A little over a year ago, I called Apple out as a great buy. As soon as I made the call, I was flamed for it. Apple seems to be an extremely polarising company for people, they either love it or they hate it. I still love it and these are my reasons why:
"Sticky customers" and the upgrade cycle
Apple enjoys the most valuable brand in the world and with good reason. It has what we like to call in the world of finance "sticky customers". Think about something like fuel, you are probably not very loyal to your petrol station and if you are, it's likely because of the price difference and not because you love a particular brand so much. Now, compare this with something like your favourite beverage, if it's not available at your local store, you would likely not be as happy with a substitute, you may even go out of your way to acquire it. This is what I mean when I say "sticky". Traditionally, companies would sign customers to long term contracts to keep them "sticky" (some still do), but this is a dated paradigm, the best way to keep a customer "sticky" is to bring them more value than your competitors.
Apple enjoys extremely "sticky" customers, why is this? Many of the people that disagree with me on Apple say that other brands are cheaper, more powerful, have more functionality (yada, yada, yada...), the thing about value is that a lot of the time, it is subjective. So while having 100 apps on your phone already when you start your Samsung might be "value" to you; I value the beauty, simplicity and minimalistic design of Apple products and the eco-system which brings them together. I love the fact that there are just enough native apps that I rarely need to download any third party software and the seamless and intuitive integration across devices. I love the look and feel of the hardware and software. At the end of the day, there is as much chance of me switching to an android as there is of most android users switching to Apple.
The beauty of this comes together when you factor in the "upgrade cycle". Most of us upgrade our phones every 1-3 years, laptops and desktops every 3-5 years and this will continue. There will always be some new feature in the new model that we don't know we need yet. "Sticky customers" + the "upgrade cycle" = cashflows that I'm fairly certain of for years to come.
Optionality
The next reason I love Apple is optionality. A lot of analysts place too much emphasis on what Apple is selling now and don't give a lot of thought to new products that the company will add on in the future. While the Apple Watch has already taken off, it is still yet to enjoy the widespread adoption of phones but as it's functionality increases (think emergency phone calls with GPS location, pulse oximeters and other medical uses), the adoption will increase. The "connected home" is in it's infancy but Apple is extremely well placed to bring it into their eco-system for their customers. The VCSEL laser embedded in the iPhone X is currently scanning your face to keep your phone secure but in the future, the VCSEL could be embedded in smart glasses and scan out the other way and identify objects, landmarks and people. The connected car could also be huge for Apple. Just think of most new consumer technologies on the horizon and it makes sense that Apple would be well placed to bring them into their eco-system for their customers. If you've got a MacBook, iPhone, Apple TV and they are all seamlessly integrated, why would you buy a Google home device? It is just likely to create fragmentation and reduce ease of use and functionality, and increase frustration.
The fundamentals
While all this sounds great, as investors, we want to know if Apple is still a good buy after this recent run. Let's get into the numbers:
Forward P/E: 15.4x
5yr forecast p.a. growth rate 10.7%
PEG ratio: 1.4x
(source: Morningstar broker consensus)
For a wonderful business with trustworthy and disciplined management, and favourable long-term economics; many long term investors and analysts see it as a steal. Bear in mind that we're not even considering the $200B cash pile sitting on the balance sheet, which makes up nearly 25% of the market value. If we were to back this out of the price, the P/E and PEG look even juicier.
In Conclusion, I will be "sticking" with Apple long-term, barring any unforeseen events that change the story enough for me to re-asses my long-term investment case.
"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
– Warren Buffett
Please note that I am not a financial advisor and this is not financial advice. I hold AAPL stock and may choose to buy more or sell at any point in the future without notice. This post is general in nature and expresses my opinion only, it does not factor in your personal circumstances. Please seek advice from a qualified financial advisor if you are considering acting upon anything presented in this post