What I'm Looking for In a Growth Stock
What I am looking for in a growth stock is a holistic growth in all of a companies' product or services. I don't usually like growth companies with a diversified line of products or services. I prefer companies with a focus and a small number of product or services. Reason for this is focus. Focus is only achievable if a company is discipline in product development. And I love disciplined companies.
In addition to having a small and focused range of products, I'm looking for a history of growth in every of those product and a potential for that growth to continue. The regular profit growth rate must be achieved thru actual revenue growth through on going operating revenue and this growth should be sustained at least for 2 years. I do not consider one time gains like the sale of a property or assets in the equation.
Classifying Apple (NASDAQ:AAPL) as a Growth Company
From Apple's financial report, they have the iPod, iPhone, iPad, Mac, mobile Mac, iTunes and App Store. This to me is a rather focused portfolio of products for a company that is worth more than half a trillion in market cap. These are the only products that contribute significantly to Apple's bottom line.
In fact, over the last three years since 2009, Apple's profits has been growing thru rising sales of those products. Operating profit growth rates have been a very consistent 75% percent growth yearly. Was the parabolic growth of AAPL extreme? Maybe. But because of its consistent profit growth, it was well justified.
From this point of view, with such a focus in this small number of products, Apple is defined as a growth stock.
Why is Apple So Powerful
With Apple's limited streams of products, it has been able to generate profits and cash-flow of this level. This focus Apple has as a company is what makes Apple so powerful. Focused research and development with such a large cash flow has a multiplying effect on the company's efforts in staying ahead of competition.
This limited number of products also allows Apple to effectively integrate their products and services, enticing consumers who owns just one of Apple's product more likely to get products from the rest of the eco-system. The success in integration thru Apple's iCloud platform is evident by the success in every new product launch.
The largest driving force behind Apple's focus on these few products is discipline. It would be really easy for apple to start developing products like iMac A1287849 and the MacBook F34849 series to cater to every single market segment. But discipline has been what's keeping Apple so focus. This discipline allows Apple to create products that they believe is good for the consumer, instead of creating products to cater to everyone. With this limited variation of product, together with its vertically integrated chain of retail stores, Apple in full control of it's profit margin
This limited selection of product also reduces the confusion for consumers. It will take a buyer probably one hour to understand the differences of Samsung's large selection of galaxy phones while choosing the iPhone 5 is an easy choice. Choosing between the iMac 27 or 21 inch is easier than choosing an Alienware (what are the names of their mobile computing series?). Though a luxury, Apple makes it easy for anyone to join its ecosystem.
Choosing Apple's Mac OSX is also easy as well. There are no editions of Home, Professional or Enterprise. Choosing one of Microsoft's Windows 8 requires some research. To select the edition of Windows that meets all your needs require you to spend some time just to decide. Choosing OSX is easy. There is only one version and that version is no less inferior to Windows 8 Enterprise.
Having limited number of products of course can be a double edged sword. A failure and loss of market leadership of a stagnant growth product group will single handedly affect the entire earnings season for Apple. That compared to a company with thousands of diversified portfolio of products, a failure of one or even ten products will most likely not affect the company as a whole.
This was evident in the 3Q results where Apple's results did not meet expectations. Reason for this was that the iPhone did not meet analysts' sales target. Many potential buyers for the iPhone 4S were holding back in during 3Q for the much anticipated iPhone 5. Proof of buyers waiting for the iPhone 5 was when Apple sold two million iPhones on the weekend of launch.
Simply failing to meet targets for just one product will affect Apple in a big way.
If you decide to own AAPL, you should own it because of Apple's discipline, because you like the focused product selection. With a P/E of less than 10 after 2 November 2012's 3% intra-day drop, there is no better company to own now that has such growth in all of its product classes, and yet cheap.
My opinion however will change if Apple starts to launch products like iPad 7 inch, iPad 9 inch, iPad 11 inch, iPhone note, iPhone, iPhone X5, confusing the hell out of everyone.
Original post on MilkYourDough.com
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.