Apple stock plunged 10% last Thursday after management revealed that the slowdown in the Chinese economy was impacting sales of iPhones. This, of course, followed previous stories noting that the high prices of the newest iPhones—as high as $1,449—were driving away some customers. By the end of the day, the stock was a whopping 38% off its October high, very close to its 50-month moving average. So, what to do now with AAPL: buy, sell or hold?
AAPL: Buy, Sell or Hold? It Depends
Short term, this is probably a good buying point. A look at the chart of the past decade shows that the stock has come close to this moving average twice before —in June 2013 and in May 2016 — and both were great buying points.
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So if you want to make money over the next year, I recommend buying Apple now.
Looking longer term, however, Apple’s situation reminds me a lot of two other great companies, IBM and Microsoft—and that’s a story worth exploring.
International Business Machines (IBM) was the original great computing company, beloved across America; my grandmother owned it and never sold it. But eventually the company grew too powerful. So in 1969, IBM was sued by the Department of Justice, accused of violating antitrust laws. The case dragged on for an amazing 13 years before the government finally gave up, at which time IBM’s share of the mainframe market had fallen from 70% to 62%—and the computing landscape had changed immeasurably. IBM is still a decent conservative stock, yielding 5.5%, but it’s not a growth stock.
In fact, it’s actually down over the past five years—and probably a decent buy here at this double bottom if the dividend is attractive.
When the government finally gave up on its suit against IBM, Microsoft (MSFT) was already 10 years old, though still invisible to most Americans. But it had signed a contract to put its MS-DOS operating system in all IBM PCs, and that catapulted the company—eventually—to the top of the computing world.
Once at the top, however, the U.S. government came knocking, accusing Microsoft of using its operating system monopoly to conduct uncompetitive practices like bundling copies of Internet Explorer with its Windows operating system—and in 2000, Microsoft was convicted of violating antitrust laws. The resulting settlement, however, didn’t seem to do much damage to the company.
Over the past 10 years, in fact, Microsoft has performed quite well—but not as well as Apple.
Apple, thanks to Steve Jobs, innovated its way right past Microsoft, developing consumer-oriented products like the iPod, iTunes, the iPad and the iPhone, so that Apple eventually became King of the Hill. And I don’t think that’s going to change anytime soon, even if the Chinese buy iPhones at a slower pace and Apple can’t raise prices on iPhones as fast as they used to.
I pay Apple money every month for a variety of services, and I don’t see that changing soon. And of course, there’s no sign that the government’s antitrust watchdogs are serious about attacking Apple (though I’d keep an eye on Elizabeth Warren).
But what about valuation?
Consider this:
Apple and Microsoft are currently growing earnings at similar rates, while IBM’s earnings are shrinking. But Microsoft is more than twice as expensive as Apple, as measured by both price/earnings ratio and price/sales ratio.
So, back to the original question of what to do with AAPL: buy, sell or hold? Well, it depends on what you’re looking for. Combining the message of the charts with the message of the valuation comparison, I conclude that AAPL is the better deal of these three stocks today, and will probably make you money in the coming year.
However, I know that eventually, new innovations from new young companies will leapfrog Apple’s offerings, just as Apple leapfrogged Microsoft, which leapfrogged IBM.
The Next Apple?
For example, I recently added a hot technology stock named Twilio (TWLO) to my Cabot Stock of the Week portfolio.
Twilio has a universal, customizable and easy-to-program communications platform that any company can use to automate and simplify communications to customers, clients or coworkers. In fact, just as Salesforce became the standard in marketing software, Twilio is becoming the standard in communications software.
Coca-Cola Enterprises, for instance, uses Twilio to rapidly dispatch service technicians. Airbnb uses it to automatically text rental hosts information of potential guests, including dates and the price of a stay. The Red Cross of Chicago automatically sends texts to volunteers in an area with pertinent info about a disaster. Trulia uses Twilio to power its click-to-call app so potential buyers can hook up with an agent quickly. EMC uses the platform to quickly send texts to employees when an IT service goes down. Lyft uses Twilio to provide real-time driver updates with text messages, while allowing passengers and drivers to call one another without sharing their personal phone numbers. Yelp is using the platform to allow restaurants to automatically text users that booked a reservation through its website, and for users to respond. Nordstrom connects shoppers and salespeople via a mobile app so customers can privately text their salespeople when they need assistance.
The fundamentals are great; sales growth has accelerated over the past few quarters, and earnings have pushed into the black.
And the stock looks good too.
It was hitting record highs in early December before it got pulled down for a couple of weeks with the broad market, but buyers took control again, and thus the odds are very good that this stock will soon be hitting new highs once again.
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