Why I’m Buying Apple

By Matthew DiLallo - July 23, 2012 | Tickers: AMZN, AAPL, GOOG, INTC, MSFT | 0 Comments

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There is always a stock out there that as an investor you’re just reluctant to buy.  Whether it is some psychological barrier or a bad experience, you just cannot pull the trigger.  The more time that goes by, the harder it is to make the buy.  For me that stock had been Apple (NASDAQ: AAPL). 

I’m willing to bet that if you are reading this article you might have struggled with that one too, or maybe you are still struggling with it.  We all have our own Apple story, maybe you bought it decades ago and are now living the high life (though, if that’s the case why are you reading this?).  Maybe your story is more like mine where you bought it much lower than it sits today and turned around and sold it much lower than it sits today.  That’s the past and those decisions can’t continue to haunt the decisions we’ll make in the future.  Apple is too cheap and has too much future growth to be ignored. 

Before getting into the specifics, this recommendation is part of an ongoing series of virtual trades in a portfolio I’m calling the “No Drip, No Mess” Portfolio.”   For those following along, that portfolio has but a single technology company currently among the holdings, a simple written put on Intel (NASDAQ: INTC).  Large cap technology is incredibly cheap these days and is generating amazing piles of cash.  While I like seeing vast sums of it being routed back to shareholders in dividend form, their ability to reinvest that cash into new products is what’s going to really reward shareholders.  Apple is the best of both worlds with a soon to be steady stream of cash flowing back to shareholders along with a nice pipeline of product upgrades and whispers of its next big thing.

Why Apple and Why Now?

It truly goes without saying that “past performance is not an indication of future results,” a key principal that every investor must learn along the way, we’re not buying Apple to make up for missed opportunities but for the opportunity that lies ahead.  In that past I’ve written about two keys to Apple’s success that have made them a better company: their cash management and their simple product structure.  While that makes for a great case study, what’s more important going forward is how that’ll translate into continued growth.

Apple currently has two very profitable growth platforms in the iPhone and iPad.  Not surprisingly they are facing increased competition from a who’s who list from the tech space.  Amazon’s (NASDAQ: AMZN) Kindle Fire, Google’s (NASDAQ: GOOG) Android platform on mobile phones and their Nexus 7 tablet and Microsoft’s (NASDAQ: MSFT) Window’s platform on mobile and Surface tablets are just a sampling of the many devices that are now being built to challenge Apple’s dominance.  Who can blame them after Apple pulled in $11.6 billion dollars of net income last quarter alone?

While rumors always swirl about Apple’s next big product launch and what might be in the pipeline, I think that they haven’t even begun to tap the markets for their products already on the market.  Consider the iPad for a moment, it has been on the market for just shy of two years.  In those two years it’s been handed to me as a menu at a fancy restaurant, my pastor preached from the pulpit with it and on a recent vacation my wife lounged by the pool reading a book on it.  I’m sure you have your own revolutionary story of where you’ve seen an iPad being used in a new and innovative way.  Having just sold 67.1 million of them worldwide I don’t think they’ve scratched the surface for the product.  Nor have the begun to tap into the recurring revenue stream coming from future upgrades. 

Further, if you’re like most of Apple’s newer customers like me you first really discovered them via the iPod.  Eventually you realized you needed to join the smartphone revolution and upgraded to an iPhone.  It’s only a matter of time before you get yourself a tablet and why would you go outside an ecosystem that you’re comfortable with by getting a Fire or Surface, no you’re getting an iPad.  Finally, despite what Intel bears might say, the PC is not dead and as great as the iPad is for entertainment and some productivity functions you’ll still need a PC. 

Enter the Mac which is the product that I think has the most potential for upside.  It’s not just on the consumer side; the potential in the business market is massive as they have just 3% of the business market.  The PC industry expects to ship nearly 400 million units this year, but only about 5 million of those will be Macs.  The upside there is even more tantalizing than an Apple TV if you ask me. 

The Trade

Because of the stunning past success of the company I do think that discretion is the better part of valor.  Therefore I’m recommending just a 2% position to start which we’ll likely build over time.  For those scoring at home, that’s a grand total of three shares for the virtual portfolio.  Apple made headlines earlier this year when they announced their first dividend in over a decade.  At current prices the yield equates to about 1.75% but it has the potential to grow immensely over time. 

Risks and Why We’d Sell

While a major product flop could have investors heading for the exits, we’d likely hold our shares unless something more dramatic happened.  If a competing product from Amazon, Google or Microsoft really started to eat into their market share after multiple product mishaps, then it might be time to reconsider an investment in Apple. 

If Apple ever had to resort to buy growth and went on a buying binge paying obscene premiums for acquired companies that would be a tell-tale sign that the company can no longer innovate in-house.  Any deal to move the needle at Apple would have to be so large that it’s unlikely they’d be able to get it approved by regulators.  Should Apple ever announce a head scratcher of an acquisition we’ll be reevaluating our investment.

Bottom line, the best time to buy Apple is today, sure you could have gotten a better price in the past, but we’re not living in the past.  At just 14 times earnings and with over $100 billion dollars in the bank, Apple is cheap.  They still have a lot of ways to grow and while many ways still have not been dreamed up, there is more than enough growth in its current lineup for today’s investor to do very well.

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