Bite of the AAPL
Since we have given you behind-the-scenes looks at everything from babies to engagements, it’s only fair that we discuss some ideas we are cooking up behind the scenes.
A lot of readers have been with us since day one as we covered some of the most basic financial topics, which we find so important we have re-run them over the last several months. But we also have gotten requests for over a year now to go more in depth into stock picking and portfolio building. You know the fun stuff, despite our pleas to be boring and buy index funds.
So due to a lack of new brilliant ideas from my brain (see my I’m bored post) and popular demand we have considered discussing more direct investment advice.
But first, we need to talk about how to evaluate an individual stock. And guess what pal it’s not based on a hot tip. Or the vaunted “everyone is trading crypto bro, buy Coinbase” analysis.
And for the love of god don’t listen to charlatan morons like Cathie Wood predicting 50% returns every single year. Clark knows I hate the New Yorker so if I am linking an overly gilded article of theirs it must be important.1
Now to explain how to evaluate a stock it only makes sense to start with the biggest one in the world, who makes the *cough*shitty*cough* phone that you are most likely reading this on. You guessed it friends, Apple. Stock ticker AAPL.
So why is this the biggest company in the world?
The eye test of, everyone buys their overpriced phone and half the country decided that Rolex had it wrong in the watch department, seems to be a good start. And you would be right if you said that ⅓ of the entire US population owning a device that costs $1k+ and needs to be replaced every other year is a good business model.
First of all, $25 BILLION PROFIT in a quarter isn’t so bad. That means they made roughly $100 BILLION in a year.
Second, if you don’t already follow @EconomyApp on Twitter or X or Elon.com you definitely should because they have great graphics like the one above that break down a lot of popular companies.
As you can see Apple makes a lot of money. The iPhone accounts for more than half of their revenue, but as you can see multiple other business segments contribute a lot of revenue with the next largest being Services. Everything from music to streaming to Candy Crush purchases fall under that sector.
It is important to look at the product mix and even more importantly to see the growth potential of that product.
While it is great to own stock in a company that makes a lot of money, if they aren’t growing the long term potential is greatly diminished and you end up with something like Altria, a company that makes cigarettes. They are highly addictive (iPhone adjacent) but they are a business that has largely captured all its target audience and is in decline, or has plateaued at best.
So while they make a lot of money and comfortably pay 8% a year in dividends they have no real growth potential which is why the stock is sideways to down over the last 5 years while Apple has ripped almost 4x.
With that in mind let's look at how Apple’s largest product the iPhone has grown over the years.
While it continues to grow, it has setbacks in 2019-2020 which is when the stock exploded which logically makes no sense if we are basing value purely on iPhone sales. But if we turn back to our friend @EconomyApp we know that Apple is also growing multiple revenue streams. Namely wearables (AirPods and Watches) and the app store revenue.
So in the early 2010s if you bought Apple you could argue you were simply betting on more and more people buying iPhones. But by 2018/2019 you had to make a much different argument as iPhone sales flatlined and even fell for a couple years. Luckily we can see that was around the time when the wearables and app store took off. Holding down the fort until iPhone sales accelerated in 2021 propelling Apple to new heights.
Using our Cigarette vs iPhone addiction comparison.
Cigarettes don’t project to sell more, iPhones do.
Cigarettes can’t sell you a watch, or an app to track your stats (business idea?), Apple does.
Cigarette profits are cheap to buy at a 14 Price to Earnings ratio, and they pay well, 8% dividend.
Apple profits are expensive to buy at a 32 Price to Earnings ratio, and they don’t pay well 0.5% dividend.
What’s the Upside?
Good stock investing comes down to getting a good value. Either buying into a growth company like Apple early, or investing in a company that can pay you a large share of their profits.
While hype becomes a big factor in the short term, as we have discussed, long term success comes from buying growing companies at a fair price. Apple is a great example of this because they keep finding ways to grow the bottom line and reward investors.
If you liked this deeper dive, or have more questions about individual stocks, please comment below.
Editor's Note: Ian (that’s me) is an noted idiot when it comes to picking stocks, HOWEVA…
I did buy some Apple as a college freshman after convincing my parents to let me cash in my baby bonds to open a Roth. Below are the receipts to prove it, taking the whole $1000 they gave me to buy AAPL.
2 quick observations…
1. AAPL was split 7/1 and then 4/1 making my initial purchase price about $16 and $20 respectively.
2. In 10 years we have come a long way from $10 commissions.
With AAPL current price means I have what the pros call a Ten Bagger.
For Your Weekend
Read:
How All Ghillied Up How All Ghillied Up Changed Call of Duty Forever - Art of the Level by Matt Purslow (IGN)
Developer Infinity Ward changed first-person shooters forever when it launched Call of Duty 4: Modern Warfare in 2007. Set on the frontlines of a politically murky war, its adrenaline-fueled action set pieces redefined campaign design for an entire generation. But while levels like Crew Expendable and Charlie Don’t Surf channelled the trademark intensity of Call of Duty’s World War 2 days, one mission set the series’ rulebook ablaze and threw it out of the window. It was called All Ghillied Up.
Ian apparently regards the New Yorker with such disdain that he cited an article from New York Magazine, which is a different publication.