- While many think the recent product announcements lack innovation, customers are clearly happy.
- 10M iPhones sold (excluding China) in the first weekend shows the power of the brand.
- All these factors and more are already 'baked in' to the price.
- We are forecasting 10.1% growth and still have the company trading at our fair value.
Let me start with a line that will make at least half of you groan with despair ... I love Apple (AAPL). There you go guys, fan boy alert.
While I absolutely love this business, I love good investing even more - which is why this probably won't resonate that well with my fan boy friends out there - or will it?
Apple has struggled with innovation in the last 3 years - no doubt about it. With roughly $9 billion in R&D spend over the 3 years just gone, it's clear to see why people feel there has been some failure in this department. I'm not sure this is entirely justified though. Here's why:
The reviews of the new MacPro are unanimous too. Scores of 80% to 100% are all I've seen and the machine smashes all desktop benchmarks - but it is a very expensive machine. A far more reasonable (and equally well received) is the iMac all-in-one. This machine also smashes review cards all over the world.
Arguably the worlds highest rated laptops and desktops is no mean feat. Generating around $67 billion in revenues over the 3 year period means the R&D budget for the same period is covered by Mac sales alone.
A lot of the R&D budget has been spent on developing free software to make the entire Apple experience easier and more pleasant for the user. OS X, productivity apps and iLife pieces for tablets and phones and several other lines have been made free where they were once charged for. In my opinion, this is how it should be for a premium hardware device - 'nuff said. Where the real R&D has been going is in the delivery mechanism for the ecosystem. The iTunes / App store integration is already delivering over $16 billion a year in revenues and is growing at 25% a year ... all this, before Apple Pay.
There was apparently disappointment at the keynote according to all sorts of media pundits. 10 million units in a weekend speaks volume to how well the media understand Apple's business model.
I'm not sure I have to try and dissect what is innovative and what isn't about the phones, yes they copied bigger screens - beyond that, I thought it was all pretty innovative. Yes, Google and Samsung have had NFC-based payment technology working for a long time... so why couldn't they make it a success? Apple understands the consumer far better - that is the only clear difference. Apple ensured it had 1000s of deals signed so that, instead of launching technology, they launched an easy-to-use service with wide adoption and availability on day one. As for the rest, it's bells and whistles... but bells and whistles that clearly resonated well on the opening weekend and that have the Chinese market in such a frenzy that the phones were fetching $1,500 a piece on the black market.
This has been the truly disappointing space for Apple and we can only hope that the October event sheds some light on this for us.
No-one can comment yet, but the media say that it looks like the queues will stretch around the blocks once again for Apple's new wearable product. As I said above, the media doesn't often get it right with Apple, so who knows how this will go.
STRIDE ratings for the company are good at present, so fundamentally the company is in rude health. Strength has been stable, returns are still high but have been better. You don't expect high intrinsic value from a technology business, however, Apple has that incredible cash pile that we all keep hearing about. Having initiated dividend payments and buybacks to create shareholder value, STRIDE is more than happy with the way this is being managed in terms of growth, affordability, timeliness and relativity to free cash flow growth. Predictability of earnings has taken a small knock over the past 2 years, so this is the only fundamental to be slightly concerned about. The business is currently trading at the top end of technicals, resulting in the low timing score.
10.1% growth 'baked in' at current price
Apple has a great track record of turning investment into returns over a 2-3 year period and we've seen them do this consistently since 2001. What's interesting about the current market view is that we feel it's factoring in ~10% growth at a STRIDE EPS and FCF per share level. Now, our EPS and FCF levels are lower than the market as we are extremely strict on making the company pay for unusuals, taxes and discontinued operations on the year they happen. Furthermore, we strip off current debt overhangs and ensure amortization and depreciation are written down effectively to get to our FCF number.
The STRIDE picture ahead
From the chart, you can see our clear, timed entry points at the end of January and April 2013 and we have been holding them ever since. We are more than happy with the development of the company and are still happily holding them now due to:
1. The fundamentals stacking up
2. Trading around fair value
3. Forecasting double digit growth
4. Their model already has significant moat although this is decreasing
I said it at the beginning, I love this business - but that's not the reason I'm holding it. The management team has made incredible returns of their R&D spend and the focus on shareholder returns is positive. Topping the charts in all areas the business currently operates in, is not easily done and top line growth at 18%+ once you're over $100 billion is a feat only achieved by oil companies. If you've got it, hold it, if you missed it, sorry for your loss.