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Introduction
I’d be shocked if you weren’t laughing at the title of this article, but many times it pays to look the other way from the crowd. I’m not a (direct) investor in Apple and therefore don’t hold a biased opinion. I’ve just written some articles on Apple and follow the stock closely, so I thought I’d chime in again like I did last time when I called Apple a historically rare buying opportunity.
I’m not here to suggest anyone sell, but rather tell those buying to wait for better opportunities. Apple has already fallen 5% since reaching the $3 trillion market cap, but that’s not the opportunity I’m talking about.
A $3T safe haven?
It wasn’t long ago when Apple became the first US company to reach the then-unfathomable trillion-dollar market cap. Two years later, it doubled, and now it’s tripled that (at least briefly at the time of writing).
If you understand just how much a trillion dollars is (I know it’s after glancing at policy spending), you know $3 trillion is crazy for a stock, especially with a P/E of 30 ahead of a hawkish Fed. However, there’s been no better place to put your money. Yields are way negative when compared to inflation and other trillion-dollar giants like Facebook, Google, and Amazon are under regulatory scrutiny. Indexes are near all-time highs, but many stocks within them have gotten hammered except Apple. Investors don’t know what to do with their money, and for anyone not interested in high-speculation, Apple has been the perfect, safe bet.
However, I believe active money will take their win and search for new opportunities should they find a reason to take some Apple off the table, and I have two.
Reduced gross margins & iPhone shipments for ’22-’23
This isn’t the first time I made this claim against Apple. The last handset Jobs had control over brought Apple’s gross margins to a record 47% thanks to a Siri-enabled iPhone 4S. This advantage didn’t last long though due to competition. Large-display Android devices such as the Samsung Galaxy S3 were competitive (and different) and Apple’s margins quickly retreated below 40%. A few years later, Apple again topped 40% and I called it unsustainable because it wasn’t backed by innovation. Instead, Apple still relied on customers spending an extra $100 to upgrade from a 16GB iPhone (6/6S) to 32GB, or $200 for a 64GB model. A year later, the infamous 16GB entry-level model was doubled, and a 64GB option was now half the price. ASPs fell until Apple launched the $999 iPhone X, which boosted profits but didn’t help margins due to the high cost of replacing an LCD display with OLED.
This time, Apple’s margins are up due to higher volumes caused by the pandemic. For years, analysts have been calling for a “super cycle”, or a rapid upgrade cycle for customers holding onto their iPhones for far longer than expected. The iPhone 6S/7 cycle is still the highest-volume two-year period of iPhone unit sales. The stay-at-home, work-from-home lifestyle was a good reason to upgrade. Fortunately, for anyone buying an iPhone 12 or 13, they’re upgrading to what will likely be future-proof phones for many years.
These models are all 5G capable, have outstanding cameras, and all new iPhone models (rather than just the “Pro” devices) come with OLED displays. I suspect that these customers will be holding onto their phones for even longer than last time. Even an iPhone 13 Pro is a hard sell compared to an iPhone 11 Pro or XS.
I’m expecting Apple to announce that they’ve sold around 100-million iPhones over the most recent holiday quarter. Apple’s iPhone install base has certainly grown since it announced reaching a billion units last year, but 100-million units is close to 10% of their overall install base. In January 2019, Apple announced that its’ install base was over 900 million, and the holiday quarter before that they sold 68 million iPhones or just 7.5% of their total install base.
I suspect that over the next few years, Apple will need to cater to new lower-margin products (such as a 5G iPhone SE) and see volumes drop compared to 2021’s record sales. As such, I see margins in decline and investors panic-selling as they’ve done historically after Apple hits new all-time highs.
A historically ‘bad’ time to buy Apple
As a long-term investment, there’s never been a bad time to buy Apple. However, Apple has been more volatile than the indexes, sometimes dipping while they keep roaring. This is atypical of most stocks in the Dow such as Apple because Apple is a unique business. It’s in a highly competitive market and there’s always the fear that Apple will lose its competitive advantage. It’s never happened yet, but every time there are signs that it could be, the stock has fallen. Over the last decade, we’ve seen Apple pullback 30-40% while the indexes climbed higher most of the time.
In 2012, Apple shares fell nearly 40% while the S&P 500 continued to march higher. This was after Apple’s margins contracted from a record 47% down to 37%. At the time, just a year after Jobs’ passing, investors wondered if Apple could fend off the competition.
In 2015, Apple fell over 30% over the course of a year while the S&P 500 marched higher. Apple’s revenue growth slowed sharply, margins contracted, and EPS downtrended despite the overall growth of the company.
In 2018, after topping the trillion-dollar mark, Apple fell over 30% over several months. Apple’s decline far outpaced the macro environment, where the Dow lost 11%, the S&P500 lost 18%, the NASDAQ lost 20%.
In 2020, Apple fell 30% at the beginning of the pandemic, which is mostly in-line with the macro environment.
Of course, no one can time the market but a difference in capturing Apple at the trough of these dips after it peaked is a ROI difference of 2-7x (peak) and 3-13x (trough). Again, you can’t time the market, but if history repeats itself as it often has, there will again be an opportunity to buy Apple. Should my guesses on Apple’s 2022/2023 slowdown in sales growth and reduction in margins hold any merit, I believe there will be a good opportunity for investors.
