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Why to Like Apple

Apple is our second most widely held stock in Vestact portfolios in New York, so it's worth checking in on it often. It's an interesting investment, because it's one of the world's most valuable companies by market capitalisation, and it is also absurdly cheap.

At its current share price of $186.60 it trades on a laughably low 15.7 times historic earnings, below the market average (as I discussed yesterday in this newsletter, the current number of the S&P 500 is around 18 times). The latest negative rumour going around is that the Chinese government might ban iPhone sales in China, to retaliate against Trump's ban on Huawei. I doubt that will happen.

Here are the top reasons why Apple is a strong buy right now: Firstly, the iPhone is not dead, it's just in the middle of a replacement cycle. In other words, the iPhone Xs looks too much like the iPhone X, but the next one, the iPhone 11 (I guess?) will see a sales surge. More than 90% of Apple's iPhone customers re-purchase an iPhone. iPhone sales are driven by seasonality and product lifespans, not competition.



Horace Dediu at Asymco points out that the iPhone is the most successful product of all time. Over 1.6 billion have been sold. Including the iOS products it spun off, the total is over 2.2 billion. Of those 2.2 billion sold, 1.5 billion are still in use. There are about 1 billion iPhone users. Economically speaking, iPhone sales have exceeded one trillion dollars.

Secondly, Apple is all about services now. Again, Dediu points out that in 2006, the year before the iPhone launched, Apple customers spent $3.3 billion on iTunes, Software and Services. By 2018 the spending rate was $80.5 billion per year. That number will be over $100 billion soon. What Apple is selling is a phone, plus all the apps on it, make it such a wonderful life accessory.

One final point about valuation, that I have made here before, but is worth pointing out again: Apple has done lots and lots of share buybacks. In recent times the number of shares in issue has declined by a third. In other words, all the juicy profits to come are going to be shared amongst a much reduced club of loyal capital providers. I like it, a lot!


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