Over 3 years ago, I wrote “Apple: IF I could buy and hold only one stock, this is it”. The premise was:
“I’ve often been asked…If you could buy just one stock for your kid and hold it for at least 5 years, what would that stock be and why? Without blinking, I would always say AAPL.”
And boy, did I have my detractors…
Apple (AAPL) was trading at $390.49 (or $55.78 accounting for the 7-1 split) and SPY was trading at $129.33. Before Apple announced its recent massive quarter, it closed at $109.74 (up 96%) vs SPY at $203.88 (up 57%). Excluding dividends, it beat the “market” albeit with more volatility (which also provided us with more trading opportunities) as you can see from the chart below…
…which worked wonders for our mechanical trading model and
…we still have 4 recently opened positions still in the money.
Last Monday, Apple reported its record breaking quarter. I won’t go thru the fundamental analysis side as I believe there are SA writers here that have done a great job covering it. However, allow me to highlight the items that will serve as some sort of “claim chowder” to support my bullish thesis over 4 years ago despite the noise and drama that was surrounding the company. The highlights of the recent earnings call were:
- Record quarterly revenue of $74.6B; net profit of $18B or $3.06EPS. It holds the record for the largest quarterly earnings result EVER. Do you notice, it doesn’t even blame “currency fluctuations” as an excuse?
- 65% of its sales are now outside of the good ol’ US of A.
- 74.5M iPhones were sold and was a new record.
- 5.5M Macs in a moribund PC market and 21.4M iPads.
- Sold the 1 billionth iOS device during the quarter.
- iPhone sales were up 46% YOY and ASP (average selling price – $687) was also UP (so much for the “Apple need to sell cheaper phones to win “market share” meme).
- Growth in China, India, Japan and Korea. Hello Android switchers!
What Kool Aid was I drinking 3.5 years ago? Could you have seen this as well? Why are some of us so drawn to false prophets? Now, while I certainly don’t have Michael Blair’s following or Henry (the ex-con) Blodgets’ riches, I do know that both have been consistently and more often hilariously wrong when it comes to Apple. Yet, I’m sure they are raking in the money with the same “doomed” angle spun a hundred different ways (some would argue there is nothing fresh with their bear arguments either…how they are able to push those materials out is beyond me. I digress).
Samsung’s and Google’s betrayal was the best thing that could have ever happened to Apple. Ever been betrayed by a best friend or business partner or girlfriend or spouse? Did the painful lessons learned from those failed relationships contribute to your future successes?
We can certainly thank Samsung for teaching Apple a thing or two about how to exact revenge on a conniving, manipulative, and treacherous partners! The recipe was pretty simple:
- Focus on what you do best. In Apple’s case, it was on building the best products and figure out the enemies’ sweet spots – for Samsung, it was the larger screens. Was it a coincidence that Samsung suffered an earnings implosion during the same quarter that the iPhone 6 and 6Plus were released?
- Minimizing its reliance on what Samsung and Google had to offer. Samsung used to be the dominant supplier for Apple’s chips; now, it has to compete with TSMC in price as well for Apple’s orders…not a great position for Samsung to be in. Facebook (FB) is eating Google’s (GOOG) lunch in mobile; with Apple doing everything it can to rid itself of anything Google, how long can Google continue to put a positive spin on its lack of traction in mobile Ads? How will iAd disrupt this market?
- IMHO, the huge success of the iPhone 6 and 6Plus provides a tipping point – the beginning of the end of the Samsumgs’ Galaxy line. When the next Galaxy line (high on useless specs – “flexible” is the next cool?) bombs, expect it to fade away and get re-branded. The results will be the same as the Emperor really has no clothes at this point of the ball game. This will leave Apple to clean up the mid to top tier market and leaving the bottom to the rest.
Nothing beats home cooking. My wife makes (at least in my taste) the best smoked Salmon Spinach salad with her secret dressing. I’ve tried ordering it, I’ve tried making it, I’ve asked my ex to make it (that didn’t go over well) and nothing comes close! She does the whole dish from scratch (except catching the fish and growing the Spinach!).
Apple, if you haven’t noticed, has been homebrewing (and buying tech companies that it could integrate) its own secret sauce – its OS and its chips. This was the reason why they were able to shock the tech world with the first 64bit mobile chip that its competitors were quick to dismiss as a marketing ploy (funny how they are now racing to have one themselves!). It is also the very same reason that Apple was able to successfully integrate touch ID on its gadgets while the rest are still scrambling to match it.
Currently, there isn’t a smartphone company in the world that controls its hardware and software designs as tightly as Apple. Until that happens, every OS and hardware release will continue to set Apple apart from its competition. Why do they need Intel (INTC) to power its Macs?
What happened to all the “but Android has the biggest market share” ergo Android is “better” than Apple crowd? As Dr. Phil would say…”how’s that working for you”?
Market share alone does not guarantee continued success and profitability over the long run. Blackberry (BBRY), Nokia (NOK), Dell (DELL), and Motorola (MOT) will remind us that there is nothing permanent except change. Apple is not immune to this slippery slope.
Tim is the real deal. We’ve seen what he could do as a CEO for 3 years running now. Apple is in good hands; SJ picked the right person to lead the company.
State of disbelief. The general market (pundits in general) are still in a state of shock. After years of feeding us lies and the meme of “Apple is doomed because (fill in the blanks)”, it continues to doubt Apple’s future. Some samplings…
How do these jokers make a living providing advice is beyond me. I like reading crazy doomsday predictions about Apple. It makes me feel sane and normal.
6 reasons why I think it continues to be a compelling buy…
1. Keep it simple stupid! Why do pundits and arm chair quarterbacks obsess themselves with “new and forward looking” analysis that looks at Apple from a “fresh angle/perspective” when the real story is just in front of them?
For example, why are some pundits fretting now about the iPhone being the single biggest driver of its revenue right now or how will Xiaomi impact iPhones’ China sales? Using this logic, should we discount Netflix (NFLX), Priceline (PCLN), or even Google the same way for that matter? It is almost like the market is viewing Apple as having the same growth potential as Microsoft (MSFT) or Intel . Replace Xiaomi (used to be Samsung) with another “up and coming” competitor and you will notice that the same tired bear story is being written as a “fresh angle”.
Because of this perceived dissonance, Apple will most likely remain “undervalued” and will therefore provide patient long term holders like us with more opportunities to re-balance our holdings as we see fit.
2. The future of mobile computing is in “context” and Apple’s ability (by leveraging its gadgets, software, and partners) to act as an “enabler” to enrich the various activities in our daily lives. Consider this scenario (masterfully written by Kontra)…
The launch and success (it appears to be gaining traction) of Apple Pay, along with the development of future apps/software/hardware that would incorporate this payment system further supports my belief that “context” based transactional chains aided by Siri, Apps, and Apple’s OS will be the next big wave that will further differentiate Apple’s ecosystem from the rest. What do you think are the possibilities when you start adding CarPlay, Healthkit, and HomeKit into the equation?
3. Apple now has the financial clout and freedom (from Steve) to manage its denominator. Since I’ve been following Apple (when Moby Dick was a sardine), I do not remember a consistent time frame wherein Apple had the freedom or ability to manage their share count using buybacks. While purists like me had a hard time adapting to Tim’s use of debt and Cashflow to fund buybacks; it wasn’t difficult to surrender to the logic behind it. I had to trust that Tim knew what was best for the company and the shareholders; the rest is history.
4. Despite Apple’s fundamentals, it continues to be “under-owned” (60% as per Yahoo Finance info) by most fund companies. Netflix (88%), Microsoft (71%), or even Amazon (68%) has been given more love! Not surprisingly, Index funds unconditionally embraced Apple.
5. Just because people are from the Emerging markets, it does not mean that they don’t have money (or still use Rickshaws). Of course, I was being facetious. Do you remember Gene “the Apple TV is really really really coming” Munsters’ line about Emerging markets? He said:
“…the iPhone is growing slower in the Emerging markets because it is priced too high”.
Gene has been so wrong so often that I still cannot believe he is still employed! How could I be so right here and even way back in 2011? If the statistical trend continues when it comes to the population/economic growth outside of the USA, the middle class population in Emerging countries (Asia Pacific specifically) will have the most disposable income. This should not really be a surprise as the transfer of wealth (from North America to Asia/Middle East) have been going on since the 1970’s.
6. It is just a very well managed company with products that consumers do not mind paying a premium for.
When should you worry about Apple?
Remember this chart I shared not too long ago…
Where do you think are we when it comes to Apple, its gadgets, its stock price, and its addressable worldwide market?