Why I’m Buying More Apple
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A little while ago I recommended that followers of my virtual portfolio, the “No Drip, No Mess” Portfolio, buy shares of Apple (NASDAQ: AAPL). The recommendation was for just a 2% position as the shares had been volatile and earnings were upon us. Apple ended up disappointing investors and shares have been up and down about since we added them to the portfolio. As time has passed investors have largely shrugged off the miss and I think you should too.
Initially, Apple’s earnings release sent shares down as they missed analyst expectations as the company reported revenue of $35 billion and a net profit of $8.8 billion, or $9.32 per share against forecasted earnings of $10.35 a share (a miss of about 10%). This is the second miss in a year as they missed last September’s quarter by 3.5%. In between these misses the company bested estimates by 22.6% and 37.7% so it’s not been easy to forecast their earnings.
Apple sold 17 million iPads in the quarter, which is up 84% over the year-ago quarter to go with 26 million iPhones (up 28%), 4 million Macs (up just 2%) and just 6.8 million iPods (down 10%). Sales of iPhones haven’t been growing quite as fast as customers are beginning to anticipate a major upgrade when the iPhone 5 comes out and are delaying purchases. The new iPhone is but one product in their pipeline that customers are anticipating, Apple CEO Tim Cook had this to say about what’s next: "We've also just updated the entire MacBook line, will release Mountain Lion tomorrow and will be launching iOS 6 this Fall. We are also really looking forward to the amazing new products we've got in the pipeline." Other than the new iPhone, the web is buzzing about a possible iPad mini and a possible Apple TV.
I’ve written before that Apple does two things better than anyone else -- managing their products and their cash. While we are still waiting for them to announce those “amazing new products” in the pipeline, Apple did make some official announcements that will put a little bit of their cash pile of $117.2 billion to work. First, they finally declared their long-awaited dividend. The dividend is payable Aug.16 to shareholders of record on Aug. 13. In a release subsequent to their earnings they announced that they would buy AuthenTech (NASDAQ: AUTH) for $350 million. AuthenTech makes finger sensors for mobile phones, tablets and personal computers. Apple didn’t disclose what they plan on doing with the technology but analysts are speculating that this could be a move into a digital wallet.
Eventually I’d like to get the position up to 5% of the portfolio, but we’ve got time to get there incrementally. I’m only adding another 1% to the portfolio at this time, a whopping two more shares. I’m not too concerned about Apple operationally, but the troubles in Europe and our own slowing economy could lead to some market volatility so I’m leaving the door open to possibly pick up the rest of our shares at bargain prices.
Risks and Why We’d Sell
In the original buy report I noted that two of the biggest risks facing Apple could come from an attempt to buy growth. I don’t think the AuthenTech purchase at just 0.3% of their cash qualifies as a concern. They could make one of those pretty much every day for a year before they’d drain their cash.
Where we do need to keep an eye on is to see if their competition can put any dent into Apple’s market share in the smartphone and tablet market. All the big players want a piece of the market with Amazon (NASDAQ: AMZN) working to heat up the competition with their Kindle Fire, Google (NASDAQ: GOOG) working to endear customers to their Android platform on mobile phones in hopes that they’ll eventually pick up a Nexus 7 tablet, and Microsoft (NASDAQ: MSFT) continuing to clean up their Window’s platform on mobile while hoping to scratch deeper into the tablet market with their Surface tablets. None of these tech giants are going to go away quietly so Apple needs their pipeline to produce.
Apple might have missed the quarter, but I think they are setting themselves up for a huge finish to the year. They continue to make the products their customers want to buy and they manage their upgrade cycle very well. Over the long term I think we’ll look back at this as being a good time to add to the position.
latimerburned owns shares of Apple and has the following options: Apple. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, Google, and Microsoft. 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. If you have questions about this post or the Fool’s blog network, click here for information.