Beating Buffett on Apple (AAPL)

Written by Charles Mizrahi
Posted May 10, 2018 at 10:49AM

Apple (AAPL) is on pace to become the first trillion-dollar company.

And to think it was once on the verge of going bankrupt.

For the past decade, Wall Street has missed the boat on Apple.

During that time, Apple has been on a tear, up more than 695%:

Wall Street was either looking in the rearview mirror or looking to the next quarter.

That kind of short-term thinking is the thief of all profits.

Generally, I ignore Wall Street and its short-term expectations.

That means not listening to all those nervous Nellies when they fret over lower iPhone sales.

Now, don’t get me wrong; the iPhone is the hub of Apple’s cash machine. It drives customers to other products and services.

It’s the gateway for consumers to buy more Apple products.

Once you’re in, you start to see how all the Apple products work together.

And just like potato chips, you can’t have just one Apple product.

I started out with an iPhone back in 2007. A short time later, I dumped my PC and started working on an iMac. And that led me to an iPad.

This isn’t unique. In fact, the average household owns about 2.6 Apple products.

When Apple introduced the iPhone to the world in June 2007, it changed everything.

Back then, Blackberry was the leader in the smartphone market. Blackberry’s former co-CEO Jim Balsillie wasn’t even concerned about losing market share.

Just six months after its release, the iPhone had captured 28% of the U.S. smartphone market. A new iPhone launch ultimately meant better functions. And this is how Apple drives sales higher.

By September 2012, when Apple launched the iPhone 5, it had a 34% market share.

Don’t Buy on Emotion

By 2012, the only thing Wall Street focused on was iPhone sales.

The iPhone was the driver behind Apple’s revenue. Revenue went up 4x between 2008 and 2012. The stock price followed, rising more than 60%.

And then the party stopped.

In September 2012, Q3 earnings missed Wall Street’s expectations. The stock plunged more than 20%.

Wall Street was looking at Apple as a one-trick pony. Its fortunes were tied to one product: the iPhone. And competitors were breathing down Apple’s neck.

At that time, Google was giving its Android operating system to handset makers for free. Amazon was selling its hardware at cost. And Samsung was offering functionality similar to the iPhone at a much lower price.

“With Apple down well over 20% from its 2012 peak, there have to be better places to put money to work in tech,” said one Wall Street analyst.

That’s about the time I rolled up my sleeves and went to work.

Instead of trading on emotion, I drilled down and looked at the big picture. The more I researched, the more I realized Wall Street just didn’t get it. It was missing the big story.

I added Apple to our Park Avenue Investment Club portfolio on December 28, 2012, at $65 per share. Apple’s shares are now trading for $186 — a gain of 183.9%.

I know many of you were all over this trade from the start. Congratulations. You proved yourself to be intelligent investors.

However, if you missed jumping on board the Apple bandwagon, here’s your second chance.

Apple’s Long-Term Outlook = Buying Opportunity

Back in 2012, and even as recent as just a few weeks ago, Wall Street had tunnel vision when looking at Apple.

It’s only focusing on the iPhone and missing what is really going to drive Apple sales higher.

At the end of 2012, Apple’s revenue from iPhones was $80 billion, which made up close to half of its total revenue.

But buried at the bottom of the income statement was a line item labeled “software, service and sales.” It showed only $3.5 billion in revenue. Compared to the total revenue, it was like a pimple on the ass of an elephant... about 2%.

The more I researched, the more convinced I became.

Apple services was the Saturn V rockets that were going to propel Apple even higher.

At the time, Apple had more than 100 million credit cards on file — it was ringing up charges every time someone bought an app.

To me, it was a no-brainer. Apple made it so easy to buy an app. Consumers didn’t give it a second thought.

Since 2012, the services segment has soared.

It didn’t matter to me if the next quarter’s iPhone sales came in below expectations. I didn’t give a hoot. Because in the long run, growth was going to come from services.

Back in 2012, Apple only did $3.5 billion in services revenue. In about six years, Apple now does $30 billion... almost 10x more. And the profit margins are huge.

Services grew by more than 30% during the quarter. Apple projects services revenue will grow to $50 billion in the next three years. I think the company is being too conservative.

The great thing about services is its high profit margins. And Apple is transforming from a hardware (iPhones, computers, iPads, etc.) to a services business.

And this shift from hardware has turned Apple into a cash machine.

Beating Buffett

In fact, Apple has returned nearly $250 billion to shareholders since 2012 (in dividends and buybacks). And it still has more than $285 billion in cash left on its balance sheet.

Apple has caught the attention of the world’s greatest investor, Warren Buffett.

Buffett just announced that he added 75 million shares, more than $12 billion, of Apple stock to his holdings.

Buffett, through Berkshire, now owns a stake of more than $44 billion of Apple shares.

Charlie Munger, Buffett’s partner, said, “I wished we owned more Apple.”

Buffett started buying Apple during 1Q 2016 at an average price of $109 per share.

I recommended Apple in Park Avenue Investment Club a little more than three years earlier at $65 per share.

Apple’s shares are now trading for $186 — a gain of 183.9%.

But There’s More…

Apple is now diving into another business: financial services. It’s beginning to ramp up Apple Pay and Apple Cash.

Apple Pay will soon make physical credit cards obsolete. As long as you have the app, you can store all your credit cards electronically.

Apple is also building a beachhead in health care. Millions of people are using iPhones to participate in medical studies. One app uses the iPhone’s sensors to measure hand tremors and will, hopefully, aid in diagnosing Parkinson’s disease.

Apple is also working on self-driving car technology. I see the future of Apple looking more like a technology conglomerate than a maker and seller of iPhones.

I’ve been in this business for more than 35 years and have read thousands of annual reports and SEC filings. It’s very rare to come across a business that has so many irons in the fire.

Apple has many world-class “companies” buried inside it.

If you are underinvested, I recommend buying Apple (AAPL) when it pulls back to $185 per share.

All my best,

Charles Mizrahi signature

Charles Mizrahi
Founder, Park Avenue Digest

follow basic@Park_Ave_Digest

Charles cut his chops on the trading floor of the New York Futures Exchange before he moved on to become a wildly successful money manager on Wall Street.

And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball. He's compiled an amazing record of success and posted gain after gain for his loyal readers. He's the founder of Park Avenue Investment Club and Insider Alert newsletters.

Charles is also the author of the highly acclaimed book Getting Started in Value Investing.

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