Apple: Highest Level Of Safety

As tech giants face increasing government scrutiny, one company stands out as having a higher level of safety amongst the group. Apple (NASDAQ:AAPL) has both the balance sheet and lack of regulator ire to provide the most safety in the group of tech giants with market caps in excess of $400 billion. In addition, my previous research indicated that the stock was still cheap at a valuation of $1 trillion.

Image Source: Apple website

Balance Sheet

The best way to control the safety level of a stock is via a fortress balance sheet. A company with tons of cash and assets is better insulated against market downturns and competitive threats.

Such a company can use strong balance sheet to return large amounts of capital to shareholders as Apple has done aggressively in the last few years. Most of the other tech giants are in similar positions, with Alphabet (GOOG, GOOGL), Facebook (FB) and Microsoft (MSFT) having massive free cash flows and positive cash balances to reward shareholder.

Amazon (AMZN) is the major laggard in the group and the one undoubtedly to face problems in the future. The online retail giant basically has no net cash after buying Whole Foods last year. The market currently ignores this fact, but it increases the risk down the road.

Other key financial metrics like EV/S and P/E ratios speak more to the risk in the current valuation. Again, Apple, despite having the best balance sheet, still has the cheapest multiples of the group.

From a forward P/E multiple standpoint, Apple still has significant upside potential to reach the 20x levels of Facebook. Until Facebook started facing regulatory risk, all of the stocks outside of Amazon traded at about 24x forward earnings. Such a multiple would provide 50% upside for Apple, or conversely, more safety in the next market selloff or recession.

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AAPL EV to Revenues (Forward) data by YCharts

Again, Amazon trades at the highest P/E multiple in the group showing the risk the stock faces. The company has the growth, but it doesn’t have the cash flows or balance sheet that provides any safety.

In the case of Apple, the tech giant had $129 billion in net cash at the end of the last quarter. It can easily ride through financial roadblocks over the next few years.

Source: Apple capital returns

Apple uses that balance sheet to return the most capital to shareholders via dividend and stock buybacks. The net payout yield that compares these capital returns to the market cap of the company has Apple with a yield of nearly 7% and Microsoft next on the list below 3%.


AAPL Net Common Payout Yield (TTM) data by YCharts

Regulator Safety

Nothing is certain with regulators, but Apple doesn’t have an advertising model that feeds on collecting user data that currently runs afoul of regulator issues on data privacy. Alphabet and Facebook are now the dominant digital ad networks. eMarketer forecasts the market share actually slipping over the next couple of years, but the combined companies are expected to still control over 55% of the market in 2020.

Source: eMarketer

Amazon is starting to use its influence in the online retail market to push into advertising. eMarketer notes that the company is expected to leap into the third position this year with a 4.1% position (partly due to accounting change) on $4.6 billion in domestic ad sales. Amazon using its dominant market position to drive ad sales will drive further market scrutiny than possibly even Alphabet or Facebook.

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Just this week, Facebook released news of personal data on 50 million users getting hacked. At the same time, the European Competition Commissioner, Margrethe Vestager, expressed concerns over the dominant position of Amazon’s marketplace and how the online retail giant utilizes merchant data.

On the flip side, Apple doesn’t even control the smartphone market. The company only has about 15% market share in the smartphone market based on operating systems of phones in use. If anything, IDC forecasts Android grabbing market share in the smartphone market through 2022.

Source: IDC

Now, Apple does control the profits in the sector. Counterpoint Research has the tech giant pegged as controlling 62% of the profits globally in the smartphone market, leaving a large swath of smartphone makers fighting over peanuts.

Regulators though aren’t going to have a problem with such a market dynamic, being that Apple doesn’t deny market access to other participants. Even in the premium market of smartphones costing over $400, the company only controls 43% of the market.


The key investor takeaway is that Apple provides both financial security from both a valuation perspective and a strong balance sheet, but also that the company has the least regulator risk amongst the group of large-cap techs. It provides a level of safety that the other tech giants don’t.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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