Apple: a mature stock with extraordinary growth potential

Another remarkable quarter, with massive share buybacks by the company grabbing the headlines. But can Apple carry on growing?

Article updated: 2 May 2018 11:00am Author: Michael Baxter

Mature companies pay out a lot in dividends - at least the healthy ones do. They may operate in a business where scope for growth is limited, but they do pay cash to shareholders. They are generally seen as low risk, income stocks.

I wonder about the low risk description. Banks were once seen as low risk - the crash of 2008 put pay to that. Oil companies are big dividends payers, but BP’s Gulf of Mexico oil spill shows that they can be risky. The way that the technology behind renewables is evolving, I even wonder how safe some of the utility firms are.

Maybe, though, Apple is the new defensive stock for the age of disruptive technology. (In a funny kind of way, Facebook is another example, it’s a kind of modern day utility - it operates in a market which provides the conditions for a natural monopoly, and many see it as providing an essential service. Although, of course, Facebook is not yet an income stock.)

Results

Apple’s latest quarterly results were good - profits up 25 per cent from a year ago to $13.8 billion. Revenue jumped 16 per cent to $61.14 billion. In fact, come to think of it, they weren’t just good, they were really good.

But the markets have been focusing on a share buyback announced as part of the results presentation. It is buying $100 billion shares - that’s a record, which breaks the previous record for a share buyback announced in April 2015 for a $50 billion buyback from a company called, err, Apple.

In fact, Apple has already forked out some $275 billion in share buybacks and dividends in the last few years, this latest $100 billion comes on top of that.

Given that the company is valued at $858 billion, shareholders have received an outstanding income.

Mature markets

The high dividends/buybacks make sense. Apple’s key product is the iPhone - it accounted for around 62 per cent of revenue in the last quarter. And as we all know, smart phone sales are not growing like they used to. In fact, unit sales of smart phones were around 52 million in the latest quarter, from 50.7, this time last year. So, there was still growth, just nothing exceptional. But iPhones cost more money these days, the iPhone X costs £1,249. Revenue from iPhone sales was up 13 per cent in the quarter, with the iPhone X, the best seller.

Despite the reasonable growth, what you see when you look at Apple’s main products, iPhone, iPad and Mac, is a company that is still growing nicely, but not spectacularly - it pays out cash to shareholders like it was a mature company, while market positioning is not that different - if not mature, then at least maturing fast.

Apple feels like an income stock that offers some growth.

Except

Except that is, the company is also making exciting progress in certain areas. Its products are proving to be big hits in China - where the smart watch has captured the public imagination in a way that it hasn’t done in the West.

But services are where the real interest belongs. Service revenue in the latest quarter was $9.1 billion from $7 billion a year ago. This is exciting because it is repeatable and still growing fast.

Apple is investing heavily into content creation too - presumably the aim is to eventually take on Netflix and Amazon Prime - it is said to be producing a TV series based on Isaac Asimov’s Foundation series, possibly the most acclaimed science fiction series of books ever.

Waiting

But there is an even bigger point.

When Apple released the iPhone in 2007, it changed the world. But the iPhone was only possible thanks to advances that had occurred elsewhere - Moore’s Law advancing computing power, commoditisation of components, the evolution of wireless internet access.

The technology to create the next big leap - whether it be augmented reality, or some kind of device that links directly to the brain (although that may be the leap after next) is not yet sufficiently advanced for a mass market consumer product.
When the technology is there, a product will emerge that will make sales of the iPhone seem modest.

Providing Apple does not listen too much to the share buyback vigilantes and continues to invest in new technologies, I think it is in pole position to seize control of the next world changing consumer device.

For me, Apple has the advantages of a mature company, but still has the potential to be a high growth super-star.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.