For many investors, Apple (NASDAQ:AAPL) is the single best investment they have ever made. There is nothing a company can do to inspire more loyalty among shareholders, than to make them rich and Apple has made its shareholders a lot of money. Nevertheless, no matter how much you’ve made on Apple in the past, you have to ask yourself whether you would invest in Apple now at its current price. Here’s what Raymond Meyers, a top Marketocracy manager, has to say.
Raymond started his Marketocracy track record in September of 2000. Since then his flagship fund, BSMF, is up 189% handily beating the SP500 which was up 85% over the same period. Over the last 10 years, Raymond would rank in the top quartile of all Morningstar mutual fund managers. Perhaps most importantly, Apple is the most profitable position in his portfolio, having generated nearly $1 million of gains. Click here to see his track record.
Ken: Apple is already the most highly valued company on the planet. Do you really think it can double from here?
Raymond: Apple will continue to grow, in spite of the "Law of Big Numbers." Simply because Apple is the largest company in the world, many say that its growth will slow or stop. I believe this is not true, for four reasons.
- Apple continues to innovate, and not just with new gadgets. Apple continues to rethink and redesign how we consume digital content. With Apple Pay, Apple has reimagined how we transact business.
- AAPL is undervalued. Its P/E is less than 20.
- Apple has industry-leading profit margins on its hardware and unprecedented customer loyalty to its brand. The Apple Stores have the best sales per square foot of any retail business. The iTunes store has redefined the music industry. The iPhone is the standard for smartphones. Every other smartphone is compared to the iPhone.
- Another reason for Apple's low stock price is the inaccurate representation of how Apple's products are doing in the marketplace. For one example, the iPhone is compared against Android. No other company's product is held up for comparison in this way. Android is held up as a monolithic entity, when in fact it is multiple versions on innumerable devices. In some instances, those devices don't even claim to be Google's Android because of proprietary changes. Amazon's Fire products use Android, but it is modified from Google's version.
Apple is one company making one limited slate of hardware products to run iOS and OS X, and Apple assumes responsibility for the hardware, the software, and the user interface. This is why Apple has excellent customer loyalty. It's not a religion – another myth that breaks down quickly on analysis.
Ken: There is no question that Apple is doing a lot of things right. That is why it is already the most valuable company in the world. To make a case that Apple can double from here, I think you have to identify an opportunity for Apple that is big enough to warrant the double. There are not many industries that are big enough for Apple to double its market cap by taking it over.
Raymond: Apple's stock price is down from where it could be, based on a misguided negative sentiment. That always eases over time and the stock has climbed as reality displaced perception. I expect that to continue. That will accelerate the growth.
Apple has announced the Apple Watch. This is a new vector of personal tech that other companies are trying and failing to enter. Competing "smartwatches" are failing in reviews and in the marketplace. Sales of the Apple Watch itself may or may not have a great effect on the bottom line, but the attendant health care initiative might create a very large new market. Baby boomers are getting old, have a lot of money to spend, and are increasingly health conscious. A new hardware/software ecosystem (alá iPod/iTunes, iPhone/AppStore) is entirely possible and could be a colossal boost.
Apple TV. Apple has been noodling around with television for several years with the Apple TV. The goal is to make television viewing completely customizable. This one is difficult because the distribution of content already has a lot of entrenched big players – broadcast networks, cable, satellite – but Apple has proved adept at this kind of negotiations before. Apple also has made some inroads to customized delivery in the Apple TV.
Apple Pay. I haven't been able to find an analysis of just how big this might be for Apple's bottom line, but if it catches on, Apple could suddenly be an 800-pound gorilla of consumer commerce. What does this mean for the bottom line? I don't know, but I'm pretty sure it will be a good thing.
Frankly, I think the expectation of Apple to double in market cap in the next couple of years is conservative.
Ken: It sounds like the Apple Watch is the one you think could be a major value driver. Apple TV has been around a long time and I think even Steve Jobs was disappointed with it. Apple Pay is new, but Apple is not alone in mobile payment systems. Do you think Apple will be the 800 lb gorilla here? Or, are you really counting on the Apple Watch and the other 2 "opportunities" that are not yet compelling to you?
Raymond: Yes and no. Each of those opportunities in and of itself will create a significant increase in revenue and profit. The real expansion will be the result of the expanded Apple ecosystem, as it incorporates each of those initiatives, and the increased perception that Apple has created the best way to do things. We don't know what Apple will do, specifically, but it's a fair bet, based on recent history, that it will seem obvious in retrospect.
For perspective, find a picture of a 2005 smartphone or a 1999 mp3 player. Every mp3 player designed after Apple's iPod, looks very similar to an iPod. Almost every smartphone designed after January 2007 looks like an iPhone.
Ken: In order to double, Apple has to create another $500 billion (or so) of value. This is no small feat. I agree with you that they have done if before, but that's why they are worth their current market cap. The question is, can they keep the margins they have on their existing products AND find new equally large/profitable markets to conquer. A $500 billion market opportunity should not require us to squint to see it.
I agree that if they succeed, it will seem obvious in hindsight. But we have to make investment decisions before it becomes obvious to everyone. Do you see anything they are doing that you think could turn into a $500 billion business? Or, are you willing to make the investment based on Tim Cook's track record? Keep in mind that the iPod and iPhone were both part of Steve Job's track record, not Tim's.
Raymond: I think the Steve Jobs/Tim Cook comparisons overstate the delta since Tim Cook formally took over the helm. First, Tim Cook has been in the middle of every important decision, if not the decision maker since 2004 when Steve Jobs was first diagnosed with cancer. He was not just thrust into the CEO job in 2011. Second, the CEO at Apple has had some kind of magical power ascribed to him, or expected of him. He's just one guy, and not even the most important one. Most people don't know the names of the CEOs of Exxon-Mobil, Microsoft, Procter & Gamble, and Johnson & Johnson. Yes, Tim Cook's job is important, but the real driver for Apple's growth has been their ability to attract and keep excellent talent. Jony Ive has been the constant, and his vision has been central to Apple's innovations since 1998.
As for a $500B opportunity, Apple Pay, the Apple Watch, and the continued growth of iPhone sales with their attendant increases in content and application purchases is, to me, at least that.
Ken: As I've said before, everyone has access to lots of facts. What is in short supply is the judgment to say what the facts mean. With all investment decisions, the facts will take you maybe 80% of the way. But, the last 20% is a judgment call. In this case, I’m hearing that the judgment call you are making is that you are placing your trust in Apple's ability to attract and get the most out of really talented people like Tim Cook and Jony Ive. The specifics of how they are going to create an additional $500 billion of value are not yet clear to you, but you can see how it could happen with the products they have already talked about.
Other investors who need to see more concrete evidence will wait until Apple makes more progress. But they will pay a higher price for the stock once it is clearer which industry Apple will take over next. I would not bet the farm on Apple, but I do agree that it has a place in a well-constructed portfolio.
Raymond: I absolutely agree with that. I have always maintained a position in Apple in my personal portfolio, and in BSMF, mostly against the sentiment of analysts. Numbers and facts are not the prime movers of the market. Sentiment about what those facts and numbers mean moves stock prices. Apple is a great example of that. I'm too cautious to ever bet the farm on any one stock or company, even Apple. That said, AAPL has been very, very good to me over the last 16 years, so I'm not afraid to keep it as a large part of my portfolio.
In my personal portfolio I bought AAPL in 1999 at $1/share (split-adjusted). I have since ignored the conventional wisdom of numerous analysts on countless occasions saying, "now is the time to take your profit and run." That's a huge part of the reason I'm able to retire from my career at the tender age of 58. That's not to say I don't watch Apple like a hawk. I read everything I can find, positive and negative, about the company and what they're doing because it's such a large part of my portfolio.
Ken: Thanks Raymond.
My Take: There are a lot of people who have a strong opinion one way or the other about Apple, but few have a track record like Raymond Meyers. For that reason alone, I think Raymond’s opinion deserves our attention. In addition to his take on Apple, I think there is a broader lesson here for individual investors. Note that Raymond is not trying to anticipate whether Apple will exceed analyst’s expectations for this quarter’s results. Nor is he trying to tell Tim Cook how to run his company. Instead, Raymond’s confidence in Apple comes down to Apple’s ability to get the best from some exceptionally talented people.
All companies say they recruit the best and the brightest. But getting the best and brightest to work together effectively is not an easy thing. Since there are so few companies that do this as well as Apple, I find Raymond’s point that this is the reason he is confident they can produce another doubling to be compelling.
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Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
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