earned from the company’s stocks. According to Forbes, analysts estimate that Apple Inc.’s earnings will increase by 10.3% and 14.8% in 2020 and 2021 (Kramer, 2020). This represents $13.11 and $15.05 growth in the per-share earnings of the stock. Therefore, there are high expectations that Apple Inc.’s price to earnings ratio will decrease in the future, which would increase demand for the stock and sequential growth in the expected return from growth in inventory prices. High growth rates in wearables and provision in the online services are expected to contribute significantly to the future extensions in the company's earnings. Revenue from online services and wearables has maintained high growth rates of above 15%.
The monthly beta for Apple Inc. stock is expected at 1.17. Beta risk estimates the risks experienced by investors of a company’s stock. It is the level of change in the stock prices of a company relative to the entire market. A beta of more than 1 means that the costs of Apple Inc.'s stocks are more volatile than the average market prices. A beta of less than would imply that the stock prices are less volatile than the average market prices, while that of 1 would mean that the volatility of the stock prices is equivalent to the volatility of market prices (Van der Hart, Slagter & Van Dijk, 2003).
In conclusion, Apple Inc. is a low-risk stock with significant potential for growth in the prices and impressive dividends. Low-risk stocks are recommended for risk-averse investors as well as those saving for retirements. Apple Inc. stocks, therefore, present the desired balance between expected return and the underlying risk.
Part II
The customer is risk-averse, given the importance of retirement savings. Investment in Apple Inc. stocks would help provide the required balance between expected return and risks associated with the investment.
For any investor, selecting stock can be very challenging. That is why there are set rules and guidelines that an individual has to do to avoid making a foolish investment. According to these guidelines by Forbes, Apple Inc. is the best choice for this client because; Apple Inc. has an easy to understand and a reasonably straightforward business model. They engage in the sketching, producing, and selling of smartphones, personal computers, tablets, wearables and accessories, and other electronics. It functions in America, Europe, Greater China, Japan, and the rest of Asia Pacific (Apple Inc., 2020). Some of their products include and services include iPhone, Mac, iPad, Air Pods, Apple TV, Apple Watch, Beats products, Apple Care, iCloud, digital content stores, streaming, and licensing services
Also, every best-performing stocks in history have a great brand, just like Apple Inc. and with strong past performance. Apple has experienced tremendous success over the years. In November 2001, when an iPod was first released, the price was $399. On the first release date, stock sprang to complete the day at five cents of up to $9.38. One week later, however, Apple closed at $10.00 per share, a 6.6% increment (Apple Inc., 2020). Investing in high-breed companies was also a consideration for choosing Apple Inc. It is well known for its commitment to inventions through research and design. In 2019, they had a $16.2 billion budget for research and design (R&D), a $2 billion increase from 2018. It provides a clear distinction between Apple Inc. and other companies as they are concerned about advertising, cost-cutting, and efficiency. For instance, as of 2019, Apple held the market share in the tablet domain of 36.5%. One year after releasing iPads, Apple was trading at $341.19, marking a 43% increase from the initial day share value.
Lastly, Apple Inc. pays dividends, making it ideal for this client headed for retirement. After a 17 years break period, Apple resumed paying dividends to its shareholders. At the end of the financial year 2019, Apple announced a dividend of $0.82 paid quarterly for every share or $3.28 annually. It marked a 6.5% increment from the previous $0.77. It makes Apple Inc. an ideal company to purchase stocks from.
The current ratio of working capital compares the existing assets of a company with the current liabilities. It was useful while determining whether Apple Inc. can fulfill its floating debt concerning current assets. In 2017, 2018, and 2019, Apple Inc. had a current ratio of 1.28, 1.12, and 1.54. It deteriorated in 2018 but significantly improved in 2019. Quick ratio provides evidence that an enterprise can cater to short-term liabilities without requesting additional financing or selling its inventory. The bigger the ratio, the more an enterprise’s liquidity and health, financially, is enhanced. 1.38, 0.99, and 1.09 marked the quick ratio for financial years 2019, 2018, and 2017 respectively (Yahoo Finance, 2020). The cash ratio is a measure of a corporation's liquid assets, total sums, and money equivalents with its current obligations. It was an indicator that Apple Inc.'s value when faced with the worst-case scenario. As of 2017, the cash ratio was 0.80, which dropped to 0.57 in 2018 and increased to 0.950 in 2019.
Besides, the price-earnings ratio (P/E ratio) elaborates more about the price of a share in a company about the income per share. Therefore, a significant P/E ratio means that the organization's stock could be overvalued, or an investor can expect a tremendous growth rate soon. This is true for Apple Inc. as their P/E between 2017, 2018, and 2019 was 18.32, 16.07, and 20, respectively. There was immense progress from the decline in 2018, making it more suitable. Lastly, price to sales (P/S) ratio is a measure of the company's stock price regarding its revenues. It explains the worth of every dollar placed on a company's turnover or returns. The P/S ratio was essential in analyzing how much the client could pay per dollar for the stock sale. For instance, for Apple Inc., the P/S for financial years 2019, 2018, and 2017 were 4.25, 3.60, and 3.86 accordingly (Yahoo Finance, 2020). However, this ratio does not consider whether an enterprise is earning any income or will ever make any.
With technology and android advancing fast to dominate the smartphone world, Apple Inc. faces a considerable risk of a recess in the expansion and invasion of smartphones. iPhone products are the present central source of income for Apple Inc. Out of a total of $215.639 billion, the sale of iPhone products generated 136.7 billion in revenue, which is more than 63% of the total income revenue for the company (Apple Inc., 2020). Any slowdown in the smartphone market could significantly reduce Apple's stock price and growth. With the current pandemic globally, the demand for smartphones has also cooled down, especially. Most of the retail shops are closed down. Apple was already having trouble penetrating the ever-growing smartphone market with android closely to overtake the market. In 2016, the unit sales for iPhone dropped, showing that market share loss. Should this market loss continue, then financial performance in the long term will be significantly affected.
To mitigate this risk, a client must not invest their entire investment budget in one company. It is an essential rule for keeping a safe and diverse portfolio with regulated risk. No business is ultimately failure-proof, and one can hardly predict the future. Nokia was once leading in the phone industry globally but was later outsmarted by Apple. It could or could not happen to Apple the same way. Therefore, one should invest probably 5 to 10% in one company, and should there be more cash flow, then they may consider adding more investments to better their returns. That way, risk will be distributed evenly.
Apple Inc. is a definite recommendation for investment opportunities. Recently, they have better avenues for increasing income, which are wearables and services. Some of the software by Apple are iTunes, and the App Store, Apple Arcade, Apple Pay and the Apple TV Plus are among the most vital services. Fifty-two new countries can now access Apple Music. According to Reeth (2020), in the first 2020 quarter, Apple's services increased by 17% to $13.35 billion. Wearables such as the Apple Watch and AirPods wireless earphones, Home and Accessories like HomePod wireless speaker units skyrocketed sales with a 22.5% addition to $6.28 billion in this year’s first quarter (Apple Inc., 2020). Such a diverse way of operation ensures that the company stays relevant despite a decline in one product. Besides, Apple has a lot of potential in the wearable tech space as they are more devoted to research and design. Their potential has not yet been fully utilized; hence there is still room for growth.
Moreover, the levels of revenue that Apple collects every year has reached legendary levels. By March 2020, the enterprise had almost $193 billion in capital and assets, redistributed back to shareholders through dividends (Reeth, 2020). Their consistency in dividend growth over the years is a plus for any investor as there is no sign in stopping. Despite the global pandemic, a 6% increase in dividend was announced, bringing it to $0.82 per share. With the rise in iPhone revenue, soaring services sales, and vast room for growth in wearables, it is wise for any investor to consider Apple's stock.
References
Apple Inc. (2019). Apple Inc. 10-k report 2019. https://investor.apple.com/investor-relations/default.aspx
Apple Inc. (2020). Apple Inc. 8-k report 2019. https://investor.apple.com/investor-relations/default.aspx
Kramer, M. (2020, 29th January). Apple’s stunning results suggest the stock is still too cheap. Forbes. https://www.forbes.com/sites/kramermichael/2020/01/28/apples-stunning-results-suggest-the-stock-is-still-too-cheap/#1ceb9b181600
Reeth, M. (2020). Should You Buy Apple (AAPL) Stock? Apple is powering through a pandemic. After the latest AAPL earnings report, is the stock still a buy? https://money.usnews.com/investing/stock-market-news/articles/pros-and-cons-to-buying-apple-aapl-stock
Van der Hart, J., Slagter, E., & Van Dijk, D. (2003). Stock selection strategies in emerging markets. Journal of Empirical Finance, 10(1-2), 105-132.
Yahoo Finance. (2020). Apple Inc. (AAPL) . Yahoo Finance - Stock Market Live, Quotes, Business & Finance News. https://finance.yahoo.com/quote/AAPL?p=AAPL&.tsrc=fin-srch
Yahoo Finance. (2020). Apple Inc. AAPL Income Statements. https://finance.yahoo.com/quote/AAPL/financials/
