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Is Apple Inc. (AAPL) Destined for Greatness (Again)?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Apple Inc. (NASDAQ:AAPL) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Apple Inc. (NASDAQ:AAPL)

What we’re looking for
The graphs you’re about to see tell Apple Inc. (NASDAQ:AAPL)’s story, and we’ll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s take a look at Apple Inc. (NASDAQ:AAPL)’s key statistics:

AAPL Total Return Price Chart

AAPL Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 230.8% Pass
Improving profit margin 10.9% Pass
Free cash flow growth > Net income growth 265.8% vs. 266.9% Fail
Improving EPS 255.3% Pass
Stock growth (+ 15%) < EPS growth 80.7% vs. 255.3% Pass

Source: YCharts.
*Period begins at end of Q1 2010.

AAPL Return on Equity Chart

AAPL Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity (3.3%) Fail
Declining debt to equity No debt Pass
Dividend growth > 25% Initiated in 2012 Pass
Free cash flow payout ratio < 50% 17% Pass

Source: YCharts.
*Period begins at end of Q1 2010.

How we got here and where we’re going
Apple Inc. (NASDAQ:AAPL) doesn’t quite come through with the flawless performance we might expect, as it’s only earned seven out of nine possible passing grades. However, one of those failing grades only happened due to the narrowest underperformance — free cash flow has certainly grown substantially along with net income. Even if Apple Inc. (NASDAQ:AAPL) does flip that script when we examine it next, a massive debt raise (which hasn’t yet been recorded in SEC filings) will certainly cost it the debt-to-equity passing grade it earned this time around.

Despite promising revenue and earnings growth, the stock has dipped more than 40% from a peak last September. The main reason appears to be that the company’s critical product, the iPhone, has lost its edge, and the product cycle that drove Apple Inc. (NASDAQ:AAPL)’s mind-boggling profitability over the past several years is nearing an end. At least that’s what anti-Apple chatter would indicate. Can the Apple bear be killed? Let’s dig a little deeper.

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