Using Apple’s Loss for Your Gain
It’s all over the business news section – Apple missed their quarterly earnings mark. They made $1.90 in earnings per share compared to the estimated $2 per share that Wall Street predicted. The Street reacted and has so far have dropped the stock approximately 10% down to just under $95 per share. Thus far, the collective whole of Apple shareholders have lost about $50 billion in market capital. Market capitalization, for those of you who don’t know, is total outstanding shares multiplied by the current share price. It’s kind of like a “net worth” indicator, which they now have $50 billion less of.
The reason for this drop was inevitable. While Apple sold more phones than anticipated (although still a sizeable drop from this time last year) their average sales price was a cool $9 less than what was expected. Tim Cook painted a rosy picture about how a strong dollar led to weakened purchasing in America, plus smartphones as a whole had a rough quarter, but it’s a heck of a lot simpler than that. People don’t need to buy new phones anymore.
Global Ownership is High
Global ownership of smart phones hits record highs nearly every quarter now. Simply put, they’re running out of “new” customers. It’s becoming increasingly apparent that their only customers can come from early adopters who buy the newest model every year, transferring customers from Android to iOS, or people replacing their broken or outdated technology. When you’re talking about Apple, who purports to sell a luxury smartphone, they simply can’t compete in emerging markets. South African based MTN, Chinese Xiamoi, and Android all sell smartphones in Africa for less than $100. Apple is priced out of these economies because the consumers can’t afford a $650 phone. When looking at just the U.S. and Europe, market penetration is at 68% and up according to a Pew Research study from 2015. At this point, it’s probably fair to assume that those who don’t have a smartphone in the U.S. or Europe are likely not able to afford the price tag of an iPhone.
Further, there just isn’t a competitive edge to differentiate Apple anymore in the smartphone industry. The Samsung Note 5 and the Samsung S7 Edge are technology equals to the iPhone 6S Plus and have a comparable price. Those were just the first two I compared and noticed had similar specs.
Apple and Your Wealth
The ignorance of all this Apple hoopla is that it completely disregards the fact that Apple still made $10 billion in net income. It’s still an immensely profitable company with cash and liquid assets of about $16 billion on hand. Not to mention that Apple still retains a nearly 40% gross margin. What that means is that for every dollar in revenue they earn, they make about 40 cents after cost – which is really impressive.
I’ve written a few articles about your retirement (like this one about investing young or this one about taking advantage of an IRA) and stocks are a great way to fund that retirement. They can provide a higher return than just buying a regular old market index; however, they’re a lot more volatile. A lesson we can learn from Apple. The thing that is important for the average investor though, is they can’t be swayed by short term movements. You probably aren’t buying Apple to sell anytime soon, it’s a 5 or 10-year investment. Day trading and Wall Street influence on corporate decisions are at an all-time high, and those same brokers are squeezing out every last time they can before selling the stock with no regard to the short term damage it does to the long term investment holder.
Don’t Go Chasing Unicorns
Unless you’re someone like me who voluntarily spends the little free time I have sifting through income statements and earnings forecasts, you probably shouldn’t actively manage your own portfolio. Buy some long-term picks if you feel like making an educated gamble and then sit on the stock. Those picks will be in the same portfolio has your market indices or mutual funds. If you have some additional capital that you wouldn’t mind losing, go ahead and buy some riskier stocks that you think have a short-term potential, but be forewarned about the potential capital depreciation. I bought Fitbit earlier this year and then it proceeded to topple 44% in afterhours trading that evening. I was able to mitigate some of the losses by buying and selling a few options, but I’m still in the red on that trade. For what it’s worth, I still own the stock because I still have very bullish expectations for the company. Just goes to show that even someone who reads about the market every day and has been trading stocks for nearly 10 years can still get crushed.
That said, I do think once you reach a point where you’re really seeking to increase your net worth because you don’t have any upcoming large purchases (like a house) that you should set aside some money in your portfolio for some “riskier” stocks. Up and comers. Netflix, had you bought 5 years ago, would be worth 150% more than you put in; Amazon would be worth 223% more than 5 years ago. Just understand that those stocks could have just as easily been worth zilch now. It’s good to have a little risk. Unless you’re an active reader and investor though, those riskier stocks should still be long-term holdings.
Readers, did you lose any money with Apple this quarter? What does your investment portfolio look like – are you all in on indices or do you buy mostly stocks or a combination of both? As always, share your thoughts below!