Apple is a phenomenal business, but...

Apple is an incredible business.  No doubt about it.  The iPhone, iPad, and their computers are no longer fads.  They are the standard for quality and technology as of now. 

Now they are expanding, successfully, into the subscription business with Apple One and have been selling Apple Music for years.  This is a much higher margin than selling iPhones, iPads and computers.   

I went to our Everything Money AI in our software, and I asked what the margins on the physical products are versus their subscription business.   

Physical Products: 35-38% 

Subscription: 75-77% 

That’s a HUGE difference and that is where the growth for the largest company in the world can come from.   

How do you make above market returns from owning the largest company in the world?  

This is the hard part that I didn’t even understand until I was 20 years into investing.  The larger the company, the harder it is to find hidden value because: EVERYONE IS WATCHING IT! 

With that said, you can definitely find value by using its size to your advantage.  When markets fall hard, the largest companies will fall the hardest because they make up a bigger percentage of the index.  So, when the index is being sold off, the ETF and mutual fund companies are forced to sell everything in their funds.   

The other advantage in buying large companies, like Apple, is less likelihood of a permanent capital loss if you pay a reasonable price.  What does the world look like where 10 or 20 years from now, Apple no longer exists?   

Is it possible?  Of course it is.  Is it probable?  Doubtful.  And for that reason, you are going to make less return.  

Unless you see something that not many others see.   

But let’s talk numbers to see what it would take to make above average returns on Apple for long periods of time.   

Let’s say the markets make 9-10% for the rest of time.  What do you need to make to justify buying an individual stock?  Well it depends on the company and your understanding of their business.  Apple has a very easy to understand business.   

They make awesome shit that people love and use for hours per day and can’t live without.  Pretty good business model if you ask me.  

Ok.  So it’s worth $5 trillion today, give or take a couple hundred billion on any given day.  

Let’s say you assume that because it’s a premium business that you would say it needs to sell for 25X their profit, so that would mean that on $5 trillion in market cap, they need to make $200 billion per year ($5 Trillion divided by 25).   

Well, in the last 12 months they have made $122 billion in profit, so it FEELS a bit overpriced as is, but let’s just go with it.  

Now, if you think Apple will increase their profits 7% per year for the next 10 years, that means the profit will about double in 10 years.  That takes their $122 Billion and turns into about $250 billion. Again, it’s a premium business that’s worth 25X for their profit which would put their market cap at $250 billion X 25 = $6.25 Trillion.   

It’s selling for $5 Trillion today.  That’s only 25% upside from here for 10 years from now.  Now, to be fair, that doesn’t take into consideration all the cash they would generate in the next 10 years being applied to their balance sheet, or paying down debt, or buying back cheap shares (at some point), or paying out dividends.  That’s merely based on the 25 multiple of earnings for the company.  That’s about 2.2% per year in appreciation.   

Yes, it’s Apple. Yes, it’s amazing.  AND the question is: Is it worth it to buy Apple today to make only 2.2% per year?   

Of course, my assumptions could be wrong. They could grow earnings faster than 7% per year or slower.   

The point of this is not to get to exact number. It is to say “Ok, I made reasonable assumptions and I don’t think it works.”  

This is what we use our Stock Analyzer for.  Make assumptions about the future.  Pick a return requirement and figure out the price you need to pay today to get those returns.   

I can’t stop repeating until I am blue in the face.  When you buy a stock, you become a part owner of the business.  Your job is to determine what the right price to pay for the stock would be based on your assumptions about its future.  We can help you get better at that, one stock at a time.  

There are no shortcuts to this. If you want to be good at picking stocks, you must have a process that is based on fundamentals and that, unfortunately, means there may be stretches of time when the market drastically disagrees with you.  

-PG

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