Of all the stocks in the Dow Jones Industrial Average, I think making a decision about Apple Inc. (NASDAQ:AAPL) may be the most challenging right now. The company is in a difficult period, so we have to look at its present and potential future states very carefully to see what Apple stock might offer us as investors.
First, let’s look at the positive elements of Apple stock and AAPL as a company.
Why Investors Like Apple Stock
Apple makes great products. You can argue about iteration versus innovation, but the fact remains that its products — iPhone, Apple TV, whatever — remain far easier to use and troubleshoot than Windows-based products.
Apple has a fantastic brand. Its Apple Store and Genius Bars are fantastic creations that drive customer engagement and brand loyalty. And by creating the App Store, it has effectively forced every single business in the world to work through it if it wants to have a meaningful mobile presence.
Financially, Apple stock is on astonishingly firm ground. Apple stock has $230 billion in cash and investments (and while much of it is overseas and subject to tax liabilities, it’s simply silly to downplay it) offset by $68 billion in long-term debt. Its free cash flow is unreal, truly. FCF is $51 billion in the trailing 12 months, generated by $48 billion in net income over that time.
Think about that! That’s how much money AAPL ends up with at the end of the past four quarters alone. And that’s amid a pair of disappointing quarters, no less!
Apple stock is so overwhelmingly successful on so many levels it seems like a slam dunk to buy.
However, when we look deeper, we see troubling cracks.
Apple is no longer a visionary company. Steve Jobs is gone. Tim Cook has been a game manager, at best, but he lacks vision. He’s not the guy to lead AAPL into the future. We see this because Apple now derives more than 60% of its revenue from the iPhone.
That’s a huge concern. Apple Inc. has become a barely diversified company. How long will consumers, in a broad sense, continue to keep buying every new iteration? I myself only buy every other version, and the iPhone 7 isn’t showing enough to convince me to change my ways. I’m concerned that Apple, under Tim Cook, lacks the vision to push the company past its current state and will start to falter on iPhone sales — and worse, while not developing new venues for revenue.
That $230 billion of cash is fantastic, but most of it is parked overseas, because it will be taxed at 35% if Apple repatriates it. If Donald Trump wins the election, he says he’ll lower the corporate tax rate to 15%, so that would be good, but we can’t count on that. So the obvious solution here is for Apple to use some of that cash to buy its way into new revenue streams by making very smart acquisitions (if that’s even possible) and integrate them into Apple (which is no easy task).
That’s the thing people really overlook with the cash. Whether it’s 35% or 15%, Apple still has an enormous chunk of cash left over. That’s not the problem. The problem — which is the same for most companies — is using it in a disciplined and business-growing way.
Finally, Apple is a $609 billion company. There’s no limit to big a company can be, but the concept of a $1 trillion company really does boggle the mind and seem somehow unlikely.
So, what do we do as investors?
Bottom Line on AAPL
The good news is that I think Apple stock probably has a near-to-medium term floor of $88, which is the cash-adjusted stock price assuming a 15% corporate tax rate. We saw that price level get tested and rebound after the last earnings report.
Apple will also always have a ton of investor support. It’s Apple, after all. The increasing amount of cash shoved into buybacks and dividends certainly helps, too.
Lastly, while Tim Cook isn’t a genius, I think there’s still plenty of opportunities to grow Apple beyond its phone.
I am leery about purchasing here at $113, but I don’t think it’s an unreasonable price over the very long-term. Be prepared to see lower prices, but don’t panic if that happens. In fact, you may want to open a half-position in AAPL here, then look at adding in at much lower prices.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.