First of all I have to say that I would like to talk about “Apple the company”, not “AAPL the stock”. Today, more than ever before people spend more time trying to understand the stock than the time they spend trying to understand the company, once you clearly understand a company is pretty clear for you when you should get in and get out. This growing trend makes markets more volatile and investors’ work a lot more difficult. There are many reasons for that, but that’s topic for another article so I won’t cover any of that here.
The first thing people need to understand is what is Apple? and where its revenues come from. Believe it or not, not so many people understand that. Once you understand what is Apple you don’t need to ask anybody if is a suitable investment for you or not, you will have all the tools to help decide that for yourself.
First of all Apple is a very diversified company with a successful line of products that have been introduced at the perfect time when other products start to fading. Currently Apple’s best selling product is the iPhone, if you look back just a couple of years ago, the best selling product was the iPod, and back in 2003 were desktops, if we look ahead iPads or Apple TVs seem to be star products of the future.
Apple is an innovative company that releases successful products every 3-4 years. If that trend continues, revenues and market share will most likely follow. Apple is perhaps the only technology company that has been able to integrate its product ecosystem from hardware to software, bringing along a huge community of independent developers with it. This makes Apple a company with a strong competitive advantage that would be very difficult for competitors to challenge. Just think about this, last quarter Apple sold 35.1M iPhones, while Nokia windows based smartphones sold “well over 1 million” phones according Nokia’s last quaterly report. To put these numbers in perspective answer this question: Would any developer in the world be interested in developing apps for windows based phones when market share is so small in comparison to Apple? absolutely not! The only way developers will get on board is if they are subsidized by Nokia or Microsoft, and that’s very unlikely to happen any time soon. No matter how much cash Microsoft has, it would be impossible to subsidize the development of thousands of applications for its platform.
This graph highlights two important factors:
The last two products Apple launched (iPhone and iPad) are still just at the beginning of their product cycle. The blue line on the chart represents iPhones released on June 2007, and the green line represents iPads, first released in April 2010. The natural cycle of these two products will likely follow the life cycle of the iPod (orange line), which is currently in decline. If you keep in mind that iPhones are currently 57% of total sales, there is no doubt that the future of Apple still quite promising.
Revenues from Asia are growing at a face pace. Apple’s Asian revenues grew 32% over the prior quarter. If this trend continues, by the end of their fiscal year, Asia-Pacific sales will surpass those in Europe for the first time. Apple’s Chinese iPhone sales brough revenues from China to $7.9B
As compared with other diversified, big technology companies Apple’s stock is not actually expensive. It’s PE ratio is just 14 while Amazon’s PE ratio is 142, and Google’s is 18.
Apple stock lookseven more attractive with the latest announcement of stock buyback and dividend payment. Apple will pay a quarterly dividend of $2.65 per share, beginning in its fourth quarter, which starts July 1. Apple will also buy back $10B in stock, beginning September 30th, when that happens many value investors who have avoided AAPL stock in the past may finally jump in.
There are other developments in the industry that make me think that Apple will continue to rise. One example of this is the spike in R&D which is a clear indication that a new product is coming down the pipe. The Apple TV promises to be as revolutionary as the iPad, iPhone or iPad.
The second industry development that can generate new income stream for Apple is the emergence of the mobile payment industry. Apple is the company with the best position to take advantage of the this technology and profit from it. Similar to what they did with music and books, they have the knowledge and expertise to bring this project to life at a massive scale. We are not that far for the payment industry to start a huge transformation. To understand this more you can download the PDF “15 Ways Mobile Will Change Our Lives – March 2012” by JWT, especially section 9 called “Friction-Free Purchasing.
One question I always get asked when talking about Apple is, if you are so sure about the future of Apple why don’t you put all your money there? While a valid question, I have few reasons for not taking that approach. First of all Apple could be king, but no matter how successful the company is, investment ALWAYS involves risks, any major world event, even if it is not related with Apple can bring the stock down, at least temporarily. Secondly there are many other great companies that I believe are undervalued now, with strong competitive advantages that have the potential to grow tremendously in the near future. I like to have a foot on those companies as well. Diversification is always a good thing to do, and can protect your investments from uncertainty. In my portfolio AAPL is my largest position, but it is just 14.6% of the total portfolio, especially section 9 called “Friction-Free Purchasing.
Some investors are afraid to invest in Apple because they feel it is getting too big. The company accounts for 20% of the Nasdaq 100 (not all companies on the Nasdaq are weighted the same. To understand more about this concept, read this article from Bespoke Investment Group). Apple is also #1 in market capitalization, having overtaken Exxon Mobil. I personally think this shouldn’t be a cause of concern, if a company is good, who cares about the size? Apple is not the first company in the world getting so big in comparison with its market peers. Ecopetrol in Colombia makes 20% of the IGBC index, Samsung’s weighting in the KOSPI 200 index is 16.4%. Does make Ecopetrol or Samsung risky investments? Probably not.
While I cannot tell you whether you should buy Apple stock, what I can tell you is that Apple is a great company. It innovates year after year and until that changes, Apple will continue to be the largest position in my portfolio. I will continue to watch Apple’s development, and I’m planning to continue building this graph, so you can see for yourself in one shot where Apple is currently and where they are heading.
Another interesting graph to see is the one below. This infographic compares Apple’s massive reach to things around it in the world.
Source: Best Computer Science Degrees
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