Monday, 8 August 2016

For Apple a billion is the new million

Late July Apple announced they had sold 1 billion iPhones. It's an amazing milestone not many products have sold that amount let alone a product that was released in 2007 taking less than a decade to achieve. To put it in context the total number of computers sold since 1981 is likely to pass 5 billion this year.

That's the problem with Apple the sharemarket is always asking what is next. Coming up with a successful product after the iPhone is tough. The Apple Watch would have been a success for any other company but for Apple it was a relative disappointment. We expectations reset we do think investors have become too pessimistic on Apple products. Software can scale to a billion users but to actually manufacture a billion products is a massive achievement. Apple's spending on Research and Development is now 6% of sales up significantly from the 2-3% average over the last couple of years. The spending is likely on the much rumoured car and TV but also the tenth anniversary of the iPhone will likely result in major product updates for the phone. Having just one success will likely positively impact the share price given expectations are low.

Apple Free cash yield vs the market
Source: Bloomberg

Is the phone a consumer staple?
While Apple is not a consumer staple most people would notice their phone missing ahead of losing their wallet. Smartphones are a must have product but because of their volatility (time to upgrade has increased) Apple hasn't participated in the large cap consumer brand rally. We think the Apple system is very sticky (think iTunes, iCloud) while it might not be a "consumer staple" users are highly likely to continue buying their products once they become a part of their system. Most people would regard Apple as an above average company yet the market prices Apple below the average. Apple's free cash yield is significantly higher than the market. In other words we are paying 11x for Apples cash flow versus 19x for the S&P500.

Great "problems" to have
In addition to 1 billion iPhones sold Apple has $231.5 billion in cash. The market always looks ahead but its current "problems" highly successful products and high levels of cash are the right "problems" to have.

Decisive has a long position in Apple. The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.