Apple $AAPL in 2013: Rare Perfection
About: Everyone knows Apple. It is the world’s largest technology company by revenue as well as by market value. Its main products are the iPhone, iPad and Mac, and it sells add-ons such as the airpods. Apple’s services business - iCloud - keeps all its products glued together for a seamless experience for the user. Apple’s user loyalty is sky high, and people still line up in the 2020s for a new release of the iPhone.
Today: In 2023, Apple’s valuation is close to $3 Trillion. Its TEV/RE is around 30, expensive but not overly so. Apple’s brand value, user loyalty and its rapidly growing services business - which creates a big sticking point for users to stay within its ecosystem - are outstanding. However, its valuation does not scream “Value” to us. The company will certain grow, but would it do so at a rate to justify its current value ? As we have mentioned elsewhere, we like to invest with 95:5 odds, with minimal risk of permanent capital loss. At today’s date, we keep Apple in our Wait-n-Watch bucket.
Rewind to 2013: At this time, the situation was very different. While Apple brand value and user loyalty was still outstanding, Google’s Android mobile operating system had enabled Samsung and others to build smartphone that were essentially copies of the iPhone with a different underlying OS. On top of that, these firms, and especially Samsung, offered their phones with many more features and size options compared to the iPhone. Their market share was rising while Apple’s became static. iPad sales actually fell. There was a sense in the market that Samsung and others were offering brighter and shinier gadgets to customers, especially those who were not die-hard Apple fans.
“Apple Is Being Short-Term Greedy — And This Shortsightedness Could Clobber The Company Over The Long Haul”
“Reasons why Apple is in trouble - Weakning leadership, Form factor (small screens), Digital landscape perpetually in motion”
iPhone 5c: Being at a lower price point, it made many question whether Apple could grow profits at the top-end of the market.
Opportunity: Apple had always been on our tracking list. When its stock price fell from ~$21 (all prices split adjusted) to $12, its Price/Earnings (adjusted by me) suddenly fell below to around 12, an unheard of discount for such a firm. The only reason this had happened was that the market was getting nervous about Apple’s future growth. We disagreed strongly with the market. I had never met anyone (across the US and Canada) with an Apple device who willingly wanted to move to Android. They did jealously look at the Samsung’s bigger screen, but didn’t really care for the other bells and whistles in Android.
In our opinion, Apple was still the king of the hill as long as its fierce user loyalty remained strong. An year or two where a competitor sold more to other customers didn’t really affect long-term outlook as a rare firm to invest in. It ticked all our boxed, business model and strategy, financial position, and finally the price had come down to such a discount that it screamed Buy to us. It is not often that you get such an amazing business at such a discount. Plus this was a business that I could hold onto for a long time.
Results: I invested more than 20% of my portfolio in Apple at that time. And till date I am glad I made that decision. Apple has returned over 15 X my investment in 10 years. And the story is not over yet.