Investors managed to make it through a volatile April modestly ahead of the game, though individual returns were held back by one principal culprit: Apple. The tech giant was “the biggest wealth destroyer” for market participants during the month.
Apple’s decline hits especially hard because it is the most-owned stock by mutual funds. Some 363 mutual funds owned the stock as of the end of 2015 with Microsoft the second most-popular and Alphabet third, according to Credit Suisse.
Many index funds include Apple in their holdings. For example, Apple is off 12 percent year to date as of Friday’s close and has subtracted about 92 points from the Dow Jones Industrial Average in the second quarter alone, a period during which the blue chip index is just above positive.
So where is the real hope in Apple’s earnings call? This quarter’s earnings provide no silver lining and one instead must look past this quarter’s earnings (and probably next quarter’s results) to continue to be positive about Apple’s prospects.
Why it isn’t time to give up on Apple stock:
- New lower-priced phones. While Apple iPhone sales declined for the first time, results do not reflect the new lower-priced iPhone that will likely capture market share from competitors.
- A healthy product mix. Apple services, including cloud services, music offerings, and Apple Pay, are a recognition that services and ongoing revenue are an important part of a healthy product mix.
- Apple is still massively profitable, pays a dividend, has huge cash reserves and built-in consumers for future upgrades. It has a low price to earnings multiple compared the rest of the market.
Why the best days for growth are over:
- Wall Street believes that Apple really needs to kick off its innovation engine. The discussions around the iPhone 7 indicates that it is an evolutionary product rather than revolutionary. Market sentiment is negative on Tim Cook as an innovator compared to Steve Jobs.
- Analysts were particularly concerned about declining sales in China where sales have fallen 26% over the year. They also believe that iPhone pricing is uncompetitive to penetrate the huge cell phone market in India.
- Within developed markets, the upgrade cycle has been extended. Consumers don’t feel the need to buy a new phone every year. Plus U.S. carriers are required to separate the cost of the iPhone from their data plans. Many U.S. consumers are deciding to save about $40 per month rather than upgrade once their two-year contract with their carrier has expired
- Analysts estimate that Apple has sold 12 million watches last year, generating about 6 billion in revenue. Despite the big numbers, users aren’t particularly impressed with the slower processing and response times. The frequent battery charging requirements didn’t make it the most favorite wearable.
My two cents worth on Apple:
Apple reminds me the early days of Microsoft. The windows operating system was growing Microsoft’s revenue and profits for many years. However, the market for windows became saturated and the growth in upgrading cycles slowed down. It turned Microsoft from a growth company into value stock generating a huge about cash. The chart below illustrates a ten-year period where Microsoft’s stock price was struck in a trading range between $25 to $30. Microsoft’s growth cycle didn’t resume until the company got into offering cloud computing.
Now, my wife is very happy with her iPhone 6 and we seem to manage to share our iPad. Don’t laugh but I am still a dinosaur using a flip phone for the few times that my wife and I are not together. In my defense, I am retired, not on Facebook and only use my phone for emergencies. The iPhone 7 will have to be revolutionary for me to upgrade.
What do you think, are the best days for Apple over?