On a day like today, I’m forced to re-evaluate my overweight investment position in Apple Stock. Fortunately, I first purchased Apple shares in 2004 in the same month that I got my first iPod, the newly introduced iPod Mini. At the time, I marveled at the miracle of having so much of my music embedded in such a small player and the ease with which I could play back and enjoy the music. I have since owned many other Apple products, but my favorite Apple has been AAPL, the stock.
Why did I buy in the first place?
I have 3 primary investment philosophies that I use to initiate any real-money investments. Apple checked 2 of the boxes at the time. First, it was a product I know and love, along the lines of Peter Lynch’s “Invest in what you know” principle. Second, it fit one of my identified business trends, the Long Tail, by enabling access to ever more distribution of music and other media content.
It has payed off well for me over these 9 years. So, even with Apple down another 13% today at about $450 per share, I am up about 2000% from that initial purchase, so nothing to worry about from that sense. But, the question remains – is it time to exit the building? My answer is an emphatic “NO!” so let me explain some reasons quickly.
Does my reason for owning still apply?
My original thesis for investing still applies. Apple still makes great products that I am more than willing to pay for and enjoy owning and using daily. Also, the Long Tail of media consumption continues to develop, and I believe the Apple ecosystem is a strong contender in this space, for music, TV, movies, books, apps, and other content. The value of the ecosystem can’t be too easily dismissed here. I, and many others, have invested in content that is most useful when paired with Apple products, so I’m most likely to continue choosing Apple as long as there isn’t a more compelling reason to switch. In addition, I believe that a newer business trend and inflection point that I’m now investing toward also applies, and that is the mobilization of computing. Smartphones, tablets, and similar are changing the way that we compute and work with computers. Apple is also at the forefront of defining this next generation of computing.
Is the business still sound?
What about the fundamentals? Apple is debt-free and holding a pile of cash, now over $130 Billion (with a B!). The two core business categories continue to grow. iPhone sales grew by 29% YOY and iPad sales grew by about 48% YOY. That is tremendous growth into the mature markets of mobile phones and computers. Still, Apples global market share leaves much room for future unit growth. Also, that means Apple sold over 75 million iOS devices during that quarter, further establishing the ecosystem.
Is the price too high?
What about the Price? I think Apple is undervalued. If you can show me another company that has achieved revenue growth of 27% per week YOY and continues to make record profits in it’s industry and sells for an effective P/E under $8 (after removing cash), then I want to know that stock too. For another perspective check, if Apple ran a price multiple (PE) like Google, it would be priced at over $1000 per share. If it was priced at a multiple like Amazon, it would be priced at over $6000 per share. In all, I think that the current price is quite attractive for the earnings. If Apple is able to continue growing revenues going forward, it will have to move to a higher price since there is not much downside from here.
Why is the market less enthusiastic than me?
There are 2 main problems that I have to acknowledge. First, margins are being squeezed. Both iPhone and iPad yielded lower margins in this latest quarter’s results. That’s why income stayed relatively flat with such dramatic revenue growth. In iPhone line, this is mostly due to the product refresh. iPhone 5,being early in it’s lifecycle, is more expensive to make so the margins are somewhat lower. Over the lifecycle, Apple will see component costs go down and yields go up with relatively stable pricing, so the margins will improve. For iPad, they launched the iPad Mini recently and a greater portion of iPad sales are in the lower priced and lower margin iPad Mini. I see this as a worthwhile trade-off as it is important to remain the best provider of mobile computers and protect market share position. I believe that Apple will continue to dominate this space much as they did in iPods. That will require them to offer more than one model and price tier as they are already doing.
Second, there is an emotional question of whether Apple will continue to be the same company now that Steve Jobs is no longer at the helm. As an admirer of SJ, I understand this concern and share it in the long run. Disney and other great personality-driven brands have struggled with the loss of their charismatic force of a leader. My answer to this is that even if Apple does nothing truly innovative and just iterates on the products already existing, Apple will continue to be a major force in the computing and phone markets. That alone should continue to drive great value over the mid-term. I personally believe that Apple has a unique culture that could still birth new and exciting products that transform other industries. Maybe its the elusive Apple brand TV or maybe something else. We can only wait and see.
My Apple Stock is not for sale!
I’m willing to ride this one out. In the current economy, if I sold my Apple stock, I’m not sure what would be the better place to safeguard my retirement savings. Apple pays about 2.3% dividend with a chance for the dividend to increase over time, which is better than money market or T-Bill rates. I believe that Apple will continue to grow it’s business, so I expect to reap some benefit from that over time as the market realizes that Apple is still performing well and will continue to make piles of money for it’s shareholders.