For the past few quarters Apple (AAPL) has been the province of traders – and in recent weeks investors have come back to the stock.
If you are a trader, the next few weeks will test your patience. If you are investor, do not hesitate; the stock is a bargain, the most undervalued stock I have seen in a long time.
Why Apple, why now?
Traders saw the stock move 5% or so on Monday past when Apple announced it had sold 9 million iPhones and was out of inventory. The shorts got pounded. Serves them right for shorting Apple; they probably are still using BlackBerrys (BBRY).
The news was hardly shocking. According to ChangeWave Research (part of the 451 Group) and other data, Apple has been picking up market share for several months. Why was that shocking is so many people, supposedly following the company? Don’t they visit Apple stores, talk to Apple customers? I guess not.
All of this makes traders seem dumb. Trading Apple is dumb compared to owning it. As an investor, these traders are your friends; they are making the stock a great buy right now.
Investors could not — or should not — be happier with that iPhone announcement, for Apple put a stake in the ground no one is discussing. Why not? Headlines and ratings are dependent on pundits making pithy (if wrong or irrelevant) comments that are all about the moment. Not the product, the company or the stock — the moment.
It’s all about profit margins
These temporary experts have overlooked the most critical feature in Apple’s new iPhones. Not the screen, not the fingerprint reading capability, not the new colors in the low-end phone, the 5C. Apple said, explicitly, it will continue to focus on profit margins, not market share. And it will continue to focus on an integrated experience with all products having a level of quality – and integration with other Apple products – second to none on the market. And nothing could be more important for the longer-term investor.
Market-share fights destroyed the profitability of Dell’s (DELL) and Hewlett-Packard’s (HWP) personal computer businesses; market-share fights destroyed Nokia’s and Motorola’s handset businesses. Not so Apple. The Mac and its ergonomic cousins, the iPhone and iPad, have generated more profits in the past five years than Dell and HP’s personal computer businesses combined over the past decade . . . or over the past two decades.
Hanging on to the profitable customers
Apple has used its superb profit margins — almost triple that of Dell, of HP and probably double that of Samsung (SSNLF) — to create and support the best user experience anywhere. Apple is picking up market share as people who tried Android and Lumias and whatever else come back to the unique, integrated and feature-by-feature, superior appeal of the iPhone — and the iPad – and the Mac. Oh, and iTunes and the iCloud and iPhoto. . . you get my point. The fight for success — for profits — is not about getting the last customer with a few dollars to spend. It is keeping the profitable customer and offering them more and more things to buy — with the same or better profit margins. And Apple is winning that battle. Buy a Samsung computer lately, buy anything from the Samsung music store? How about a Samsung a tablet? Apple’s primary competitor in phones only has phones (OK, they also sell some tablets). Apple has multiple hardware and software offerings that extract multiple streams of profit from the same customer.
The bottom line for the investor – the world is coming back to Apple, and this most recent announcement told us Apple would take people back in a way that is highly profitable.
Are there bumps ahead? Only for traders and people who do their thinking based on what the latest pundit says on CNBC. Earnings for Q3, to be reported in mid-October, are hard to predict because no one knows how many people postponed purchases of the iPhone. And no one knows how many iPhones will be sold into the channel by Sept. 30. If you are investor, this means nothing, unless the stock falls, creating an ever-bigger bargain. Apple’s focus is on profit margins, not market share. That’s all you need to know for the long haul.
Michael Shulman is the author of Made in America: Inside Stories of Success and writes several investment advisory services.