thoughts &



How An Apple A Day Helped Many Keep Their Investment Doctors Away

Apple Inc recently released their 3rd Quarter Reports and shareholders are extremely pleased with the results. Share price shot up from $190.29 to as high as $201.50 after the announcement. A whopping $11.21 rise in 1 day, bringing its market cap ever closer to $1 Trillion!

With owning 239.6 million shares of Apple Inc as of the end of March quarter, and more than 5% rose in the share price, the master of Value Investing – Warren Buffett and his company Berkshire Hathaway likely made more than $2.6 Billion in a single day.

In fact, if you have kept stocks of Apple Inc in your portfolio since 5 years ago, you would have walked away with a 189% return. Every $10,000 invested will turn into $28,900. That would be an average of 25% return per annum EXCLUDING DIVIDENDS.

So how did Apple Inc managed to help their long term shareholders keep their investment doctors away? To understand this, we need to understand why are investors willing to pay more for Apple’s stock over the years.

Firstly, we need to understand what is Apple Inc’s business model:

Apple have 5 sources of revenues:

Iphone – Sale of Iphones

Mac – Sale of Macbooks

Ipad – Sale of Ipads

Service – Revenues from Digital Content and Services such as AppleCare, Apple Pay, Licensing and other services.

Others – Sale of Apple TV, Apple Watches, Ipods and other Apple branded products and accessories.

As we can see from the breakdown of these revenues, Apple generates most of their revenues from the sale of Iphone.

But in summary, all these sources of revenues helped to generate huge amount of monies for the companies as seen below:

Since 2008 until 2017, Apple Inc grew their total sales from below $50 bil to more than $200 bil. And to top it off, they managed to consistently keep more than 25% of that money as their operating profit! That’s a lot of money!

If we check the Net Asset Value (NAV) of the company, we can see a similar trend as well:

NAV can be thought as the net worth for every share of Apple. An increasing NAV tells us that each share is becoming more valuable over the years. Imagine holding as asset that becomes more and more valuable without you needing to do anything at all!

When we dived into their cash flow statement, we were even more impressed:

Apple Inc is able to consistently generate at least $40 bil in Free Cash Flow for their shareholders. Free Cash Flow simply means Cash Flow the company generated by selling all their products and services less all the capital expenditures to grow the company. In other words, money that they do not know what to do with.

And when the company has additional cash not utilized, they shared this money generously with their shareholders:

Since 2012, dividends have grown from $ 0.38 per share to $2.18 per share in 2017. On average, roughly 20% of the net profit earned by the company has been consistently paid out as dividends.

With such a stellar performance over the long term, it is no wonder that investors have been very greedy over shares of Apple!

But the question is, will this track record continue?

You see, when we invest in a company, we do not invest for the past but we invest for the future. Past track records are pointless if they will not continue into the future.

To understand this, we need to understand what makes Apple successful today and how likely is it to continue over the long term.

1. Apple’s Competitive Advantage: Its Powerful Brand and Stickiness Effect

Apple is well known for its high quality products and the social status affiliated to their users. A common answer to why people would pay luxuriously for Apple branded products is because not only are the devices innovative, but they last reasonably long. However, there is another reason why people who buys an Apple branded product tend to stick with them, it is because the company has made it very hard for them to leave. Take for example, the iCloud. Every Apple user will be very familiar with this service where they are allowed to store their data and access them across all Apple devices. Imagine switching to Android, the user would have lost access to all the data they have accumulated and this inconvenience led them to remain loyal to Apple. So will you pay more for an iPhone?

2. Will there be more Sales coming in?

Apple can only grow their revenues provided that:-

a. They have new customers to sell their products to.

The global population today is 7.54 billion people. However, the amount of smartphone users are expected to be less than 3 billion users even by 2020. That’s at least another 4.64 billion new customers to sell to.

b. They have new products to sell to new and existing customers

Apple needs to constantly innovate not only to create new products and services to sell, but also to remain relevant in the market. Coming out with new products are not cheap either. Therefore, Apple needs to have deep pockets to spend on research and development in order to remain competitive. Recently in 2018, Apple’s investments in research and development exceeded $3 billion. And that has resulted in a lot of new products and services by the company to remain relevant.

But can this continue? Wait till you learn about how much cash they have in their bank account:

In a nutshell, the facts and figures does give a good confidence to investors that Apple can indeed continue their historical track record. However, again, there is never any guarantee that they can do it.

The most important question to ask is, after knowing all of these, will you take a bite in Apple?