Apple: Why I Sold All My Shares

Summary:

• Recently I sold all my Apple shares at about $182.
• I sold primarily because the stock had gotten extremely expensive, not because I believed that the company’s fortunes had gotten worse.
• Apple is facing challenges in China, and its Vision Pro reportedly hasn’t sold enough units to move the needle for the company.
• I’m not expecting Apple to reveal that it grew a lot in the first quarter.
• For this reason, I’m not buying any shares, despite the fact that Apple is now slightly cheaper than it was when I sold.

I sold all of my Apple (NASDAQ:AAPL) stock earlier this year. I had bought the stock in 2022, at prices between $130 and $150, with an average cost around $145. My opinion on the stock did not change between the time I bought it and the time I sold, but the stock got considerably more expensive. I sold the stock at $182–pretty close to today’s price.

I still think that Apple is one of the best tech companies in America. It has a wide moat, a valuable brand, and the most interconnected “ecosystem” in all of big tech. Warren Buffett thinks it’s the best business in the world, and I more or less agree. However, nothing is worth an infinite price, and Apple at today’s prices is undeniably expensive, trading at:

• 26 times earnings.

• 6.8 times sales.

• 35 times book value.

• 22 times operating cash flow.

• 25.6 times free cash flow.

At today’s interest rates, Apple’s free cash flow per share ($6.63) is worth $147 assuming that it never grows again. That’s discounting it at the treasury yield using no risk premium, yet still, we need no upside. So this stock requires considerable growth in order to be worth the investment.

Will Apple grow much going forward?

On balance, I think that Apple probably will grow, but maybe not enough to make the stock a buy at $173. I don’t consider AAPL a clear sell at today’s levels, but it’s not at a level where I’d be overly enthusiastic about buying it either. The problem is the company’s scale. AAPL is doing about $385 billion in annual revenue. It’s difficult to move the needle at such a scale. Imagine you invented a new-patent protected product called the widget, with 20% margins and a $100 billion total addressable market (TAM). Getting the patent rights for the widget would be a huge win for most companies, but for Apple, the product would only represent about a 20% increase in revenue should it capture the entire global market for widgets. The 20% margin on the widget would likewise only have a 20% impact on Apple’s net income.

Just recently, news outlets reported that Apple had scrapped its plans to develop an electric car. That Apple had been planning to launch an electric car for years was well known, but the recent news reports showed for the first time ever how seriously Apple had been working on the project. The magazine MacRumors–which has a history of successfully predicting Apple product launches–said that “Project Titan” had 1,000 engineers on the team and was in active development for four to eight years. It might sound like a big loss for Apple to shelve such a massive project, but the fact that such a bold change of direction was proposed in the first place reveals how difficult it is to launch products that move the needle when you’re at Apple’s scale. Tesla’s (TSLA) entire 2023 free cash flow would only represent a 2.6% increase if added to Apple’s own!

Of course, there is potential for Apple to grow incrementally from things like services, price hikes, and market share gains in existing hardware categories. However, such impacts are likely to be modest going forward: Apple already has 1.74 billion users worldwide and some people simply find the company’s products too expensive. It is likely that that subset of the population will remain in the Windows/Android world for the foreseeable future.

When I last covered Apple, I rated the stock a buy on the grounds that its iPhone 15 launch looked like it was going to be a success. The available data still suggests that the iPhone 15 was a hit, but since Apple has made some mild gains since that article was published, and remains fairly pricey, I now only consider it a hold. In the ensuing paragraphs, I will explain why I’m downgrading my rating, and at what price I’d consider AAPL a buy again.

What My Rating Means

Before going any further, I should clarify that my rating is by no means a “soft sell,” or an encouragement to short AAPL stock. When I say Apple is a hold, I mean that in the literal sense of the term: worth holding if your cost basis is lower than today’s price, but not the most intriguing place to deploy fresh capital into today. I definitely do not think that anybody should short Apple, and if we lived in a world where ‘buy’ and ‘sell’ were the only ratings available, I’d consider Apple a low-conviction buy. With that out of the way, here are some reasons why I consider Apple only a hold today.

Competitive Position: Strong, but Under Threat in Foreign Markets

As I’ve repeatedly emphasized in past articles on the topic, Apple has a very strong competitive position. It is #1 or #2 in several tech categories (smartphones, smartphone operating systems, tablets, smartwatches, etc), and has the world’s most valuable brand. Additionally, the company has a high level of hardware/software integration, making a collection of Apple products almost like one product (an “ecosystem”). This fact incentivizes repeat purchases. So, Apple has a lot of going for it. I expect it to remain the dominant tech company in the United States for the foreseeable future.

It’s a different story in foreign markets. Many countries have severe import restrictions and capital controls. Apple has made inroads in several of these markets despite all the regulations, but today, the company’s presence in some foreign markets is under threat. China has reportedly told government employees to stop using iPhones at work. According to research by Stirling Finance Limited, there are 40 million civil servants in China. These employees remain free to use iPhones at home, but that would require switching phones. There is therefore a powerful incentive in place for a sizable chunk of China’s workforce to use non-Apple phones. Whether China’s new phone rules for civil servants will shrink Apple’s market share remains to be seen, but we’ve already seen reports of the company slashing prices in that market. If other countries follow China’s lead, then Apple’s international growth story could be threatened.

Vision Pro

Another question mark for Apple is the Vision Pro. Specifically, it’s sales. Although early reports said that the product beat expectations, the initial expectations were for only 100,000 units sold. 100,000 units of a $3,500 product is $350 million. Such a figure wouldn’t have moved the needle for Apple.

According to TF Securities Analyst Ming-Chi Koa, Apple has sold 200,000-250,000 Vision Pros, and sales are slowing down. While a 2 to 2.5X beat might look good on the surface, remember that this company does over three hundred billion in annual revenue. If the Vision Pro sold 250,000 units, then Apple gained $875 million in revenue from the product. That would not even be a 1% revenue impact.

Again, this all comes down to the problem of scaling at Apple’s size. A one billion dollar product launch would be a success for most companies, but for Apple, it barely registers in the context of the company’s overall financial statements.

The Price I’d Pay For Apple

Factoring in everything I have written so far, I’d be comfortable paying $147 for AAPL stock. I believe the stock has upside at that level.

Although it’s difficult for Apple to grow much at its current scale, it does have a very dedicated customer base in the U.S. and elsewhere. It might not grow much, but there is little indication that it is about to start shrinking. Indeed, the company’s interconnected ecosystem–which some have called a “walled garden”–gives it an advantage in securing customers’ repeat business.

Near the start of this article, I said that Apple has a fair value estimate of $147 per share if you simply discount its free cash flow at the 10-year treasury yield with no risk premium. That estimate comes from dividing the company’s TTM FCF per share ($6.63) by the 10-year treasury yield (4.51%). While I usually use risk premia in my discounted cash flow calculations, here I’m not modelling for any growth. For a company with as strong a brand as Apple’s to grow at 0% minimum does not seem like a forecast that faces much “risk.” Some minor price hiking and expense trimming is all it would take, even if the company never gains another customer again.

Honestly, I think it more likely that Apple will grow than shrink. In earlier paragraphs, I highlighted the difficulty the company will have in launching new products that become successful enough to move the needle–that calls into question the possibility of high growth. But the company can still juice EPS with buybacks, raise the price of the iPhone 1% a year, and cut back on expenses. Moderate growth in the 5%-10% per year range is quite do-able. Therefore, I consider Apple’s fair value today to be close to $147. I would pay that price for the stock.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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