With markets grinding back and forth for the last couple of months, it is easy for some to lose focus, but I believe there are more opportunities to build wealth over the next five years than in the last twenty years combined. Apple may be one of those ideas.
Apple shares are close to the same value opportunity not seen since May 2019 when shares were trading at an adjusted $44-a-share. In November 2020 Apple made history by moving away from outside supplied CPU chips.
From the very beginning, Apple has never been in direct control of their PC chip destiny. This changes everything.
The new M1 MacBook they have produced is their thinnest, lightest notebook ever with over 20 hours of battery power, all using a silent, fan-less design. This GPU is in a class of its own and brings the world’s fastest integrated graphics in a personal computer, and dramatically improves power and efficiency while using just a third of the power of traditional chips.
This technology alone will sustain the company for the next two decades. From iPhones to MacBooks to iMac to Apple Visor, we will see Apple continue to design, manufacture and build Apple-exclusive environments.
And therein is the next point. Apple is now a play on digital infrastructure that most investors do not yet understand.
Apple’s user base is over 2 billion users. Maybe 50% of that are iPhones which Apple is planning to increase production of by 30%, and the iPhone 12 release saw pre-orders up 100% to 2 million units.
Services and subscription revenues in Cloud, Music and Fitness segments, a newer segment, should grow at 50% for the next ten years.
Software in medical and consumer health applications is booming. One Bar Ahead analyst Keith Fitzgerald wrote that we are close to the point where you take a bite of a jelly donut in the morning and your insurance premiums will go up that afternoon. Apple already controls 16% of the US health systems market and that could grow exponentially.
Some analysts think that Apple moves into consumer credit, finance and insurance. It is not out of the question that we end up banking with Apple in the not-too-distant future.
Stimulus – despite one’s potential feelings about various government spending programs, the trillions are flowing. Apple is competing for tens of billions of stimulus payments that are being spent on discretionary products or services.
Something big ahead?
Then, there is the possibility that Apple might be getting ready for something big ahead. For the past three years, Apple had been reducing capital spending sharply, but the company’s capital spending skyrocketed last quarter with the biggest three-month investment since 2018. Also notice that the spike broke a three-year long downward trend.
What could be behind the recent spike in Apple’s capital spending? Could the increased cash outflow indicate ramped up production, or maybe something new to come?
The graph below shows that Apple spent about $3.5 billion in capex in the last quarter alone.
While big tech stocks have stagnated, business is booming. In January 2021 Apple turned in a $111.4 billion quarter, meaning Apple’s annual growth rate is 30%+ and climbing during COVID-19.
Anything can happen in financial markets, but whether APPL moves from the current price of $120, or it goes lower first, I would be very surprised if AAPL does not hit $170 in 2021 and doubles to $240 within two years. We are holding other names for which I have similar expectations, which is why we are bullish on wealth creation and bullish on our Trending Value portfolios over the next year.
As always, please reach out with any questions.
Peter Schenk, CMT, CIM | Portfolio Manager