Equity investors worried about a possible recession but still interested in staying in the market don’t necessarily have to deal with utility stocks or other traditional defensive alternatives that hold up well in tough economic times. They might consider buying shares of Apple (NASDAQ: AAPL).
While a technological actions may not be your typical choice as a “safe” investment to weather a recession, Apple is an exception and a better buy than many of its growth equities peers. Here are a few reasons.
1. He’s not ridiculously overrated
One of the reasons Apple isn’t as big a risk as its peers during a downturn is because it’s not too expensive. While the stock may fall during a recession like any other macro-sensitive security, it is unlikely to suffer large losses in the long term as it is currently a good value buy. His assessment suggests that its price is fair and that it will more likely recover sooner once economic conditions improve. Even at the $ 1,000 billion valuation it hovers now, Apple is still only valued at a price / earnings ratio (P / E) out of 19. It is far from the P / E ratio of over 70 Amazon trades at or in the multiple of 30 which Facebook is currently trading.
While Apple’s price could suffer losses during a recession, for a growth stock, its fairly modest valuation relative to growth stocks and the broader market is one of the main reasons it is low. likely there will be a sharp correction during an economic downturn, even though many of its overvalued tech peers suffer long-term hardship.
2. The company has solid fundamentals
Apple’s finances are very strong, and with free movement of capital totaling more than $ 58 billion in the past four quarters, the company is well positioned to face adversity. Apple also has $ 94 billion in cash on its books. Key to the company’s impressive results is its strong profit margin of 21%, which ensures that a significant portion of any additional income flows into the bottom line. And with more than $ 66 billion in cash on its books, the company has the resources to help support its share price by repurchasing more shares, if necessary.
Another benefit of all this cash flow is that the company should have no problem paying its dividend, and might even have the option of increasing it since its payout ratio is very manageable 25%. While it only provides a modest return of around 1.4%, dividend income could prove to be very valuable to investors, especially if the stock is not performing well.
Even with modest gross profit margins of 38% over the past 12 months, that’s still enough to cover operating expenses, which currently only account for 13% of sales. This gives Apple plenty of room to continue posting strong profits, even in light of concerns about trading with other countries and other issues that could negatively impact its costs.
This is also why Cheaper iPhones can be a great way to attract more customers while the business can still generate significant profits. Apple’s low operating costs give the company great flexibility in its strategy, which is crucial if the economy slows and consumer discretionary income begins to decline.
3. Cult tracking makes the company more stable than most
What has made Apple resilient over the years is the strong brand loyalty it inspires. Despite the high prices of many of its products, Apple stores remain busy and there is no shortage of people willing to pay for the latest model. The recently released iPhone 11 is off to a good start, although it doesn’t look all that different from the previous year’s model.
The latest version of the phone has additional camera features and other functional upgrades. Whether it’s worth the premium price or an annual upgrade is debatable. Apple really benefits from a large loyal user base who have become accustomed to and intimately connected with their iPhones and iPads. The reluctance to pay the high switching costs to non-iOS phones gives Apple a big advantage in being able to retain its users and revenue streams. Whether it’s apps that aren’t available elsewhere or just better integration with Apple TV and other services, there are plenty of reasons why a transition to another system wouldn’t be seamless.
Apple has so many subscribers that consumers are always willing to pay top dollar for a phone that might not be much better than the last one they bought. That’s why it’s perhaps not surprising that Apple hasn’t had to invest much more in its selling, general and administrative expenses, which have increased by 18% in two years.
Apple devotees didn’t need a lot of conviction to keep buying the company’s products. Even in a recession, many customers are likely to be more than willing to push their budget limits to keep buying the latest and greatest iPhone. And given how much integrated cell phones have become in people’s daily lives, devices are much more of a necessity, making Apple products harder to cut in the budget.
Key to take away
Apple has proven to be a great stock buy over the years, growing over 700% over the past decade and showing steady growth. With a strong financial position and a strong user base, the company is in excellent shape to succeed, even in the midst of more difficult economic conditions. For these reasons, in addition to the good share price, Apple could be a great option for risk-averse investors looking for a safe buy.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.