Or: Gloating, Part 2
A year ago today, I issued my only “buy” call ever, on Apple. How did I do?
Since June 20, 2011, Apple’s share price is up 83%, for a market cap increase of over $250 billion (not including a shareholder dividend of nearly $10 billion). That’s over a quarter of a trillion dollars of value creation – all during the year Steve Jobs died, Apple was raked over the coals for labor practices in China, Samsung rose to become the world’s #1 smartphone seller, and legitimate iPad competitors from Amazon (and now Microsoft) finally emerged.
Again, not too shabby.
To be sure, it’s a small sample size, but allow me to make a general conjecture about investing. Charles Munger said it’s better to make a few big bets than many little ones. I’d add that it’s better to understand a little about finance, but a lot about strategy and innovation, than the reverse.
Disclaimer: I own a single share of AAPL.
Rampant Innovation 
Looking forward to June 22, 2013, 1 year from now, where do you see Apple? Are you just as bullish now as you were last year? At its current price of $582/share is it still a “Buy”?
In my view, the only thing holding Apple back from being a TRILLION dollar company is the law of large numbers – how much bigger can Apple possibly get at this point before their growth with decelerate and how long can they maintain their market dominance in phones and tablets? Even if Apple were to continue its extraordinary growth and innovation over the next few years, with no other past, current or prospective trillion dollar companies to compare it against, investors might be reluctant to buy simply because it will feel like a momentum stock.
That said, I think Apple is still a “Buy” at $582 and and here are a few reasons why:
*Incredible Profit Margins*
Their margins on iPhones are a whopping 47%. Apple’s PROFIT per phone is greater than the REVENUE per phone of competing device manufacturers (Samsung, HTC, Motorola, etc). Even if their marketshare in phones ultimately looked like its marketshare in PCs (12%), that’s still hundreds of millions of phones sold, and they’ll be laughing all the way to the bank while their competitors just try to stay afloat and shave R&D costs.
*Tablet Market*
The iPad came out 2 years ago and there’s still nothing on the market that can compete with it. I wouldn’t be surprised if Apple wound up with a marketshare that resembled their marketshare in MP3 players (75%).
*Cash On Hand*
They EARN $125MM/day. They have well north of $100BN on hand at this point. Their runway is infinite and they can afford to innovate themselves out of a few flubbed product launches. Microsoft has tons of cash on hand and the market doesn’t seem to care – the difference is that Apple has a history of using their cash to invent new markets, where as microsoft makes defensive bets (bing, windows mobile) and burns cash.
*New Markets*
– Television (I think Airplay is the trojan horse in the AppleTV equation. Allowing 3rd party developers to build applications for the television could enable companies to go direct to consumers on the big screen and ultimately dis-intermediate both game consoles and cable companies, among others)
– Payments (Keep your eye on Passport)
Only time will tell whether or not I’m right, but at $582 I think there is still a ton of upside.
Great thoughts, Nate, and I totally agree. The “law of large numbers” argument doesn’t make sense to me – Apple still has <10% share of global mobile phone shares, and its share of computers is low too, so there's a lot of room for upside. I don't yet see any reason to believe their innovation engine has stalled, so I think it's still undervalued.
If you haven't already, check out one of my favorite blogs on Apple, asymco.com – lots of great analysis about how and why Apple is disrupting the phone and computer markets.