Apple is back with smart new products – but wait for a dip before buying the shares, says Phil Oakley.
Apple has been a great long-term investment. It has successfully transformed itself from a niche personal computer business loved by artists and designers into a trend-setting consumer goods company. Its strength is in selling simplicity to its customers.
Whether it’s an iPhone smartphone, a tablet (iPad), or a desktop computer (iMac), Apple’s stuff is easy to use without a lot of the fiddly bits that come with some of its rivals’ products.
The high product quality, along with clever marketing and attractive design, has led to the ‘cult of Apple’, allowing the company to charge prices that few of its rivals can even dream of.
As a result, Apple has become – and remains – supremely profitable. Yet it also attracts its fair share of doubters – including me.
So far, Apple has been able to protect itself from the fate that most electronics companies suffer; namely, falling prices and lower profitability as its products mature. It has managed to keep bringing out new, improved products and to persuade consumers to keep parting with large sums of hard-earned cash.
And recently, eager anticipation of the next ground-breaking product has seen investors fall in love with Apple’s shares all over again after a rocky time following founder Steve Jobs’ death a few years ago. The shares are now testing their all-time high (when adjusted for June’s seven-for-one share split).
So are Apple’s products and share price overhyped, or does the company have what it takes to keep growing and make its shareholders richer?
The outlook
If Apple shares are to remain a good long-term bet, you have to believe that it can keep bringing new blockbuster products to market year after year. Its track record gives grounds for confidence – but this is no easy task.
Let’s start with Apple’s most important product, the iPhone. This makes up a very large chunk of its sales and profits. Without the iPhone, Apple’s profits and its attractiveness to investors would be a lot lower. Hopes are high that the iPhone 6 will be a roaring success. And if the record order book is anything to go by, it looks as if it will be.
Experts note that the latest incarnations of the iPhone will have bigger screens that will stop users from defecting to Android rivals, such as Samsung, and possibly woo some customers back. Then there’s the fact that Apple is making phones with much bigger storage capacity of 64 gigabytes (GB) and 128GB.
Customers may be tempted to buy these more expensive models instead of the standard 16GB model, boosting Apple’s profit margins.
But surely, say critics, the smartphone market in Europe and America is saturated now, limiting the scope for growth? This is certainly possible and is the reason why Apple is making a big push into countries such as China.
However, this ignores the potential sales that can come in more mature markets from people upgrading their phones or switching from Android, Blackberry or Windows handsets.
Beyond the new iPhone, Apple’s plans to introduce Apple Pay – a way of paying for things with your iPhone, or Apple Watch (Apple’s new venture into wearable technology) – has the potential to be a money spinner.
Contactless card payment is growing in popularity (as evidenced by its introduction on the London Underground) and its simplicity and convenience means that it should keep on doing so.
As well as locking users into the iPhone, Apple will earn a fee for each transaction made. What may hold it back though is the time it takes for retailers to embrace this technology (see our cover story on page 24 for more on this topic).
I have to say that I’m quite sceptical about Apple’s smart watch. Other companies have tried to create a market for wearable devices without too much success.
I don’t see this as the type of product that is suddenly going to bring in lots of money for Apple, like the iPad did, though time will tell. But overall, Apple’s latest product launches look like they could well keep its profits growing for a while.
They are backed up by the continued growth of sales via iTunes and the App Store. There’s also still a lot of excitement about potential new products yet to be announced, such as Apple televisions.
What’s interesting about Apple is that even though the share price is close to its all-time high, the shares have never traded on really silly valuations, as many dotcom stocks did in the late 1990s and early 2000s. This shows that the market is concerned about Apple’s ability to keep on growing its profits.
Some will point to its forward price/earnings multiple of over 16 times and say that the shares are hardly a bargain. But this ignores that Apple generates shed loads of cash and has a net cash pile of over $130bn (that’s cash plus marketable securities less borrowings). Strip this out and Apple is valued at a more modest 12.5 times post tax profits.
Yes, Apple has lots of challenges ahead. But so far it has defied sceptics like me. Given that the shares are not pricing in a lot of growth, I think it’s reasonable to say that they are not terribly expensive.
However, bear in mind that Apple investors tend to get excited at this time of year when new products are mentioned. So now may not be the best time to buy – you might get the chance to pick up a few a bit cheaper after the current hype is over.
Verdict: one for the watch list
Apple: (AAPL)
Share price: $101.63
Market cap: $608.7bn
Net assets (June 2014): $120.9bn
Net cash (June 2014): $133.4bn
P/e (prospective): 16.1 times
Yield (prospective): 1.8%
ROCE: 114.5%
Dividend cover: 3.5 times
What the analysts say
Buy: 51
Hold: 20
Sell: 1
Target price: $110
Directors’ shareholdings
T Cook (CEO): 880,767
L Maestri (CFO): 0
A Levinson (Chair): 1,152,886