I finally built a position in Apple stock after years of being out of it. The last time I held Apple was in 2013, but I sold out based on just not being a believer in the company. I was not impressed with their ability to innovate, and I didn’t think their app store margins could hold up, so I thought there were better opportunities elsewhere.
For the most part – I was wrong.
I will admit that it has been hard to match the performance of the S&P 500 without holding any Apple stock. Apple accounts for around 5% of the S&P 500 – so I have been missing an important factor in my quest to beat the S&P.
I am not in the Apple ecosystem – the only Apple product in our house is my spouse’s work phone. But I am seeing a few reasons to buy the stock now – which is what let to my change of heart:
- A Bond Proxy. As mentioned in previous posts, holding bonds seems like a no-win situation. I don’t see rates falling much more, so the only thing they can do is stay flat or go up. When rates go up, bond prices fall because old bonds are less attractive than new bonds issued at higher interest rates. So if rates stay flat, Apple’s yield pretty much matches a bond’s interest rate. And if rates go up, I think Apple will be hurt less by higher rates than bonds. Yes Apple is overpriced currently on a historical basis, and it could drop if rates go up, but long term I think its a better bet than bonds. I have a hard time seeing Apple stock being lower in 10 years, than bond rates being lower in 10 years.
- Apples New Chipsets. There has been alot of hype around Apples new M-1 chip, which perhaps is overdone, but I think the chip is still a huge improvement over Intel’s offerings. I am in the camp that the the sun setting on Intel’s x86 architecture, and Apple is has made a big step away from that. In addition, with Microsoft looking at Windows for ARM, and servers switching to ARM from x86, I think Apple has taken a lead in the movement, and will draw market share short term in the PC market until (unless) PC’s migrate to an architecture as performant as the M1.
- Augmented Reality. As mentioned in a previous post, Apple is moving into Augment Reality and possibly Virtual Reality (AR/VR). I mentioned that I think the lack of progress in AR/VR is a product problem, not a technology problem, and I do think Apple with its strong ecosystem has a decent shot of building something to really be the next generation device. If so, it will power upgrades across all their hardware offerings.
- Other new devices. Apple is only strengthening their ecosystem with well designed products. I was skeptical that Apple could build the watch business, but I think I was wrong about that. This week they announced their new Air-tags, which I think are a compelling offering, and they are making real progress with home automation with improvements to Homekit. One problem with home automation is the complexity of setting up devices and all the different apps and ecosystems – and Apple has the ecosystem that is stronger than all the others.
I still am skeptical that Apple can keep their 30% margins in the app store – we have already seen them start to weaken on their pricing. But at this point – I think they have enough new products to build their ecosystem and user base to offset any margin shrinkage. I had also been skeptical that Apple was not much of an innovator – every year they just add silly bells and whistles to their phones to get people to upgrade. But I am seeing enough evidence now that they have been doing a great job innovating all their products into an ecosystem, with a real vision on how it will all fit together.
I hate buying stocks like this after a long huge runup, but I am not looking for this new stock position to ‘knock it out of the park’. Apple will be just a core position that I hold and hopefully just watch it grow slowly, as the company sucks more and more people into their ecosystem. I still have no plans to buy any Apple products.. but never say never.