News / Business / Columnists

Berko: Buy more Apple? Better to not drink the applesauce

By Malcolm Berko

Published: March 10, 2019, 6:05am

Dear Mr. Berko: My stockbroker had me buy 200 shares of Apple in November at $221. His firm has a bullish report that says Apple will turn back to my purchase price in the coming six months, and he wants me to buy 200 more shares. I’d appreciate your thoughts.

— BG, Akron, Ohio

Dear BG: Your broker may be vaping too much THC. Why did CEO Tim Cook sell 265,000 shares in August at $217?

Apple (AAPL-$176) makes, designs and markets computers and peripheral products, such as the iPod digital music player, the iPhone, the iPad tablet and the Apple Watch. AAPL also deals in apps, operating systems, iCloud storage, Apple Pay, iTunes and other popular portals.

Most investors believe that AAPL’s revenues, income and dividends will continue to increase at impressive rates. I think AAPL will continue growing, though not at its impressive past rates. Apple may have lost its mojo because its core business (iPhones, which are 60 percent of sales) has been braked by saturated markets and higher prices, with gross margins exceeding 70 percent. The prices are off-putting for most users. In the past few years, AAPL has been depending heavily on the Chinese iPhone market, which has had a solid 12-year run. Co-founder Steve Jobs stressed “innovation” as the key to AAPL’s success. Tim Cook, who assumed leadership in 2011, seems to have abandoned Jobs’ innovation dictum. But to be fair, Cook has added nearly $500 billion to AAPL’s capitalization, which is up by nearly 200 percent since 2011.

Here are three reasons some believe that AAPL’s hot streak will turn to applesauce:

1) The iPhone’s success has attracted some sophisticated copycats, especially Samsung’s Galaxy S9 and its Galaxy Fold. Many connoisseurs believe that Samsung offers superior products with superior features at lower prices. And Huawei’s P20 Pro has also put a worm into Apple’s core, with such features as three cameras on the rear. This competition for features places limits on AAPL’s revenue growth.

2) AAPL has significantly reduced its number of proprietary killer apps. Now management is partnering with other hardware-makers — for example, allowing Apple Music and iTunes to function on competing appliances. AAPL will partner with Amazon and bring Apple Music to Echo devices, permitting users to control playback with Alexa. So the HomePod — AAPL’s answer to the Amazon Echo — won’t be the only smart speaker to feature Apple Music. Frankly, I doubt AAPL can compensate for declining revenues from iPhone sales by selling more services.

3) Cook failed to realize AAPL couldn’t maintain its higher prices. Apple resellers in China, India and elsewhere are discounting iPhones by as much as 25 percent. And because Cook decided that AAPL won’t come out with a 5G phone until 2020, AAPL may have difficultly catching up. Meanwhile, head winds in other regions suggest that replacement cycles are lengthening from between 12 and 18 months to 36 months in the face of higher prices.

According to Apple aficionados, the company should continue to report modestly improved sales and earnings. Therefore, the board (like Microsoft’s board) may put more emphasis on raising dividends, using its strong cash flow to keep shareholders tethered to Apple’s stem.

However, the level of Cook’s technological innovations hasn’t been sufficient. There seems to be a lack of direction concerning potential apps using artificial intelligence and neural engines that speed speech and image processing. The probability of AAPL’s running back to your November purchase price of $221 in 2019 is slim to slimmer to slimmerer. Some say 2019 revenues, which were projected to exceed $291 billion, will come in closer to $279 billion. Some also think 2019 earnings, projected to come in at $14.10 a share, will come in closer to $13.50. But the dividend, projected to be $3.10 this year (up from last year’s $2.72), could make it to $3.20 a share. Of course, the 2 billion-share buyback since 2012 has helped make earnings, cash flow and dividends more attractive.

Although, no matter how your broker wants to polish this apple, I think his firm’s analysis sphinx. Tell your broker to take a long walk off a short pier.

Related Stories