Is Apple Stock (AAPL) Over the Hill?
In a wide-ranging interview with The New York Times, billionaire investor Peter Thiel took a swipe at Apple Inc. (NASDAQ:AAPL), saying “…it’s not an area where there will be any more innovation.” (Source: “Confirm or Deny: Peter Thiel,” The New York Times, January 11, 2017.)
Is he right? Is Apple stock (AAPL stock) truly past its prime?
Since Thiel is a longstanding member of Facebook Inc’s (NASDAQ:FB) board of directors, one could question his motives. But his reasoning is sound. He just makes the logical conclusion from what we’ve seen unfold over the last few years.
Smartphone sales have slowed down, yet they remain central to Apple’s business. So it’s not exactly a giant leap to conclude that “the age of Apple is over,” as Thiel sums up with his characteristic pithiness, “We know what a smartphone looks like and does. It’s not the fault of Tim Cook, but it’s not an area where there will be any more innovation.” (Source: Ibid.)
This assessment has some serious implications for the value of AAPL stock.
If Apple can’t replicate the monumental success of the “iPhone,” then it can’t hope to drive Apple stock much higher. It will simply turn into a boring, old stock that passes profits through to shareholders. Or worse, it could keep chasing innovation and squander its profits along the way.
The latter is a real possibility, albeit a slim one. But the real takeaway is that AAPL stock is dead in the water unless something big happens. It is simply too massive a stock to be moved by moderate advances in revenue. Here’s why.
Let’s say Apple releases a new product that people love; their new wireless earphones, for example. Those strange earbuds gobbled up 75% of headphone sales in the month of December, meaning that consumers are decidedly bullish on the idea. Imagine that Apple could eventually make $10.0 billion of revenue from this product.
Since Apple’s net margin is usually around 20%, we can theorize that one-fifth of that revenue will make it to the bottom line. So we’re talking about $2.0 billion-worth of take-home pay in this best-case scenario. How much would this windfall move Apple stock?
$2.0 billion is a lot of money in just about every context. However, the collective market value of Apple stock is roughly $633.7 billion, and is backed by $45.7 billion in net profit. This is one of those rare occasions when $2.0 billion in profit doesn’t mean all that much.
What’s important to remember is that Apple can still be a successful company, and make successful products, all while being a terrible investment idea. This is because stocks move based on the possibility of future earning potential, not on past glories.
So, from an objective standpoint, Thiel can make a very good case against betting on AAPL stock. It isn’t Tim Cook’s fault, nor is it something to feel bad about. Sometimes tech stocks get old and their share price reaches a ceiling.
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