Apple: a Growth Company or a Value Play
I believe in investing based on a strategy premised on one or any of the 5 investing strategies: Growth, Value, Dividend Growth, Momentum or Catalyst/Event (Activism in the flavor of Icahn and others falls under catalyst). In this post my musings are on Apple, the past, present and future based on growth or value.
Net Sales in the first 3 months of 2017 were $52.9 B and Net Income $11 B. To put this into perspective, over at the other member of the FANG group (Facebook, Apple, Netflix, Google), Facebook Net Sales in the first 3 months of 2017 were $8 B and Net Income $3 B. Apple is a really big deal! Where is much of that selling happening, 40% from good ol’ USA, add 24% from Europe and 8% from Japan and you got it: 72% net sales from the developed countries. How about China, a big market with great potential? Net sales from China were 20%, great!! you would say but it declined by 14% from same period last year.
Now that you know the Where how about the What: iphone net sales were $33B which accounted for 63% of the total. Yes Apple is iphone and iphone is Apple. Is that a concern or should it be? iphone unit sales declined by 1% from same period last year. Maybe a one off, nothing to be concerned about considering the fat gross margins at 38.9%, but that was a decline from 39.4% last year.
Nothing good out of the last calendar quarter, oh there is, the 18% growth in sales from services: that’s what Apple calls their subscription services, things like App store, Apple pay and such. Considering that comes to $7B in 3 months, not bad, not bad at all, considering, as mentioned earlier, Facebook net sales for the 3 months were $8B. Is this where growth for Apple will happen or is there an inext? Couldn’t resist!
If the pricey gadgets Apple sells have reached much of the market, are concentrated to one product, and the demand on that product is softening putting pressure on margins, is Apple a growth company or a value company? Why should that matter?
In Aug 2013 Activist Carl Icahn bought Apple shares and brought his bombastic activism to the storied Tech Company. When he sold out 3 years later, amassing a net haul worth north of $3B, he had agitated for more buybacks and increased dividends.
On March 19 2015 Apple replaced AT&T in the exclusive club (30) of the Dow Industrial Average. That’s where the BLUE of the blue chips stocks reside. That’s right Apple is mature, that sort of sounds deriding, is staid the better word. By joining the likes of IBM, INTEL, MICROSOFT, and CISCO SYSTEMS, Apple can hence forth be a diligent cash machine (should we rename it US MINT?), ever growing dividends yields, and predictable sales. While there is no stigma attached to joining the DOW, it doesn’t sound like a revved up engine leaving tire marks and plums of dust in the corporate world.
One of the greatest investing minds in modern investing Mr. Warren Buffett, fondly and famously known as the Oracle of Omaha, is widely known to keep a wide berth from technology companies. In mid 2016 he bought Apple shares and in Feb 2017 he added some more to amass a 133 million stake worth over $17 B and Apple now accounts for the second largest holdings by Berkshire. This put Berkshire among the top 5 institutional holders of Apple stock.
Join the DOW, fancied by an investing guru, attacked by a corporate activist, that doesn’t sound like the death knell. By no mean no. When a company has $256B in CASH, that spells FIRE POWER. With deep pockets like that, just for laughs, Tim Cook can buy Uber ($60B) and snack on Twitter ($13B) on his evening stroll.
Everyone keeps looking towards the next major product out of Apple but we forget Apple is mostly not the first into a product category only the best in implementing and executing on a product. Whatever it will be, autonomous, flying or hop skipping cars, Apple has the human capital, cold hard cash and a history to re-invent itself in ways unpredictable. After all it was a computer company, then a music company, then a phone company. What all mere mortals like me and you can do is wait with unabated child like curiosity. Meanwhile Apple investors can continue to be rewarded with dividends and rising stock price.
We continue to be spoiled by double digit market returns over the last 9 years and may become jaded by dividend paying companies but the biggest historical returns from stocks come from dividend and dividend reinvesting. We need to readjust our return expectations and remember that the long term historical market returns are in the range of 7% so with 1.73% Apple dividend is nothing to sneer at.
So is Apple a growth company or a value company? Either way it’s a company and a stock smart money continue to invest in, so should you?
Disclaimer: This post is meant for informational purposes and should not be viewed as an endorsement to trade in any stocks mentioned. Before investing in the stock market seek the counsel of certified professionals, do extensive research and remember investing in the stock market is risky.