Before you go ballistic over the title to this article, please know that I am an Apple Inc. shareholder. This isn’t a ploy to help a short position or because I like Android phones or Windows-run computers over their Apple manufactured competition. However, as investors we need to be realistic and grounded about our holdings and what the future may hold. The past is just that, current capital allocation should be positioned relative to what happens tomorrow and next year, not via what happened last month or last decade.
Good News for Apple
First, the good news. Apple continues to sell iPhones, iPads, and computers. Current estimates are looking at better than 40 million iPhone units alone during the June quarter. The company has about 10% of its market cap in cash and short-term equivalents, it is in a position to continue buying back stock, raise its dividend, and shows $130 billion of total equity on its latest balance sheet.
The bad news is that the company’s best days of growth are gone. This doesn’t mean that Apple can’t continue to grow through granular or major acquisitions, incremental improvements to existing products, or new strategic investments/products. It does mean that Apple’s revenue base will not double over the next five years, which is what it did between 2011 and today.
In fact, Apple’s revenue and earnings will actually be lower this fiscal year compared to last — about 8 percent on the revenue end and 10 percent on the bottom line. The market has priced this in, as shares trade at only about 11X earnings. Comparatively speaking, Microsoft, which has been continuing to grow its bottom line, trades around a 20 earnings multiple.
Analysts currently see 2017 as a better fiscal year for the company, with inclusion of an anticipated iPhone 7. However, there is no guarantee that current or new users will upgrade current phones at rates seen in the past.
This past weekend I had the opportunity to walk through suburban Philadelphia’s King of Prussia mall — one of the largest malls in the country. The interesting thing I noticed was that as usual, the Apple store was flooded with customers and busy company associates, while the Microsoft store had only a handful of consumer browsers with upwards of ten associates standing around talking to one another, frankly looking bored.
Both stores were in the same vicinity within the mall, but the Microsoft store was much more visually inviting and brightly lit with wall to wall video screens and areas for customers to try out Windows desktops, laptops, and even a large area dedicated for Xbox One testers.
Despite the allure, it was clear that Apple continues to maintain critical customer mass within its “ecosystem,” especially in the smartphone category. I’ve often joked that when one approaches a wireless service desk at a mall and asks to see a Windows smartphone, they usually have a tough time finding one or ask you why you’d actually want to buy one.
In any case, it’s clear that there isn’t some sort of secular abandonment of Apple technology going on. However, it’s also clear that we’re not in a favorable upgrade or product cycle right now. Whatever improvements Apple brings to its latest smartphone will likely be crucial in terms of its ability to achieve fiscal growth. And let’s not forget the fact that Samsung’s Galaxy franchise as well as other fringe smartphone manufacturers are constantly on the prowl to flank Apple in the smartphone category.
For better or worse, Apple’s path to gr owth is not the smooth sailing it once was. Still, it doesn’t appear the company is headed for the junk bin given the customer mass and retention ability it currently wields. However, don’t fall into the trap of believing that nothing could go wrong here, or that the company is indestructible. The history of technology is littered with companies that failed to innovate, rested on their laurels, and slowly became irrelevant. While Apple may not become one of them, there’s no guarantee the stock will provide investors with anything better than index-like returns in the future, either.
Adam Aloisi was long shares of Apple and Microsoft at time of writing, but positions can change at any times.
Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.