It’s almost a bit of a cliché, but Apple really is one of my favorite companies. Not only do i think their products, almost all of them are far superior to their competitors, it is also quite often, a really attractive investment opportunity. It seems to be a quite certain strategy to by Apple on the dips and wait for the return.
For a long time it’s P/E ratio has been trailing between 10-14, which for any listed company must be considered quite low. Average P/E for the Nasdaq 100 is currently well above 20.
The common explanation for the low P/E compared to peers is the lack of growth. And since some time back it’s not growing, at least not as fast as it used to do, and its future prospects of growth are very hard to predict.
From an investment point of view, there also seems to be another factor at play here. It might be a bit random, given that investors a rational people, right? Even so, I suggest that the mental barrier of shooting a company above the trillion-dollar mark is difficult. It’s similar to Roger Bannister breaking the four-minute-mile in 1954, despite it being considered undoable. Shortly thereafter the records below four minutes was broken again and again.
By being so immensely huge in all aspects, it seems that we cant imagine a company being that big, to become twice as big in terms of market cap. And therefore investors are hesitating.
Neither could Apple get around this by breaking up its parts and list them as separate companies, as a normal company would to extract unrealised value. In the case of Apple and its ecosystem, all the parts needs to be tightly integrated to create the desired customer experience. At least, that is one theory.
What about the future then?
As an investor in this company, you shouldn’t invest in it’s current line up of products, you must rely on Apples model and process for innovation and developing unique and valuable utilities that people uses in their daily life. Horace Dediu has been advocating this for a long time. The unique thing about Apple is that it has industrialised innovation like no other company has done, but that sadly their innovative powers are valued at zero.
What could possibly tip the scale and increase growth and profits again?
A better watch? No. A watch that the entire planet felt an intense craving for, that would be a different story. iPhone 7-8-9-10? Still nothing. Apple Pay, iTunes and loads of other internet based services, yes maybe. AI, AR, VR, and life automation. Yes, probably quite an interesting area with big potential.
The Apple Automobile
A self driving Apple-car, that you can lease for $300-500 per month would be something that could trigger real growth again. That would be the type of product that could really upend the way people think about a product category. The same way the first iPhone, with all its flaws and imperfections, just made us go, GAAH! And from that day we viewed Nokia and all others as obsolete dinosaurs of the past. All attempts of recuperating or mimicking Apple was essentially futile.
To summarize – you can probably find companies other than Apple, on the stock market with a greater change of dramatically increasing their value (but perhaps not at the level of safety (lack of risk?) that Apple has).
But if you are interested in, and as i, believe that growth, and the ability to create something new and valuable (i.e., to innovate) isn’t just dumb luck it can be worth following and maybe even invest in. They posess the unique strength, and in Buffett-terms, moat, that is the combination of understanding how markets work, how customers work, and how to use current technology and transform it from just a framework to something really useful. And as soon as the mental barrier of trillion dollar companies evaporate, things will probably start happening.
Some, quite random sources:
Horace Dediu on the fact that Apples process and ability to innovate is undervalued:
Note that this post was previously posted on my LinkedIn on the 23rd of August 2016.