Apple is our largest position so I thought you might want to hear my thoughts on the Apple’s earnings call. I’m not going to reiterate any facts and figures; there is plenty out there. Here’s my take and not necessarily in order of importance.
1. Emerging markets were unbelievable strong. Major markets like China growing 20% YOY, and others 40-70%. North America was disappointing but Apple owns the U.S. market. Not to worry, though. The user bases is super loyal and entrenched. When the larger iPhone comes out, it will be the biggest upgrade cycle yet. Basically the U.S is smartphone saturated and its an upgrade cycle.
2. Apparently new product categories are coming this year. Tim Cook answered that question definitively. No hint at what though.
3. Most important thing for Apple is NOT to throw out a bunch of half baked products like Samsung and everyone else. Once you lose a customer in the personal computer, smartphone ecosystem, it’s hard if not impossible to get them back. Look at Microsoft. Heard of anyone switching from Apple to Microsoft? Not likely. Apple has a culture of concentrating on a few good ideas and making them right. Tim Cook is intensely committed to that Jobs philosophy. Could Apple move faster in rollout of new ideas? Yes of course. Tim Cook reiterated more than once that coming out with new ideas is not a challenge at Apple. Keeping the focus on building a few but stunningly great products is what they are about at Apple. As long as they don’t screw up the brand with a poorly conceived and built new products, they have plenty of time to execute.
4. Tim Cook likes stock buybacks. Although he doesn’t know when to do them. When asked about it on the conference call, he made no distinguishment between buying back stock when its cheap or when its dear. He is tone deaf. I’d rather have Carl Icahn or Einhorn execute the trades than Tim. Hope’s not a good strategy but I suspect Icahn will put pressure to bear.
5. The big decline in the stock will hurt our monthly results which until today were significantly outperforming the market. That’s unfortunate but we are not selling or lightening up. Apple did the same thing to us this time last year and we managed to put in a good 2013 performance. We are not buying more either as we have a full position. One thing I’ve learned is that no matter how confident or empowered you think you are, there are always things that blind side you. This news about Apple is not one of them. I’m ok with that. Happy no, but confident in the business, the product, and the management that the stock is way too cheap to sell.
6. Valuation. I peg Apple worth $590 now if they shrink 2% a year for the next 8 years. Will they? It’s possible but I don’t see anyone on the horizon that I’m switching to. But I’m not bullheaded and arrogant enough to think that someone can’t come around and do to Apple what they are doing to Microsoft. In fact that’s the nature of the technology industry. It’s called technological obsolescence. We own a full position in Apple, nearly 12% of the Fund and that’s all we will buy based on our diversification rules. Will we wish we had bought more at these levels? Probably so in a few weeks.