Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Good Stocks

Apple (AAPL) is a value investment because of the old Apple magic

Apple (AAPL) is a value investment because of the old Apple magic. To clarify, the old Apple magic is the irrational belief that Apple is inherently good.

In addition, many Apple zombies believe Apple is better than other tech companies. A classic example of this thinking is Damon Beres’ claim “Apple Is Fighting a Good Fight Against Facebook and Google.”

In detail, Beres believes Alphabet (NASDAQ: GOOG) and Facebook (NASDAQ: FB) are evil monopolists that trample the rights of the little guy. Conversely, Beres thinks Apple (NASDAQ: AAPL) is an organization of altruists that fights for the common people.

How the Old Apple Magic Works

Notably, Alphabet and Facebook’s crime in Beres’ eyes is to engage in fairly routine consumer research. Specifically, Facebook and Google use data-collecting apps to gather information about customers.

However, Apple in a monopolistic move wants those apps off of iPhones. In detail, Apple’s move is monopolistic because it prevents Alphabet from enhancing Android’s customer experience with consumer data. Hence, the zombies applaud Apple for the monopolistic behavior they condemn in other tech companies.

I think this is a perfect example of the old Apple magic in action. To explain, the zombies call Apple a paragon of virtue, when there is little to distinguish its behavior from other tech companies.

Apple’s (AAPL) Reputation is a value investment

Realistically, there is little evidence to support the claims Apple is good or Alphabet (NASDAQ: GOOGL) is bad. However, these beliefs are widespread and they influence human behavior.

In particular, “the Apple good, all other techs bad,” belief, creates a base of loyal Apple customers. More importantly, those zombies give Apple a steady stream of cash it can tap for R&D or other purposes.

Therefore, one of Apple’s biggest value attributes is its reputation. To explain, the reputation brings in a lot of business at little or no cost. Hence, the reputation helped make Apple a value investment at $170.18 a share on 14 February 2019.

Why Apple (AAPL) is like Disney

Moreover, Apple gets a steady base of loyal customers who believe it is good. Thus, Apple is like Disney (NYSE: DIS) a company that people irrationally think is good.

In reality, there is nothing to distinguish Disney from other entertainment companies. Yet many people still believe Disney is good because of its history.

In addition, Disney; like Apple, enjoys the legend of a colorful larger-than-life founder with a great reputation. Specifically, Disney still benefits from the legend of Walt Disney, while Apple profits from the legend of Steve Jobs.

Indeed, Disney is still cashing in on Walt even though he has been dead for over 50 years. Meanwhile, Apple; which is largely Tim Cook’s creation, assiduously maintains the cult of Steve Jobs.

Interestingly, Apple is trying to make itself more like Disney by only producing “family-friendly” (heavily censored) entertainment. Notably, Apple is canceling Dr. Dre’s original series because of “sex, drugs, and violence,” Business Insider reports.

How Much Money is Apple (AAPL) Making?

Okay, Apple does a great job maintaining its reputation but how much money is it making. Currently, the answer to that question is a lot.

For instance, Apple records a gross profit of $32.031 billion for 4th Quarter 2018. In addition, Apple reports an operating income of $23.346 billion and a net income of $19.965 billion for the same period.

Impressively, Apple raked in an operating-cash flow of $23.690 billion, an investing cash flow of $5.844 billion, and a free cash flow of $23.355 billion for the same period.

The Apple Money Machine keeps ticking

Thus, Apple is still a money-making machine. Hence, the real Apple magic is making the cash appear.

Consequently, Apple reported cash and equivalents of $44.771 billion and short-term investments of $41.656 billion on 29 December 2018. Thus, Apple had $86.427 billion in the bank at the end of 2018.

Apple is generating an incredible amount of cash from its business which makes it a value investment. Not surprisingly, I think the cash made Apple undervalued at $170.18 a share on 14 February 2019.

Apple’s Revenues growth slows

There is one bothersome sign at Apple; (AAPL) its revenue growth is slowing. In fact, Stockrow gives Apple a revenue growth rate of -4.51% for 4th Quarter 2018.

In contrast, Apple had a revenue growth rate of 19.63% for 3rd Quarter 2018. Therefore, you can argue Apple’s revenue growth rate fell by 24.14% during 4th Quarter 2018.

On the other hand, Apple’s revenues grew from $62.9 billion to $84.31 billion during the same period. Thus, Apple is still experiencing incredible revenue growth despite the slowing rate.

Apple is still a great dividend investment

Hence, the old Apple magic is still working, and the company is still generating lots of cash. Therefore, Apple dividend investors have nothing to worry about.

In fact, Apple will give investors Valentine’s Day presents in the form of a 73¢ dividend on 14 February 2018. Moreover, that dividend grew by 10¢ in 2018, rising from 63¢ in February 2018 to 73¢ in May 2018.

Additionally, Apple’s second dividend has been growing for six straight years. Apple investors were enjoying dividend growth of 1.73%, an annualized payout of $2.92 and a payout ratio of 24.8% on 14 February 2019.

Obviously, Apple is a great dividend stock and a value investment at prices like $170.18 a share. Thus, I would recommend investors buy Apple.

How long can the old Apple Magic last?

Apple is a good stock and a value investment, but how long can the old Apple magic last? Unfortunately, the answer is hard to discern because corporate reputations can vanish quickly.

Notably, Sears (OTC: SHLD) reputation vanished completely in less than 10 years. However, Disney has maintained its reputation, even though the present entertainment conglomerate is nothing like the boutique entertainment company Walt ran.

Thus, the Apple magic can last as long as the company makes money, churns out good products, and maintains some customer loyalty. However, customer loyalty is hard to measure because loyalty is inherently irrational.

For instance, Ford (NYSE: F) lost its reputation completely after World War II, yet Disney maintains its image despite vast changes in management. Meanwhile, Walmart (NYSE: WMT); one of the most reviled companies in America, maintains a high level of customer loyalty.

Threats to the Apple Magic

Given the irrationality, there are some serious threats to Apple magic. Interestingly, the greatest threat to Apple’s reputation is management arrogance.

The belief “we can stamp our brand name on anything and sell it to the customers at a high price” exemplifies such arrogance. Notably, such arrogance destroyed Sears when it entered fields like brokerages and high fashion in the 1980s and 1990s.

Thus, Apple investors should fear the talk of an Apple Car, and Apple’s entry into movie and TV production. In fact, news stories indicate Apple management does not understand Hollywood all.

Apple Original Content will fail

For instance, Apple paid a rapper, Dr. Dre, big money to produce an original TV series, Business Insider reports. However, management canceled the series because it contains sex, violence, and drugs. I have to ask has anybody at Apple listened to a rap song?

Instead, Apple is concentrating on “family-friendly” original programming. Historically, viewers claim they want family-friendly entertainment but refuse to watch or pay for it. Notably, Disney made R-rated movies in the 1980s, and bases its current marketing on violent superhero and science-fiction films rather than the Mickey Mouse Club. 

Thus, Apple’s original programming could become the Hallmark Channel of streaming video. That is the butt of jokes rather than must-see programming. Consequently, Apple’s current plan for original content could work as a loss leader but it’ll never be a serious entertainment brand.

Why Apple cannot compete with Netflix

Apple will need to change its programming if it wants to compete with Netflix (NASDAQ: NFLX), Hulu (60% owned by Disney), and Amazon (NASDAQ: AMZN). I think a smarter strategy for Apple is to leave movie and TV production to Disney and Netflix and concentrate on iPhones.

I predict Apple original content will probably fail and the Apple car will never hit the road. Instead, Apple should stick to what it does best; selling well-designed easy-to-use gadgets to technophobes, and stay out of Hollywood and Detroit.

Thus, the old Apple Magic is a value investment but investors should understand that mismanagement can kill that magic quickly.