A Nine Worm Apple? Tell Me No.

Graphic, cover, Apple A nine worm appleGraphic, STOCKjAW banne, Quality View

SEPTEMBER 24, 2019

Apple

isn’t Amazon. It’s China locked-big time. Nor is it exactly cheap. Some can’t decide.  It’s either 18 trailing and 19 forward, or the other way round.  Anyone worried about that shouldn’t buy Apple.  Owning shares of Apple is like owning a slice of a country. AAPL doesn’t have revenue.  It has GDP.  Thousands of companies collaborate to create those ultra-sleek marvels. Does that matter?


GDP drops during any recession.  Being big doesn’t stop that.  Last night Jim Cramer stared into the camera and said “It’s not trading on fundamentals.”  But he was talking about JNJ.  “It’s mammoth” he said, and “JNJ’s trading on opioid headlines.” We said that in our piece “Off Label” back in August.


So what’s JNJ have to do with Apple now?  Both are involved in complications that can’t be measured.  For JNJ it’s a blizzard of full-ugly lawsuits, and Apple’s global fishing net of component supplies, most in oppositional China.  Anybody know what they’re gonna do?


Apple has more money than Italy.  That’s good because it will take money to thrive if economies dive.  What else does Apple have?  “A Nine Worm Apple?  Tell Me No.”  STOCKjAW takes a bite(Cover photo; Apple Store, Union Square, San Francisco.)

 

 

Apple Watch
What time is it now? Time to consider what you own. The future remains murky, however the trade war’s in a terrific hurry, going no where.  It’s grown destructive and very expensive now.  Global economic slowing is real.  Bond yields are pathetic.  Who and what can get us through, in good shape? We’re gonna need two things. Strong cash flow, driven by products people won’t give up when times grow tough. Apple? You sure? iPhone 11 Pro Max $1769.00.  Wow.  The Apple Watch–takes phone calls  Very nice.

Everybody

loves Apple, its’ products.  Of course.  Apple’s the Kamakiriad of now.  Apple’s the only true tech tribe, the digital campfire you carry in your hand.  Fewer viruses target Macs.  iPhones are perfectly silent in the presence of the feds.  Apple is personal, tactile.  It transports us to a clean dreamy world of panoramic fingertip power and grace-filled simplicity.  Apple is always there for us, in the night.  It will surely be behind the first personal flying conveyance.

 

 

If you’ve owned Apple over the past year, and reinvested the 1.41% dividend, you’re now 2.0% better off.  Same scenario Microsoft, 23.7%.  Who doesn’t hate the way Windows has been jacked with over the years?

 

Most say that iPhones comprise 16% of the smartphone world.  Most everything else is non-chic Android.  O.K.  But is Apple a good stock?  Most say yes, but many have always said so, to the point it may be a habit.  Denying Apple’s very real challenges doesn’t make them vanish.  It also doesn’t make owning it any smarter, or profitable.  Why? 

 

Apple lives in the cluttered messy real world, along with the rest of us humans.  The glory of Apple has limits.  Think the Apple Watch, Apple Music, Apple TV–the Apple Newton?  Of course, everyone whiffs.  And if one likes the above fine, yet none rank as blowout winners.  Apple Music–60 million subs globally, after four years?

 

Steve Jobs
Steve Jobs brought Apple back from the brink of bankruptcy. Most know that story. Jobs is legendary for his brute toughness, and blunt ways. Many feel genius is enough. Days at Apple are different now, under Tim Cook. Apple is different now as well.

9. What is Apple, now?  Growth or value?  Tech or consumer packaged goods?

Companies

are organic.  They have lifespans just like all life.  Seasons come and go.  For Apple it seems like fall now.  The company that put a phone into everyone’s hand was but a twenty-something when Jobs unleashed the nascent Mac.  Home computing was new.  Apple’s mature now, and as enormous as any business has ever been.  Now it faces grownup challenges, like what to do with itself next.

 

Growth stocks also go through phases.  The eye-blurring early stages always give way to merely rapid growth, and then emberous warmth.  Apple’s done all of that.  Yet how clearly have investors gathered in that reality?  Is Apple really a growth stock still?  Yes, it is, part time.  Without looking most might think yes, but FY’19 EPS will be lower than ’18.  Eighteen months ago it was a value stock, despite its’ strong growth then.  Fact.  The ever-insightful Jim Cramer argues more then tech, Apple’s a consumer packaged goods play.  Perceptions vary but fundamentals tell a more precise story. 

 

Of the 33 IT stocks we track AAPL ranks 16th in year-to-date returns; 39.37% as of 9-24-19 3:38am EST.  Current S&P 500 P/E ratio 22.27.  AAPL 18.7.  Forward P/E 19.1.  Return on Equity(ROE) 51.6. 

 

Chart, AAPL, 9-20-19, long term
The footprints of a glorious past. Charts are just that–the past. Divining any future is tough guess work. Tech is perhaps the hardest game in business. And greatness is no pass to a grand future. Ask Xerox, IBM, and before long perhaps ROKU(SJChart.)

8. The Love and the Info Overload. Coverage. Very smart people often disagree,  legitimately. 

When

is a lot too much?  Tracking Apple is like tracking the globe.  No stock or company in history has garnered more press than Apple.  Why?  Apple’s a kaleidoscope of wonder.  It’s a cultural phenomenon, a tech in-crowd, a status symbol, a classic American success story, and a phone/app machine.  Apple has created the most recognized consumer brand ever, a brand itself valued at $107 billion.  The iPhone is a Porsche you hold, and hundreds of millions can afford.

 

The stock’s staggering success has thus predictably drawn the overload of analysts’ coverage many now labor to comprehend.  That’s the problem–too much.  But investors need to know.  Current analysts covering: 43, or 44 depending.  Who’s got even that truth?

 

 

7. Money bag catatonia.  GPS location was built-in to phones to allow navigation around Apple’s gigantic bag of cash.

Questions

have swirled for years concerning this company’s stupendous bag of cash.  Apple has more cash than anyone–fact.  For years the company has done absolutely nothing with that mountain, except create more.  More’s good, yet the question remains; what’s next–for growing the business?  That should be a question investors are asking.  The speculation has included everything.  Long ago Cramer wisely suggested “buy Netflix.”  Looks brilliant now, especially when viewed against Apple TV Plus, a weak starter in s seriously competitive and crowded business.  Apple TV Plus will never prove a substantial revenue contributor.  No way.  Netflix would have been, and Apple had the money to both buy and build it.

 

Following years and years of money pile sitting the company initiated a dividend.  It’s now at 1.41%, not big but present.  Mature companies do that.  The 3 year dividend growth is 11%, and 13% this year.  Would shares be more attractive were the dividend to be above the yield on the 10-year treasury?

 

 

Netflix
Cramer suggested years ago that Apple buy Netflix. Apple did not, and did nothing with it’s mountain of cash. Netflix was affordable, not long ago. Far less so now. And? Apple has Apple TV Plus. When announced the SVOD service held 24 shows. A recent estimate says Netflix now has 4010 movies and 1569 TV shows. A large and rapidly-growing number of those are originals.  Netflix will benefit from them for years, or decades. Ask Disney.

6. Anti-Trust probes.  The DOJ, congress, and the EU.

Really

it’s not difficult to see.  Jealousy and envy are pungent.  It’s the EU’s sick fixation.  The EU’s got nothing with which to compare to American big tech–and it drives them crazy.  It’s an embarrassment.  So they sue, and fine, “investigate,” and target, repeatedly, America’s brightest for everything proved and unproved.  Remember when Apple took up tax residency in Ireland?  All good it was, for Fa King years.  Suddenly the European Commission had “issues,” tax “issues,” with Apple.  Out came the fine book and $15 billion was summarily owned to the European Commission by Apple.  That’s still in court.

 

Apple faces anti-trust hassles at home as well.  Will it prove a problem?  If Apple packages TV Plus or other services into products, yes.  They’re thinking that one over now.  Anti-trust hubbub could be disruptive, but not derailing.  Why is Apple facing said at home?  It’s the largest, it’s rich, and it’s powerful.  Congress loves juicy targets, and juicy targets create high-profile platforms, and it’s election cycle time all over again.

 

 

building, EU-parliament
The European Commission misses no opportunity to fleece American big tech. Violations in free trade regulations and tax infractions are their two preferred guises. Their smug sanctimony is amazing. Years after Apple had legally established tax status in Ireland, the commission suddenly charged them $15 billion, for tax dodging. We believe that one’s yet in court. Beneath each charge–including their newest anti-trust charge against Alphabet–bubbles a sick seething jealousy. Why? They have Fa King nothing with which to match our incredible towering tech heros.  No doubt MasterCard and Visa have committed fouls, and been fined.  Facebook is like the Raiders–just guilty.  Microsoft–yes, but less so.  Google’s tilted too, and within the past twelve months been fined three times.  But then the EU subsidizes Airbus–straight up–and openly abides France’s clearly protectionist agricultural policies.  Think wine and cheese, for starters. And that’s just to name a few.(European Commission, Brussels.)

Facebook

for years has behaved childishly, capriciously.  “We want, we want.”  Irresponsibly is the word.  Multiple anti-trust probes are the current result, and now all the rage.  Zuckerberg’s on the hill before congress precisely because of dozens of unfathomable Enron-style Facebook contracts concerning data privacy, all brought to a focus by the Cambridge Analytica scandal.  Why talk Facebook now?  Facebook brought all this anti-trust fury down on the rest, including Apple.  Were it not for Facebook’s gamy slack-jaw privacy violations and data usage fraud were so arrogant and egregious that none could look away.  Now everybody pays.  Scrutiny was bound to come, but it didn’t have to feel and look like a perp roundup.  

 

 

5. Recession–expensive products in tightening times. 

Economic

conditions are many times not short, nor sweet.  Many will tell you that recession is a near certainty.  Why?  The inverted yield curve.  History.  Recession follows inversion, usually, and usually in 12 to 18 months.  History never determines the future, yet economic conditions can lead to likely outcomes.

 

Here is the indisputable fact.  Global economic growth has slowed.  Many countries are at flat or even negative bond yields–Germany, Japan.  The yields in both those countries are negative from top to bottom; the longest bonds to the very shortest.

 

Apple will be fine, but not robust, if recession is our future.  The iconic iPhone will roll on, more so services, yet likely more slowly.  Recessions vary in severity, length, and their effect on employment.  Services such as TV Plus and Arcade are exactly the types of discretionary items many cut first.

 

  Apple’s margins and pricing power will help it.  Apple has a gross margin of 38% and again, a return on equity(ROE) of 51%.  The company long ago proved that there was no $1000 barrier, for their phone.  The new iPhone 11 Pro Max shatters that.  In the coming few days we will see exactly how much a high price matters for perhaps the most beloved consumer product in history. 

  

4.  China disruption–manufacturing and supply lines.

Never

has a U.S. president in peace time ordered American companies out of a foreign country.  Trump did that.  Most are deciding for themselves, yet the heart of Apple’s manufacturing activities and supply chains are locked deep in China.  The planet’s largest contract manufacturer Foxconn assembles iPhones.  They’re Chinese, and their U.S. factory does very little of anything now, none of which involves Apple.  Apple has thousands of suppliers, literally, the majority of which are indeed Chinese.

 

 

airport-2373727_1920
Where ya gonna go? Many feel it’s difficult buying a new car or clearing airport security. Right. Shifting supply lines can take years, and piles of cash. Logistics alone are difficult, without finding sources capable of meeting standards, schedules, and cost requirements. Supply lines are life lines and nothing short. When they fail so does the vitality of operations. Apple’s products are both complex and complicated. No one has more suppliers than Apple, literally.

All Chinese companies operate under the auspices of the all powerful Chinese government.  Apple’s health as a company depends on that government’s whims, and larger trade tensions and maneuvering.  Yet in reality, China no more wants to slow, or lose business.  However, in pursuit of higher goals, the Chinese government is notorious for practices that disrupt, interfere with, and block American business. That is one of Apple’s main threats in this on-going messy affair.

  

3.  The law of large numbers. What does it take to move a Trillion?

The

jaw-dropping reality of a trillion dollar market cap unavoidably carries with it the law of large numbers.  One hundred million in revenue looks very different to a company worth a billion, versus another at one hundred billion.  For Apple that’s all lunch money.  Moving Apple’s needle now requires an Earth quake, a tsunami.  Apple’s current market cap is $999 billion.

 

The law of small numbers demonstrates this law’s function even more simply.  A raise in EPS from $0.01 to $0.02 equals a 100% EPS gain.  AAPL’s Q3 EPS came in at $2.18.  A $0.01 EPS increase equals 0.45% to Apple–less then half a percent.  Thus the law of large numbers makes it very difficult for Apple to create significant moves in revenue or earnings, which is precisely what investors want.  The very same law applies to moving the share price.

     

 

AAPL, iphone-x-2957273
Wasn’t it the iPhone 10? Apple created the non-Windows consumer world of computing,. They created the first $1000 telephone and the first 1 trillion dollar company. Apple changed the world and now the world’s changing them, by not being larger.

 

2. Apple’s Evolutionary, incremental Offerings.

Once

Apple was revolutionary.  But for a long time, Apple’s lived on the evolutionary; better cameras, longer battery life, larger screens, etc.  Of course you’ve heard it–the service revenue stream, Apple’s biggest evolution of late.  Apple’s business model is different now–in just that manner.  And who’s made that notion common knowledge?  Right.  Jim Cramer.  Of course Apple has a massive “installed base” to service and sell.  Android owns 80% of the smartphone world, yet Apple’s base is staggering.  Now they have a new service package for everyone.

 

Wanna pay with your iPhone–in a new fee-free, more secure way, and be able to track it all?  Right.  And now you can also use their card–the one Apple claims wasn’t brought to you by “a bank.”  Tell Goldman Sacks that.  And keep the card unscratched in a pouch.  Apple’s all about the sleek, artful, and pristine.  What news?  Apple’s charging organizations like the New York Times 30% of revenue just to be aggregated into the Apple journalism pipeline.  Gamers now have Apple Arcade, while the rapidly-expanding SVOD world has Apple TV Plus, that very nascent service offering but a handful of shows. 

 

 

1. Shrinking iPhone Sales.  Chinese Retaliation, Tariffs, and a Saturated Market.

Apple’s

challenges are global-sized.  Their total addressable market(TAM) is anyone on the planet with $800 and a network.  The world had never seen a trillion dollar firm, one targeting everyone who talks.  Now it has, and nearly everyone’s seen Apple, and made their first purchase.  That roll out’s done.  Most say saturation is here, and the future is a battle for market share, and the replacement cycle, itself believed to be slowing.  Is the thrill gone?

 

 

Apple, Tim Cook
Apple CEO Time Cook has distinguished himself as far more than a “care-taker.” The role of CEO is never an easy one, and much more than hard, for a company under the scrutiny and stresses Apple endures daily. Following Steve Jobs is like headlining for U2. Good luck with that.

Apple’s

brand spanking new iPhone 11 Pro Max is a stunning $1790.00, with the standard version being $775.17.  Wow.  The launch came in China on Monday, in a bid to regain lost market share during the reign of the iPhone XS and XR.

 

 

Morningstar stamps AAPL with a “Narrow” mote rating, and a three star or Hold” rating.  Fair Value Estimate $200.00.  Current price $220.32, pre-market Tuesday.  What do analyst ratings currently suggest?  Let’s compare with Ford.  Morningstar rates F above AAPL with a 4 star, and a Fair Value Estimate of $12.00, suggesting a 30% share price upside potential, rather than an 8% contraction for AAPL.

 

 

20 analysts currently cover Ford, while 43 or 44 watch Apple.  30% of analysts rate Ford a “Buys” or “Outperform.”  53% rate Apple as such.  60% rate Ford a “Hold” while 42% rate Apple as such.  What does Morningstar say concerning Apple’s risks?  Morningstar’s stated concerns include “premium pricing maintaining margins, but limiting unit sales growth.”  They also suggest the firm’s reputation for products that “just work” is in danger.  How?

 

If you’ve owned Apple over the past three years, and reinvested the dividend, you’re now 103.5% better off.  Over five it’s 132%, or 26.4% per year.

 

 

Morningstar suggests that If the firm were to ever release “sub-par or buggy updates, or services,” the sterling Apple reputation could be damaged.  For whom is this not a risk?  Thirdly, Apple is believed by some to be trailing in the development of AI technology, behind the AI-driven services expansion of both Google and Amazon Web Services(AWS.)  Perhaps so.  But any way you slice it Apple has been a winner.  Regardless of what’s coming, they will be well, but at a much slower rate.  Good luck and good investing.

 

 

 

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Additional resources:

Investopedia.com.  Seriously Wonderful.  Fact.
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https://www.schwab.com/public/schwab/client_home
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2 thoughts on “A Nine Worm Apple? Tell Me No.

  1. “No one has more suppliers than Apple, literally.”
    APPLE HAS LESS THAN 200 SUPPLIERS, BOEING HAS OVER 20,000.
    THE 787 ALONE HAS ABOUT 2.3M PARTS EACH.
    BUT I LEARNED A LOT. GREAT PIECE, THANKS FITZ

    Like

    1. Thank you Fitz. As an aircraft industry inside and composite specialist, we’ll just say thanks for keeping us on track. Honestly, now that you corrected our bent thinking, it is many of the semiconductors who have more than 10,000 suppliers–some 16,000. That number comes from The Economist. Thanks again. Sj.

      Like

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