Apple | Fundamental Analysis

Apple has just become the first company whose market capitalization has reached $3 trillion. The company's stock lately reached new highs on the back of robust iPhone 13 sales, but there is more in store.

Experts predict the tech titan to release two new products in the next several years, even a foldable phone. Apple is still in growth mode, with annual free cash flow approaching $100 billion a year. Next, we'll tell you why it's worth buying stock to start 2022.

First, the iPhone 13 is a real success.

Apple has been successful in dealing with supply chain disruptions. The company's fourth fiscal quarter (ended Sept. 25) saw a 29% year-over-year increase in revenue, even though CEO Tim Cook called last quarter's supply chain problems "more significant than expected." Investors can take credit for the growing demand for all Apple products, as sales of Macs, iPhones, iPads, wearables, home products, and accessories hit record highs last quarter, and that momentum likely continued after the holidays.

Last month, a Morgan Stanley analyst noted that iPhone shipments in China were up 46% over November of last year. What's more, over the holidays, order fulfillment times for the iPhone 13 shrank to two days from nearly three weeks after launch.

Analysts now expect the company's first quarter of fiscal 2022 to see a 6% year-over-year increase in revenue and adjusted earnings per share of $1.88, up from $1.68 a year earlier.

Second, the company's new products should not be overlooked.

Investors are undervaluing the power of the current 5G upgrade cycle. During Verizon's Q3 earnings report, CEO Hans Westberg said consumers are embracing 5G much faster than 4G. Right now, 25 percent of the consumer phone base is using 5G-enabled devices, up from 10 percent in the first year after the 4G launch.

And if the 5G update slows down in a few years, Apple could announce a foldable smartphone in 2023, according to reports. That wouldn't be surprising, since Samsung already has Galaxy Z Fold3 and Flip3 foldable phones, and Apple is usually late in terms of hardware innovation. But when Apple finally does come along, it always executes the new technology better than the competition.

Samsung's Galaxy Z foldable phones, for example, have been criticized for their weak battery life and creases where the screen folds. Apple's foldable device likely won't have such shortcomings, given its longer development time, and that could make it the most popular foldable phone on the market.

The company is also expected to announce a long-discussed virtual reality/ augmented reality headset this year. The Apple headset won't be available until 2023, but the product could drive sales at the same level as Apple's other wearable devices, which currently account for about 10% of total sales (along with the Home and Accessories categories).

Well, and of course, the important point is the increasing free cash flow, share repurchases, and dividends.

The company's stock is not cheap, but with a price to free cash flow ratio of 31, it's hard to argue that Apple is overvalued.

The company's annual free cash flow is approaching $100 billion, and management is giving it all back to shareholders. Apple spent $84.9 billion on stock buybacks and $14.5 billion on dividends last year, bringing its dividend yield to 0.51%. When you believe that Apple's free cash flow continues to grow, up 55% over the past three years, the stock can grow without any expansion in valuation multiples.

Moreover, share repurchases work as expected, reducing the number of shares outstanding and therefore providing more free cash flow per share. Apple's free cash flow per share has grown 77% over the past three years.

Further 5G upgrades, demand for new products, and continued growth in the high-value services segment should result in even more free cash flow over the next few years, driving the company's stock up.

Of course, an economic downturn or major market correction could cause Apple's stock price to drop before it grows. But these are short-term risks that we all accept as investors. If you buy Apple stock today intending to hold it for the long term, you will be in a strong position to get an attractive return on your investment that will parallel the underlying growth of that business.