Apple shares have been out of favor with Wall Street for the past six months, with shares underperforming the broader market.
Traders and investors have avoided the company’s shares, worried about the outlook for iPhone sales in a challenging macroeconomic environment.
“Apple’s stock value showed unusual volatility last year rather than a steady rise or fall,” Kunal Sawhney, CEO of Kalkine Group, told the International Business Times. “This suggests that investors were looking closely at the technology company’s growth parameters as much as they were looking at the macroeconomic landscape negatively impacted by high inflation and rising borrowing costs in 2022.”
But there is one thing these traders and investors must consider: Apple is getting better at managing other people’s money, delivering superior returns to its capital owners. It’s a trend that has helped Apple shares beat the broader market for the past five years and remains intact.
Publicly traded companies like Apple manage other people’s money, the capital they raise from shareholders and capital owners, in search of better returns than they can earn by investing in debt and equity ETFs that mirror market averages.
To find out how effectively they manage this money, economists and financial experts have come up with the concept of Economic Profit or Economic Value Added (EVA) – the difference between the return on invested capital (ROIC) and the weighted average cost of capital (EVA).
Companies that deliver a positive and rising EVA manage other people’s money excellently, which will ultimately be reflected in their share prices.
Conversely, companies that deliver a negative and declining EVA are doing a terrible job of managing other people’s money, which will eventually show up in their stocks.
Apple belongs in the first category. It has delivered a positive and rising EVA. For example, according to Gurufocus.com, Apple’s EVA has recently risen from 7% in 2017 to 22%.
A rising EVA is usually an anomaly in economic theory unless the company has solid “moats” to protect the market from competition, and continues to exploit new high-margin business opportunities, as is the case with Apple.
The company has a diverse portfolio of blockbuster products, such as iPhone, iPad and Mac. Apple also has a loyal customer base and a strong brand. Also, Apple has a history of innovation and will likely continue to introduce new and exciting products. The company also has a strong balance sheet, high profit margins and solid free cash flow.
Robert R. Johnson, professor of finance, Heider College of Business, Creighton University, lists several moats for Apple, from branding to network economies and entrenched customer relationships.
Dennis Shirshikov, Head of Growth at Awning.com, attributes Apple’s superior performance in managing capital to the company’s broad ecosystem of devices and services that work seamlessly together, such as the iPhone, iPad, Mac, Apple Watch and AirPods.
“This ecosystem creates a sticky customer base that is likely to continue to buy Apple products and services,” he told IBT. “Additionally, the company’s services segment, including the App Store, iCloud, Apple Music and Apple TV+, has grown steadily and is expected to be a significant contributor to the company’s revenue in the future.”
Dissemination: I own shares in Apple.