My approach with Apple Inc. (NASDAQ:AAPL) hasn’t changed much since the first quarter of the year — which is to say, I continue to hold AAPL stock, but have reduced that position at various price points.
With a large cap tech name like Apple, the market feels very efficient with regard to the share price. So, it’s difficult to see where retail investors have an edge. Having an advantage over other retail investors in one thing, but gaining the upper hand over sophisticated institutions and professional funds is harder to convince oneself of.
Multiple expansion on top of earnings growth has been there to support a portion of the 46% year-to-date performance, but with that run-up in price and, thus, valuation, I naturally feel less and less excited about AAPL stock’s future than when the stock traded in the low hundreds (with single-digit forward multiples).
You were paying a bargain price for fantastic products with huge amounts of consumer loyalty and a compelling ecosystem — and getting future product successes for free.
But today, with share prices hovering around the $170 mark and a price-to-earnings multiple closing in on 20, that value proposition has changed. As shares get more and more expensive, investors must become increasingly vigilant about the future.
Since the presidential election, AAPL news headlines have focused on offshore cash and product cycle upgrades, with a few here and there on Apple TV/investments in original content. Nothing groundbreaking, nothing that really gets customers/investors out of their seats.
AAPL’s Absence of New Ideas
CEO Tim Cook was pleased with the 2017 fiscal year performance, saying:
“With fantastic new products including iPhone 8 and iPhone 8 Plus, Apple Watch Series 3, and Apple TV 4K joining our product lineup, we’re looking forward to a great holiday season, and with the launch of iPhone X getting underway right now, we couldn’t be more excited as we begin to deliver our vision for the future with this stunning device.”
No one disputes the quality of Apple products. The core “i” products continue to drive revenue growth and EPS growth. Fourth quarter revenues were up 12% year-over-year and diluted EPS 24% YOY.
The hordes of cash haven’t been spent in such a way that placates my concerns about the inevitable iPad and iPhone replacement cycle lengthening, however. Those products are mature by any measure and without dramatic innovation, whether on the software or hardware side, I have a hard time convincing myself to add to my position in AAPL stock.
So far, all I’ve seen is a dividend increase, bringing the yield to 1.49%. But while it might not be appropriate to lump AAPL stock into the same category as smaller tech startups, investors are certainly not chasing yield with Apple stock. They’re looking for capital gains.
AAPL Stock Needs Another Steve Jobs
Customer satisfaction is high. Earnings are growing in the double digits. Apple is still considered at the forefront of design and ever-increasing cash balances keep piling up.
But to get to a new category that will reaffirm its position as an innovator, AAPL needs a visionary to get them there.
In August, the New York Times published a piece about AAPL scaling back its autonomous vehicle ambitions that underscores this point:
“But the car project ran into trouble, said the five people familiar with it, dogged by its size and by the lack of a clearly defined vision of what Apple wanted in a vehicle. Team members complained of shifting priorities and arbitrary or unrealistic deadlines.”
Today, we have a company that still has a bright future, but the stock seems to have less luster. I’m not out completely, but the company needs new blood, to say the least, for me to get excited about the stock again.
As of this writing, Luce Emerson was long Apple stock.