…even as they expand their offerings of both products and services, they still say “no” to a lot. The best, not the most.
For those who have been reading my Apple articles for the last 2 years, you have seen me highlighting these challenges through fiscal 2019-2020, despite my overall bullish calls. The biggest questions in my mind for the last 2 years were whether they could get iPhone back on track in a highly saturated smartphone market, and China back on track given the new geopolitical tensions?
I bring this up, because investors have to ask themselves the same questions about individual stocks like Apple, and the broad market in general:
- Will cash flows justify current high valuations? Or are these gains baked in? For Apple to return to that 22 P/E I thought was right, and that people laughed at me for suggesting, it implies about a 95% YoY earnings performance in fiscal 2021 at a flat price trajectory, even with generous assumptions for buybacks. Their Q1 34% YoY EPS is pretty mind-blowing, but it is not 95%.
- Failing that, are we in the middle of another broad revaluation like the one that began in 1983?
Let’s look at just how good a quarter it was. Here, I am tempted to just say, “exceeded everyone’s most optimistic projections,” or “the greatest quarter in the history of capitalism,” and move on. You have probably already seen some of these numbers. Keep in mind, this is the largest company in the world growing at these rates.
- Revenue up 21% YoY
- Gross profit up 26%
- Operating profit up 31%
- Net income up 29%
Apple saw double digit YoY growth in all regions, with an especially strong recovery in Japan, where 5G networks are also more mature. And if we extend out the seasonal patterns for each region, it looks like very strong years in China as already mentioned, but also in Apple’s two largest regions, Americas and Europe.
I’ve described India as Apple’s final frontier geographically. It is a large, complex place, and Apple’s struggles selling phones there are also complex. But the short of it:
- Most people in India cannot afford an iPhone, but that still leaves tens of millions who can. They largely do not get them.
- The biggest reason is there are very high tariffs on imported smartphones.
So Apple has made a few moves in recent years to try and get in on this very large untapped market.
Services and Wearables
Unstoppable. I say it every quarter, and here we are again. In the trailing 4 quarters, if Services was a standalone, it would place at number 59 on the 2020 Fortune 500, just below HP, and above Goldman Sachs and Morgan Stanley. If Wearables, etc. was a standalone, it would place at number 99.
In the past 3 years, Wearables, etc. has grown at an annualized rate of 33% a year, and Services 22% a year. Even in trough quarters, these categories are growing at double digits YoY.
Usually I dig into these categories a bit here, but I want to instead step back and talk about Apple’s long term plans for these segments as we enter a new supercycle. First let’s look at what the supercycle means on the top line:
What we see is a general uptrend, with especially good years every 3 years. But notice how much more prominent the 2015 spike up and down is compared to 2018. This is because of strategic decisions Apple began making on the left side of that chart.
Things were really good at Apple with massive iPhone growth every year. But they already saw the plateau in the global smartphone market coming, so they began heavily investing in these two categories (wearables and services) to complement their organic growth.
No review of Apple’s quarter would be complete without some discussion of buybacks, as it is a big part of the stock price rise in the past decade. In the first place, Apple has now returned $530 billion to shareholders through dividends, and mostly buybacks.
Apple Outlook: The Short Term
For about a year, I have split up my Apple recommendations into long and short term. I remain a long-term Apple bull, and have been a continuous shareholder since 2005. People with whom I speak regularly are very tired of hearing about it from me.
But I think you can tell that even an unabashed Apple bull like me thinks the recent run up is overblown, even with the post-report trading last week. They remain the greatest company in the history of capitalism, in my opinion, but are they worth 36x earnings?
Your answer to that question should be based on your answer to the question I posed in the introduction: are we undergoing a broad revaluation of stocks like we saw beginning in 1983? If your answer is “yes,” then a short term bull story for Apple looks much more convincing. But if your answer is “no,” then this is a good time to take profits.
Like I said, I still lean towards no, but I am much less convinced than I used to be, before it became clear that the flood of debt-funded household liquidity was ending up in the market. If another set of checks are sent out with the same structure as the last one, this will be tossing another log onto the fire.
For years, my call on Apple was pretty simple: wait for the next dip and buy more. Like just about everything in the world, that became far more complex in 2020.
Apple Outlook: The Long Term
…I started buying back in 2005 and haven’t sold a share since. The plan at this is to die with the shares, and let my wife spend the money. If our family histories are any guide, she will likely outlive me by 15-20 years. So our situation is a bit unique.
But I still probably have 25-30 years left, so why am I so confident that I will still be holding those shares? The list is very long, but I will try and be as succinct as I can.
Leadership. It’s very hard to be Michael Jordan’s replacement, and Tim Cook has lived with that sort of criticism for almost a decade now.
Security and Privacy. In a world where data is flying around everywhere, the importance to users of security and privacy keeps growing.
…In addition to Facebook’s own apps, 85,000 iPhone apps send data back to Facebook…
The latest move to secure their users’ data comes with iOS/iPadOS 14 and macOS 11. Apps are already all sandboxed in Apple operating systems, but they added a new sandbox…
ESG. Apple has shown up in several ESG funds already, to the chagrin of many, but are the fund managers wrong to put them there? I would say no.
Customer Satisfaction. This is my most important metric for any business, regardless who the customer is. …
Focus. It’s an amazing thing to say about the largest company in the word, but even as they expand their offerings of both products and services, they still say “no” to a lot.
The best, not the most.
The Apple brand. It cracks me up that they don’t, but Apple lists no intangible assets on their balance sheet, which is where things like IP and brands go. …how Interbrand put it:
In as much as many talk about the brand’s aura, Apple has consistently changed what was in people’s minds by changing what was in their hands.
…brands are an asset in many ways, but one of those ways is carrying a company through brief rocky periods. Apple’s brand can weather a relatively long storm.
The tech stack. The other big part of those intangibles Apple doesn’t list is IP. This, ultimately, is the most important part of what makes Apple so durable for the long haul.