The Apple of any investor’s eye
This tech giant is characterised by a multitude of strengths and even if it doesn’t develop another product that is as successful as the iPhone, the odds are nevertheless in its favour.
appleInc. has the highest market capitalisation in the world for a reason: unprecedented serial success in different and innovative products and services.
Apple boasts a myriad of strengths, including:
An excellent brand, conveying affluence and luxury. With Burberry’s ex-CEO Angela Ahrendts as Apple’s head of retail, this is no accident. As a premium brand, Apple can earn significantly higher margins than its peers, as well as gain market share from first movers. A fulfilment infrastructure that is second to none, which is no coincidence: CEO Tim Cook is a supply chain expert. Furthermore, the company enjoys a rare negative cash conversion cycle as a result of its very dominant position relative to its suppliers who fight tooth and nail for the privilege of an Apple deal. This enables Apple to innovate rapidly, outselling peers who run into supply chain and cash flow problems. A strong retail sales force and footprint. A robust financial position with around $210bn in cash, which can be used for further R&D and acquisitions. Shareholders may also receive some of this cash as a special dividend when offshore cash repatriation tax holidays inevitably come along. An “ecosystem” which focuses on seamless integration from device to device – or “a killer experience”, as Tim Cook puts it. A track record of executing other companies’ innovations better and faster, which translates into strategic agility. With its strengths, Apple could capitalise on “the next big thing” that changes our lives – just as the smartphone did – and not necessarily have to be the first mover in whatever that “big thing” turns out to be.
Although we don’t know what the next big thing will be, there will invariably be a range of opportunities. The “personal Internet of Things” – which includes the likes of home automation – is often put forward as having potential for Apple domination. You could, for example, lie in bed and use your device to boil the kettle when you wake up in the morning. This kind of thing could become as much of a “necessity” as smartphones are seen as today. If home automation is viewed as a value accretive investment in one’s property, consumers may be willing to spend meaningful sums of money on associated products and technologies. So, if a compelling and seamless home automation solution hits the market – which is something that Apple is very well-positioned to provide – then the company’s solution, called “HomeKit”, could be the much-needed Senior vice president of retail and online stores at Apple Apple CEO encore to the iPhone, plugging right into the “Apple ecosystem”, while also being underestimated in its infancy by capital markets.
From driverless vehicles and smartwatches to financial services and targeted advertising, there are many opportunities for Apple – and these are just the known ones. Of course, there are also unknown opportunities as well as unknown risks. However, given Apple’s strengths, the odds are skewed in its favour.
Apple is on a 2.1% dividend yield but there’s more to the story. While Apple spends around $11bn per year on dividend payments, it is expected to continue spending even greater amounts on share buy-backs: in 2015, Apple bought back stock worth $31bn. Essentially, buybacks are equivalent to dividend payments in the way that they return capital to shareholders. Viewed in this way, Apple saw a staggering 7.7% “shareholder yield” for the 2015 financial year, considering dividends as well as share buy-backs as return of capital. It is rare to find a company with the strengths and brand of Apple, so cheaply priced.
However, one only needs to look at the fate of BlackBerry to realise the significant disruption risk in this sector. Therefore, Apple stock needs to be held in a well-diversified portfolio given what looks like a bifurcated future for the company: it could capitalise on its weighty opportunities and continue to do phenomenally well or, in an alternative scenario, it could be disrupted as BlackBerry was. In a sufficiently diversified portfolio, one can accept this risk while enjoying the potential upside towards which the odds are skewed.
The crux of the investment case for Apple lies in this question: can Apple again introduce a product that is as successful as the iPhone? If it can, Apple stock is a bargain. If not, then Apple currently sits on peak real earnings and is not quite so cheap.
While the market seemingly focusses on quarterly earnings numbers and the iPhone, I believe that the bigger picture is being ignored due to uncertainty around exactly what the next big thing will be. The fact that some of the company’s opportunities are currently shrouded in uncertainty doesn’t change the fact that the opportunities are there. All in all, the business has a strong, sustainable and multi-faceted competitive advantage, good management and, all risks and opportunities considered, is attractively priced below $110 a share.