Last week, Apple Inc. (NASDAQ: AAPL) posted some truly impressive figures:
74.5 million iPhones shipped, $74.6 billion in revenue, a 48% increase in EPS, and a net profit of $18 billion.
By virtually all measures, the company had an absolutely blowout quarter, as it now holds the record for having the single most profitable 10-Q filing of any company to have ever existed.
Just let that sink in for a moment: The single most profitable quarter of any public company in history.
The company may have even surpassed Samsung as the world’s largest smartphone vendor. Samsung reported between 71 and 76 million smartphones shipped in the same period, putting Apple’s 74.5 million figure at the top of that range.
At the very least, we should consider it a tie for first in terms of units shipped, but let’s also not forget that Apple’s 39.9% gross margin absolutely trumps Samsung’s falling profitability. What was once a neck-and-neck race for smartphone dominance has officially become a one-sided victory.
The glaring public conclusion surrounding Apple’s record-breaking quarter is that the company’s stock has officially become a must-own. After all, if the most profitable company on the market isn’t worth buying, then what is?
At least, this has been the general sentiment among retail investors over the past six days. I couldn’t so much as make it to the seven-layer dip this Super Bowl Sunday without being asked how many shares of Apple I now own.
Consistently, though, my answer to this question surprised friends and family alike. The only thing more shocking than me not owning any shares of Apple, it seems, was Pete Carroll calling a pass play from the one-yard line on second down with Marshawn Lynch on the field (seriously, though, why?!).
But I digress. What reason could I possibly have for not owning a piece of the most profitable company on the planet right now?
Well, I can give you five.
1. Apple Repeats the Same Pattern
This one is an issue of timing. Since 2012, Apple’s revenue stream has followed a consistent and predictable pattern — one that we’re very likely to see again in 2015.
Thanks to the combined help of well-timed iPhone releases and strong holiday sales, the company’s first quarter has been a blowout for the last four years. Following the first quarter, though, Apple’s revenue tends to fall off until the third quarter, where it ramps up just a tad:
Once the market becomes saturated after the holidays, any future surge in revenue for Apple becomes largely dependent on the next iPhone release and holiday sales. Revenues will surely spike again, but likely not for another year.
What this means is that you’re better off owning Apple pre-first quarter earnings than buying in right after. April and May, in particular, have been the best months to pick up shares of Apple since 2011.
Of course, if Apple ever decides to offer a significant dividend payout, a buy-and-hold strategy could become a much better option.
2. There’s Too Much Riding on the iPhone
Record-breaking iPhone sales are a double-edged sword for Apple.
On one end, the iPhone has almost single-handedly brought the company to its current position of mobile dominance. On the other, its success has made Apple highly vulnerable to anything that might disrupt the smartphone market, whether be it future wearables, augmented reality, etc.
Not only does Apple now derive a hefty 69% of its revenue from the iPhone, but its next-largest revenue stream — the iPad — has dropped off 18% in the last year. This can be heavily attributed to the fact that Apple’s new, jumbo-sized iPhone 6 has begun to cannibalize tablet sales.
The fact is that despite the massive success of the iPhone, Apple still needs to bring additional products to market — especially ones that compliment, rather than compete with, each other. Otherwise, what you’re really investing in is a single product, not a company.
3. The Apple Watch is Still Unproven
The Apple Watch, expected in April, may very well be the product to successfully diversify the company’s revenue stream. That’s because unlike the iPad, the Apple Watch will not be competing with the iPhone but rather pairing with it.
No doubt, this is the direction we’d like to see Apple moving, but for now, the demand for the Apple Watch is still unknown. Convincing customers to buy a $200 phone is one thing, but tacking on a $350 smartwatch is an entirely different story.
Past attempts at smartwatches by other tech companies have so far been major failures, so it would be foolish to assume the Apple Watch is a shoe-in, breakout success.
Despite efforts from major technology companies including Samsung, Sony, and Qualcomm, consumers have yet to find the concept appealing. After all, is taking your smartphone out of your pocket really that much of an inconvenience?
It’s certainly worth noting that Apple holds the distinct advantage of superior brand recognition and a drastically better-looking product, but until we see the initial sales figures, there’s little sense taking part in speculation.
4. We Could Be Nearing “Peak iPhone”
While it’s not much of a surprise that Apple had a stellar first quarter, the revenue increase was undoubtedly much greater than usual. Why was this?
Well, prior to this most recent quarter, there was pent-up demand for Apple in two areas: a) the world’s largest market base (China) and b) among potential Android defectors who didn’t want to give up screen size.
Coming into this quarter, Apple opened its doors to both markets.
For one, the company struck what Tim Cook referred to as a “watershed” deal with China Mobile, the nation’s largest network. It also opened itself to on-the-fence Android users by copying what Android phones had been doing very successfully at the time: making thinner phones with bigger screens.
Both moves were monumental for Apple, but both are one-time events. Apple can’t make the iPhone look any more like an Android than it already does, and it can only launch on China’s largest network one time.
There’s no question these newly obtained markets are sustainable, but the reality is each one can only be tapped once. Without any other major catalysts on the horizon, Apple’s growth story will fade (another reason to wait for the initial Apple Watch figures).
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5. The Company is Huge (Too Huge)
And finally, the number one reason for not owning shares of Apple?
Maybe it’s my youth speaking, but I want growth — not size.
Sure, Apple’s bull rally could be chugging along, but it’s going to be outpaced by smaller companies nonetheless. Just take a look at the performance of four major chipmakers compared to Apple over the last three months:
Click Image to Enlarge
My question is why would you own Apple, a company that relies almost entirely on the iPhone, if you could diversify across multiple chipmakers whose products are in the iPhone as well as competing Android products?
The answer, to me, is simple: I wouldn’t.
Until next time,
Jason Stutman
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