For the past ten years, investors looking for a buy and hold stock in the tech sector have been handsomely rewarded by owning Apple Inc. (Quote, Chart NASDAQ:AAPL). But for those of us who so far have missed the boat, the question arises whether now is still a good time to climb aboard. Not really, says David Fingold of Dynamic Funds, who worries about a slowdown in the company’s unit growth.
Earlier this month, Apple became the first publicly traded US company to hit $1-trillion in market capitalization, a feat that’s both awe inspiring and, at the same time, not too surprising, considering the pervasive impact that the iPhone maker’s products have had over the past couple of decades.
And while APPL has continued to perform superbly —the stock is up more than 26 per cent in 2018— the company’s ability to stay ahead of the pack when it comes to product innovation is now being questioned. Can Apple keep churning out the hits?
Possibly, says Fingold.
“We owned a lot of it coming out of the [2008 financial crisis],” says Fingold, vice president and senior portfolio manager at Dynamic Funds, to BNN Bloomberg. “It became impossibly cheap in 2008 and really was one of the best performing securities in the world for a good part of the five to seven years after that.”
“It’s now reached a point where they don’t actually have any unit growth —I think the units grew on an annualized basis in the quarter at one or two per cent,” he says. “And the thing that really concerns me is what would happen to market sentiment if the unit volumes actually went negative?”
Apple posted its fiscal third quarter financials at the end of July, beating analysts’ estimates with revenue of $53.3 billion and profits of $2.34 per share. Even more promising were management’s predictions going forward, which called for revenue of $60 to $62 billion over its fiscal fourth quarter, a period when Apple typically rolls out the newest versions of its iPhone. The company also used cash to buy back a whopping $20 billion in stock over its fiscal Q3.
“I’m not saying [unit volumes] are going to go negative,” says Fingold. “There are product launches that are going to be happening in September, I think that’s going to be good for volumes. In the meantime, operating profit has grown because they’re getting more and more of a service mix in their revenue base —and service margins are higher.”
“They have a lot of runway to increase services and this includes not just extended warranties but also additional iCloud capacity, the sale of apps through the App store, their streaming music business — these are all positive,” he says.
Although Fingold advises investors to speak with a financial advisor to determine which investment decisions are right for them, he’s cagey about Apple all the same.
“I’ve kept it on my watchlist because as the largest company in the stock market, it is very hard for me to add value by owning it, unless I own an extremely large amount of it,” says Fingold. “And there is this small risk that their volumes could decline. I just don’t see it as a good place for an active manager to add value.”