I f**king hate Apple. I think it is terrible for society and wields far too much power. Having said that, it has been my biggest single-stock holding for years. And that is unlikely to change soon.
It’s like recommending someone buy vanilla ice-cream, but in investing, that’s a good thing. Investing is meant to be boring, and nothing is more boring than Apple stock. Looking at its return profile against the S&P 500 and Nasdaq over the last five years, AAPL has outperformed significantly. But can this continue? And how has it done so well?
Apple has cash. I mean, Apple has a lot of cash. Coming from Ireland, I know this acutely well – the company was embroiled in a long dispute with the EU over whether it had received illegal tax breaks from the Irish government. After a few back and forths and the customary appeals you would expect, the final twist was that the tech giant could keep the €13 billion which it allegedly owed the Irish government (that’s not far off 3% of our GDP…).
Apple’s abundant cash has been used for one thing above all else – scooping up those shares. Apple is the King of the share buyback. The tech giant has spent a staggering $550 billion on buybacks in the last decade. That’s a big number (the kind of money that could earn a country the right to host a World Cup, a cynic would argue).
But here’s the thing with buybacks: they are good if they reduce the share count. This pumps up the earnings per share, which in turn makes investors happy. A lot of buybacks don’t do this, however. Some announce buybacks while simultaneously giving out funky options to employees, or hotshot executives and other insiders. Which for the average investor is no bueno.
So let’s check that share count and see what Apple has been up to. Well, in the last five years, the number of outstanding Apple shares has decreased by nearly 22%. Over the last decade, it’s nearly 40%.
There is no other company – within tech or outside of it – that can compete with these numbers. Looking at dividends, Apple has also been paying these out in massive numbers. In Apple’s fiscal 2021 alone, it spent $14.5 billion on dividends – a trend it has also been following all decade. During 2020, Apple even had more cash than the US government ($76.2 billion vs an operating cash balance of $73.8 billion of the US Treasury). Not that that means anything, but it’s a rather fun statistic.
The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businessesWarren Buffett
Of course, there is an elephant in the room. The last decade has largely been an up-only extravaganza of constant shareholder returns. There were bucketloads of free cash – especially in the tech sector – and so these buybacks flowed like champagne within the official FIFA Fan festival in Qatar (during specified hours, that is).
But that is not the world we live in any longer. The Federal Reserve has flipped hawkish, hiking interest rates and sucking liquidity out of the economy, with investors having the rug pulled out from underneath them. So can this continue?
Hmmm. Well, the bad news is that demand will fall. Customers may reduce their iPhone purchases. Indeed, it has already happened. The company reduced production plans for the iPhone 14 from 90 million to 87 million after demand failed to materialise as expected.
Its profit is also potentially hampered by the ongoing lockdowns and protests in China, although as I wrote yesterday, investors are betting on China continuing to reopen, so hopefully this will be in the rear window soon.
“To reflect the continued headwinds we are adjusting our (quarterly) estimates lower as iPhone demand could get affected by 5-8 million units (mostly at high-end) and negatively impact revenues by $5-8 billion” says Amit Daryanani, an analyst at EvercoreSI.
But while returns have fallen off in line with the wider market, Apple has still done OK. At this point, Apple may even have earned the right not to be viewed as a tech company. Because the allure of Apple lies in its stickiness. There is nothing more daunting than the Apple moat.
And this is helping it be viewed as a quasi-flight-to-safety, at least as far as that is possible for equity. The resounding fact is that Apple has built a juggernaut of an ecosystem from which customers not only do not want to leave, but feel that they can’t. The cushion this provides with regard to revenue and cash flow is immense.
Apple can also get away with things that other companies could not even dream of. Someone told me a story yesterday of how they dropped one of their airpods in a hardware store. She realised when she left the store, so she returned to try to find it. She could see it was connected through the Bluetooth on her phone, so she knew it was in the store somewhere. After 15 minutes of searching, she eventually found it.
This baffled me. I asked her why she didn’t just open her phone and have the earphones play out an alarm so she could follow the sound and track them. She said that this was not possible because she had an Android phone, and Apple doesn’t allow that feature for non-iPhone users.
To any impartial viewer, that is an egregiously annoying feature to add to Airpods. And yet, people don’t mind – I didn’t know it was a thing until yesterday. Can you imagine if any other tech producer restricted such a basic feature to certain phones? Nobody could possibly get away with it.
In fact, Airpods are my favourite thing about Apple stock, and what solidified its status in my mind as the blue chip of blue chip stocks a few years back. Released in 2016 to a barrage of memes and confusion, Airpods were originally derided.
And yet, they have been a mega smash and one of Apple’s most successful products. Apple, somehow, did it again. I have another good anecdote here, of a friend who was describing how magical it was that Airpods automatically hooked up to his phone when he took them out of the case. “They just sync automatically!”, he exclaimed with joy and wonder.
And yet, this technology was not particularly novel. It’s kind of, you know, just basic Bluetooth. My Samsung earphones did the exact same thing. That has been possible for a decade, maybe more. Even better, my Samsung earphones sync automatically to almost every phone – Android and Apple. And yet, Apple users are overjoyed at this feature.
Earphones, for most people, are a necessity. Which means that people simply have to buy them, and given how much people love iPhones, they are not going to consider anything other than Airpods. This allows Apple to charge a premium – like it does with all its products, another massive revenue driver.
Again, it is the beauty of the ecosystem and the power of marketing. Talk to your Airpods and tell them to “play Fleetwood Mac” and they won’t take you to Spotify like any other pair of earphones, they will route you to Apple Music. And despite the ubiquity of Spotify, this doesn’t annoy people. Because everything else they own is Apple, and so they don’t realise. The moat!
I still think Apple dropped the ball immensely when it came to Apple Music, or the demise of iTunes – but the loss to Spotify has been a rare miss for Apple. Airpods alone scoop enough revenue to be an S&P 500 company. It really is an incredible boost to the Apple money-making machine – and that has all been added since 2016.
I don’t agree with the sheer amount of dominance Apple and these other big tech companies hold. But as an investor, it’s a good thing. And even among these giants, Apple’s power is immense and its monopoly is unparalleled. We are even now seeing Elon Musk fighting with Apple over its advertising policies, but even the richest man in the world must bow down to the tech giant.
There was nothing starker to show Apple’s dominance than its recent moves around “privacy”. Marketed strongly as a way to protect consumers, this is nothing more than a way to grab the advertising market by the horns, fetching a far bigger piece of the pie. Apple couldn’t care less about privacy concerns. Which, again, is a nasty thing to say, but a fantastic thing for their share price prospects.
Apple introduced its App Tracking Transparency policy last year, forcing apps to ask for permissions before they tracked users for personalised ads. With most users opting out, advertisers flipped their spending from Android to Apple. The share prices of advertising-dependent companies like Snapchat, Meta and Twitter collapsed as a result.
Estimates came in that it cost Twitter, Snapchat, YouTube and Meta $10 billion in revenue in the third and fourth quarters of 2021. Talk about dominating your competitors with the flick of a pen. It was an absolutely stunning flex on almost everybody. This summer, Meta said that in 2022 the impact was even more severe, and that the move had cost them $10 billion.
Now, you won’t find me shedding a tear for the likes of Meta and Google, but there is a sadder reality here, too. Small businesses were the biggest victims of all. Advertisers were forced to cut back spending immensely as a result of it being so much harder to target customers. For the countless businesses with dependency on these ad dollars, it has been crushing. And, of course, the businesses who rely on advertising to gain sales. There has been more than enough pain to go around.
“I personally did not feel the impact of the Apple changes in 2021 as much as we are in 2022. This year is just brutal,” Nadia Martinez told the Financial Times this summer. Martinez is the founder of Kallie, a handcrafted shoes company in California that she launched out of her laundry room in 2014.
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“Any small business, at least the online ones, are at the whim of these Big Tech giants. There’s just no way around it. So if they do something that screws you, you’re screwed”, another business founder told the Financial Times in the same story.
In another show of power, Apple updated its App Store rules this year to require advertisers use in-app purchase system to “boost” posts on social media apps. This change means that those social media platforms, such as Instagram and Facebook, will need to hand over 30% of revenue from these ads to apple, in line with the standard commission Apple already recoups for content within an iOS app. 30%!
It’s an outright scary amount of power for one company, and devastating for other companies competing. Especially small businesses, which it is crushing. But again, as an investor, these are all stunning wins (as dirty as it feels to say).
Apple has more market power than nearly any company I can think of, across all industries. Its boisterous cash flow, relentless share-buying and dividends are mouth-watering. Even if these factors slow, the moat around the Apple ecosystem means people can’t get out.
And they don’t want to. Apple is marketed so well that people are happy to pay a premium to be a part of this ecosystem. Outside of oil, it is the biggest company in the world. And people still support it like its their local football team, like there is some measure of pride at being enamoured by one of the biggest companies in the world that actively chokes market competition and makes a mockery of anti-trust laws (Spotify CEO Daniel Elk actually released a thread as I was writing this about Apple’s “questionable” ethics, which is a good read):
Like I said, it’s my favourite stock on the market and the biggest single-stock position in my portfolio. Because my portfolio’s goal is to make me money, not reflect which companies I want to cheer on. So no, I won’t be selling Apple anytime soon. But you will never catch me using an Apple product, because I enjoy my petty little personal vendetta far too much.
Anyway, I have to go. My new OnePlus has just arrived.
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