There are several excellent articles here on Seeking Alpha that have stated how good the financial fundamentals of Apple Inc. (AAPL) are, and I agree that they are solid, but there are also plenty of stocks out there with good fundamentals. What I haven't seen on Apple is a comprehensive set of reasons that makes this a "once in a lifetime" investment opportunity. Now I don't use the term lightly, and I firmly believe that there is no other equity on the planet that will deliver as much return as Apple in a 3 year time frame.
As a technology and finance industry professional with 15 years of experience, I will state my case with a list of reasons below.
As we already know, this is a stock in which the management team have gotten almost everything correct (ok EPEAT aside..), but here's a list of exactly what I believe they have got correct. Some of them will be more obvious than others, but I wanted my list to be comprehensive. I challenge anyone to give me another stock which has all of the following properties:
1) Excellent market timing.
Shifting their flagship product release to capture the holiday sales in most western markets.
2) Iconic product design.
Since Sir Jonny Ive has been responsible for all of the iconic designs since Steve Jobs returned to Apple, this is likely to continue for the next few years due to the executive management remuneration package that Steve Jobs put forward before his death. This was put into place to encourage all of the senior executives to stay on past 2015. It's also hard to imagine who could entice him away, or pay him better, or provide him more recognition for his work.
3) Product Cost.
Since Apple has the financial muscle to buy large parts of the supply chain, and gain economies of scale when buying parts, the products could not be manufactured more cheaply by anyone else to the same quality.
4) Price Point.
Apple has prestige, which money cannot buy. It comes with years of pedigree in designing and manufacturing to a high quality. This gives them the ability to charge a premium which makes them a very recession resilient stock like most luxury brands.
5) Yearly product cycles.
Apple are constantly innovating in a new market, which makes them different than large market leaders in the past who have failed such as Kodak (EK).
6) Around 20% of their market cap is cash.
This gives them the option to enter new markets with a much higher likelihood of success, but also affords them the scope to fail more times than their competitors.
7) A young market, and one that is shifting users from the current PC market.
The global smart phone market is still very young, and a long way off from maturing. However, what compounds the effect of a shift from feature phones to smartphones is the fact that smartphone activities encroach on the PC market, so it becomes more of an essential item rather than a showy gadget. The recently published annual OFCOM media survey shows the trend in movement of activity away from a PC and onto a smartphone:
It's hard to exaggerate the significance of the smartphone tsunami, especially when we see Ofcom's discovery that more than four in 10 smartphone users say their phone is more important for accessing the internet than any other device. Smartphones are increasingly central to consumers' lives - for online shopping (57%), social networking (30%), tweeting (23%) and even watching TV/film content (22%). I've seen this time and again among family, colleagues, friends and acquaintances: the moment people acquire smartphones, their reliance on PCs or laptops declines, sometimes dramatically. But up to now those observations had a purely anecdotal status. The Ofcom report changes that.
8) Intellectual Property that cannot be copied.
When Dyson (private company) spent huge amounts in research and design to his high end bladeless fan heater, it was taken apart and copied by the Chinese, and sold at a fraction of the price to the Chinese Market. The Chinese do not respect western companies' intellectual property. However Apple's I.P. cannot be copied. Sure they could copy the hardware, even to the same economies of scale, however, the phones would not have access to the number one app store in the world as Apple control the software, and link it to the hardware, which is linked to a unique Apple ID; it's genius. Incidentally, since Samsung (SSNLF.PK) use Android, they will suffer from this issue in China in the next 2 to 3 years. Watch their share price drop, when cheaper functionally rich phones compete with the Android handsets in China when their smartphone consumption increases.
9) Apple have one of the largest databases of credit cards in the world.
One of the main reasons why Amazon (AMZN) trade at such a high P/E is that the company also have a large number of credit cards linked to their proprietary ID. However, Amazon do not have all of the other points that I have listed against Apple and so in my opinion, the valuation given to them by the market is ludicrous.
10) Third party support.
In terms of both software and hardware we can see the level of support given. Developers who are willing to invest a large amount of money will always release on iOS first, for the simple fact that if you see the results of surveys into the monetization of apps, it is Apple customers who are most likely to pay for an app, which makes perfect sense as they are the same people who are willing to pay more for a luxury item, and on average have more disposable income. There is also the fact that Apple iOS apps are harder to pirate. See this recent article from a developer who has made big losses due to piracy on the Android iOS. The evidence mounts against developers supporting Android as strongly as iOS.
11) Strong physical and internet retail presence.
When other companies like Samsung and Microsoft (MSFT) are playing "catch up" by building more physical shops, Apple has been executing this strategy well for many years.
12) Long product lifetimes.
The iPhone 3GS is still supported in the upcoming iOS 6, albeit not fully, but it is supported. This strategy allows them to access and compete with the lower ends of the market by allowing the older phones to stay on the market. This allows them to gain new customers, and new Apple customers have a much higher retention rate than Android customers.
13) They do not sell advertising.
Companies like Google (GOOG) have not had the best relations with China historically due to their core business being in digital marketing, and their refusal to censor. Apple have made iOS 6 to have unique customization for a Chinese audience including using their favorite search engine (hint: Not Google). China is the fastest growing market on earth for smartphones. A well executed strategy there will pay off handsomely, and so far they haven't put a foot wrong. A China Mobile partnership is inevitable due to soaring demand for the iPhone, and they have 1.05 billion subscribers.
14) They pay a dividend.
A lot of companies pay a dividend, but in Apple's case it is effectively money for nothing. Nobody expects this payment to hinder its growth, how could it? The 40 billion it is paying out over the next 3 years (including the 10B buyback), will be made back in 2 or 3 quarters! People are buying this stock for growth and are being paid for it. In my book, that's a bargain.
15) Large barrier for customers wanting to switch away from Apple.
Some people have said that all it takes is for people to start preferring another handset, and Apple will go the same way as Sony (SNE), Nokia (NOK) or RIMM (RIMM). Well, the aforementioned companies did not have a radically successful app store, and the halo effect of synchronization between devices, with one Apple ID. Anyone who has invested money in apps or even another Apple device will not be switching to another mobile OS lightly. This includes users of the iPods and iPads (or the parents of them) who are thinking of their first smartphone.
As a final point of note, the latest Q3 2012 earnings release which was regarded by the market as a miss, has the following positives:
- 100% y/y growth in China.
- $7 Billion added to the cash balance.
- A trailing P/E of 10.5 ex cash as of 25th July 2012.
In conclusion, for the reasons above, I'm long Apple. Things may change but I think for the next 3 years, the stock is head and shoulders above any other equity on the planet. Macro conditions may force the price of this equity down along with all of the others, but the already compressed P/E ratio will lessen that potential blow. It also proved in 2009 that it bounces back a lot quicker than other equities, so even in spite of an EU meltdown, this is a good investment to buy and hold.
Disclosure: I am long AAPL.