As we embark on a new school year, with campuses and classrooms filled with students accessorized with the latest MacBooks, iPods, and iPhones, it is a good time to conduct our own case study and look back at the remarkable run enjoyed the last 12 months by Apple, the iconic creator of these consumer-electronics brands, and where the stock is headed next.
At this time a year ago, Apple AAPL, +1.15% shareholders were becoming increasingly impatient with a stock that declined over 24% in the first half of 2013, compared to a market that rallied more than 13% over the same six-month period. Pundits acknowledged the company’s fortress-like balance sheet and cash position, but then wondered just what the company was planning to do with all that money.
Admirers of the late legendary co-founder Steve Jobs were often unimpressed with the strategic moves of CEO Tim Cook and the new management team, pointing to the uninspiring new-product pipeline as a sign that the company might never be the same without a visionary like Jobs at the top. Apple, the consummate “growth stock,” was clearly not growing as fast as it once did, leading many to talk about Apple shares as a good blue-chip “value” opportunity.
A year later, the stock has rallied to fresh all-time highs, which we believe vindicates patient shareholders and reflects the fact that Apple, 12 months ago, was indeed a good value. A 7-for-1 stock split earlier this year certainly proved to be well timed, as the subsequent hype for the upgraded iPhone 6 has certainly given the company the strongest publicity in years, pushing the share price to its current level. At the same time, most of the issues discussed a year ago when the stock was languishing are still a factor. Recent (past year) growth numbers remain less impressive than the results at two other bellwether tech companies, Google GOOG, +0.42% and Microsoft MSFT, +1.23%
|Sales growth — five-year||35.5%||22.4%||8.2%|
|Sales growth — one-year||5.2%||17.4%||11.5%|
|EPS growth — one-year||8.3%||16.6%||10.2%|
One of the reasons Apple’s sales growth has decreased so significantly is the slowdown of iPad sales. In fiscal year 2013, Apple sold around 71 million iPads, a 122% increase from when the iPad was introduced in fiscal year 2011. In the most recent earnings announcement, iPad sales were down 19% from the previous quarter, and down 9% year-over-year. Apple remains the tablet-market leader, but their market share fell last year by 8%, while Samsung, the second-largest tablet player, grew its market share by 5%.
Another reason for Apple’s slow growth rate recently is its lack of new product launches. Consumers and analysts keep waiting for the next shoe to drop, and advance buzz over the iWatch and the upgraded version of Apple TV create excitement for Apple bulls but are met with a wait-and-see skepticism by company critics. One wonders if Apple seems content with a safe, low-risk strategy of expanding their overseas iPhone market, while making relatively modest changes to the iPhone and iPad that will protect their premium franchise, but not alienate their loyal customers.
However, a closer look at the numbers reveals something interesting: the company’s R&D spending has risen over 30% year-over-year and could hit close to $1.6 billion in 2014. If management is allocating that type of spending to R&D, there must be much more in the works at the Cupertino, Calif., headquarters than simply adding an inch or two to the iPhone screen. With about four years since the release of the first iPad, many are suggesting that Apple may be onto something bigger than the usual product upgrade.
The question on everyone’s mind: Is it time to take some near-term profits and reduce my position in Apple? Do I hold at current levels and place my faith in the management team and the latest round of new products? Do I buy more shares and take advantage of the momentum?
Even after its strong rally this year, valuations hardly appear stretched, again compared to tech bellwethers Google and Microsoft.
|Price/Forecasted Earnings (FYF)||15.88||22.41||16.61|
|Price to Earnings/Growth (PEG)||1.36||1.77||2.28|
We like Apple’s approach of returning money back to its shareholders through share buybacks and increased dividends. However, with Apple stock in particular, new-product development is the key to a happy shareholder. Moreover, a review of Apple’s trading history shows that the stock has often rallied in advance of new-product launches, only to experience a short-term pullback in the weeks following the launch. That post-launch pullback serves as a buying opportunity for believers in the long-term story. We believe a similar pattern could unfold in the coming weeks, and that long-term investors excited about the iPhone 6 hype may be rewarded by being patient and accumulating shares after a pullback in the stock.
David Kudla is CEO and Chief Investment Strategist of Mainstay Capital Management, a fee-only, independent, Registered Investment Advisor. More information about his firm can be found at www.mainstaycapital.com. Follow him on twitter@David_Kudla.
Disclosure: Clients and employees of Mainstay Capital Management may hold the securities mentioned in this article in their investment portfolios. The securities mentioned may not be suitable for some investors, based on their tolerance for risk or their investment time horizon.