“Since 95 percent of the people are imitators and only 5 percent initiators, people are persuaded more by the actions of others than by any proof we can offer.” – Cavett Robert, Sales Consultant

 

Melbourne, Saturday, November 3rd, written on an iMac hotspotting from iPad – Apple Inc (NASDAQ: AAPL) fell 6% on Friday after the world’s largest technology company provided its fourth-quarter results to analysts.

It’s a stock I own as part of Rask Invest, so I am likely bias.

For the most part, Apple’s result was spectacular, revenue was up 20% and profit per share come in 41% higher. A gutsy quarter for a $US1 trillion company.

Hardware Unit Sales

Unit Sales (m) 2017 2018 Growth
iPhone 216,756 217,722 0.45%
iPad 43,753 43,535 -0.50%
Mac 19,251 19,979 3.78%

Software + Hardware Revenue

Revenue ($m) 2017 2018 Growth
iPhone $141,319.00 $166,699.00 17.96%
iPad $19,222.00 $18,805.00 -2.17%
Mac $25,850.00 $25,484.00 -1.34%
Services $29,980.00 $37,190.00 24.05%
Other products $12,863.00 $17,417.00 35.40%
Total $229,234.00 $265,595.00 15.87%

What Analysts Said About Apple

Listening to a conference call with senior management provides unique insight into a company’s recent performance and strategy.

Apple has sold more than 1.5 billion iPhones since 2007 and more than 2 billion iOS enabled devices to date (Macs, iPads, etc.). That’s a phenomenal achievement, so the company deserves lots of credit.

However, questions from analysts on the conference call focused on just two points:

  1. Apple’s decision to no longer record iPhone, iPad and Mac unit sales. Analysts love this style of reporting because it makes their job easy. “P times Q” they call it. Meaning, the average price of the iPhone multiplied by the quantity or units sold equals revenue. Forecasts are made easy too:

    Owen’s forecasts. There’s no guarantee they’ll actually happen!
  2. “Soft” quarterly guidance for 1Q 2019. Revenue is expected to be between $US89 and $US93 billion (last year: $88 billion). That hardly seems soft to me, especially with an updated portfolio of iPhones, Macs and watches.

According to CNBC reporting, Apple has ‘something to hide’ by dropping its P times Q reporting.

“We believe that the new iPhones are boosting ASPs nicely, but unit growth is still lacking,” one analyst wrote. Higher average selling prices (ASPs) and slower unit growth (look at the chart above) are not ‘beliefs’ — they are fact.

What Now

In my opinion, Apple’s transition to growing its extremely high margin Services business is on track. Of course, hardware/unit sales are important to the business.

But my investment thesis for Rask Invest is that unit sales will become less and less important to the business over time as revenue from selling services like iCloud, ApplePay, App Store subscriptions and more, reach further in consumers’ pockets. The tail on these lines of business are grossly misunderstood by or not relevant to short-term speculators, and it is underestimated by many long-term analysts.

I think Apple will be able to achieve above-average profit growth from these Services for many years to come. Maybe not this quarter or next, but over many years. In other words, hardware gets them in the door, sticky software keeps them on a high margin treadmill.

And when this is coupled with prospects for growth in emerging markets, $200+ billion of cash, a huge buyback, dividends and other call options, Apple is not a business I would bet against at these prices.

Cheers to our financial futures!

Owen Raszkiewicz

Founder & Lead Adviser, Rask Invest

P.S. for disclosure purposes only, at the time of publishing, I own shares in Apple Inc.

P.P.S. did you know you can get my free report, 3 Proven ASX Growth + Dividend Shares, when you join our free investment newsletter (or when you sign up for 1 year’s worth of my investment research)?

Disclaimer: This article contains general financial advice only and should not be relied upon because the information included in this article does not take into account your needs, goals or objectives. Please read The Rask Group’s full disclaimer below.

 

 

***

Here’s something I was going to add to this article but my train of thought was derailed!

Pluralistic Ignorance

What makes investing so hard to understand is that two people can hold different views on an investment and both can right as it depends on their timeframe for investing. I could be right in five years but wrong a day from now.

In addition, oftentimes people who hold views are right for the wrong reasons, making it extremely hard to discern skill from luck (especially if a person’s track record is not transparent).

So amidst all of this uncertainty, many investors look to the crowd or “the market” for answers.

“In general, when we are unsure of ourselves, when the situation is unclear or ambiguous, when uncertainty reigns, we are most likely to look to and accept the actions of others as correct.” – Robert Cialdini 

Contrary to popular belief, crowds of people are not necessarily better at making decisions. In fact, in some instances, such as when emotions reach boiling temperature, crowds make worse decisions. The fantastic author Robert Cialdini refers to this idea as “pluralistic ignorance”. Cialdini cites homicides that took place when as many as 38 onlookers or bystanders failed to help or call the police.

Indeed, as Ben Graham distilled many moons ago, the infamous Mr. Market is no-one from which a rational investor would seek investment advice. Apple’s stock price falling 6% does not mean the company is a poor investment…

Food for thought!

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