3 Reasons Apple Will Make You Rich
Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Siri, how is Apple (NASDAQ: AAPL) stock performing?” A soft double ring assures me Siri has gotten my message and is contemplating a response. A short time later a friendly, somewhat snarky voice answers, “It’s been better.”
“It’s been better” is a generous description of the stock’s performance. If for a moment Siri dropped her clever personality, I venture it might say something along the lines of “it’s gotten crushed.” Year to date the Dow is up about 14%, while Apple is down 15%.
Less than a year ago, Apple was heralded as the market’s best stock, possibly even the first $1 trillion dollar company. What has changed? Aside from the addition of a handpicked CEO, relatively little. Apple remains strong, and fortunately for you the market’s loss can be your gain.
Bears swiping at Apple’s stock price have created a profitable entry point. The time is ripe for hesitant investors to become shareholders. Apple is dedicated to expanding shareholder value, here’s how.
A moat of protection
One moat is typically enough to protect a castle and ward off attackers. Fortunately, Apple has two to protect its massive cash pile.
Apple’s brand name might just be its most valuable asset. Thousands of loyal fans will wait in line for days to be the first recipient of Apple’s latest product. These customers will gladly pay a premium for an Apple logo on their device. In addition to its loyal fan base, Apple’s brand is synonymous with easy-to-use products and cutting edge technology. Apple’s mind share is commanding, a claim few competitors can make.
It’s no secret that Apple makes great products, but so do other companies. What keeps customers coming back to Apple? A highly integrated range of products. Customers that purchase iPhones want the ability to seamlessly transfer their work to a computer or tablet. Purchasing the other products in the Apple suite (cross-selling on Apple’s part) gives this power. If a consumer buys a Blackberry Q10 from Research in Motion (NASDAQ: BBRY), he might receive a single decent product at a low price, but with no integration. RIM only makes money once.
In today’s fast paced world, time is a commodity. Integration saves time. Consumers will gladly pay a premium for the service. Competitors, for example, have caught wind of the trend. RIM has released Dropbox and Office 365 apps to bridge the gap between devices. Unfortunately, these services pale in comparison to Apple’s iCloud and are too little, too late. Consumers have taken note as it lost three million subscribers last quarter. Moats of protection are easy to overlook, but they increase and protect shareholder value over the long-term.
Unlike many of its industry peers, Apple is relatively tight-lipped about its new products and ongoing projects. For example, Google is promoting its much hyped Google Glass, a product that consumers will not be able to purchase for at least a year or two. While Google is diversified, Apple is extremely focused on a few select products. History has shown that Apple’s focus is rewarded.
Apple has not launched a groundbreaking product since its introduction of the iPad in 2010. While Apple has released multiple line extensions of its products, consumers are clamoring for a new innovative product. This creates an opportunity for investors to capitalize. Apple will launch a new product sometime within the next year. Whether it’s Apple TV, the iWatch, or a completely new concept, the stock will pop, immediately creating value. Apple’s focus will make this product a hit among consumers, creating long-term value shareholder value.
Note Apple’s performance after Steve Jobs announced the original iPhone.
Source: Y Charts
Apple’s board recently announced that it would conduct a $60 billion dollar share repurchase. Some investors may be hesitant to see this as good news after experiences with companies such as Dell. In that case, a share purchase eroded value as the company purchased its own stock at a premium.
Berkshire Hathaway’s Warren Buffett believes a share repurchase can create shareholder value under the right conditions. In his 2011 letter to shareholders he outlines his requirements:
1. A company has ample funds to take care of the operational and liquidity needs of its business
A glance at Apple’s balance sheet reveals the company has a $145 billion cash stockpile. I would say this safely qualifies as “ample.”
2. Its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.
While it’s hard to determine Apple’s “intrinsic business value,” it is only trading at 10 times earnings. For a company like Apple, that sounds like a discount. Apple passes Buffet’s litmus test with flying colors. A share repurchase should increase shareholder value.
The Oracle of Omaha once said “Be greedy when others are fearful.” With the stock market surging ahead, it won’t be long before Apple catches up. Apple’s board and management are committed to creating long-term value. Through multiple moats of protection, new products, and a share repurchase program, shareholders will be rewarded. Now is the time to buy. Don’t believe me? Just ask Siri.
This article was written by Joshua Sauer and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. Neither has a position in any stocks mentioned.The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!