Is Apple’s Magic Fading?

stocks, bonds, ETFs, straight out of downtown Chicago. This is Zach's Market Edge. Welcome to Zach's Market Edge, the podcast about investing in your life. I'm your host, Tracy Reinek.

And this week I'm going solo to talk about Apple. I don't talk about it very often here on the podcast, but given its recent earnings report, I felt like it was time to check in. As many of you know, I'm not actually that much of an Apple fanboy. I never have been.

So let's go over my scenario about Apple. It's probably very different than most of yours. But I never owned a Mac back in the day. My first computer was a Dell.

So I just kind of kept staying on that trajectory. And then when the iPod came out, I never bought an iPod. I was still using the old Walkman. I still had my CDs that I just continued to buy, which I still do today.

Yes, I still buy the CDs. And so I never adapted over to the iPod. And then we had the, I guess, was the iPad before the iPhone. I can't remember, but those came around the same similar time.

I never bought an iPad. I still have never bought one. And then we had the iPhone. Now, I didn't buy the iPhone, which launched in 2007 because that was right during the financial crisis.

And I didn't see the need for that new product that was that expensive. So when I did finally get a smartphone, it was not an iPhone. It was a Samsung. So I've kind of just stayed on that trajectory on the Google Android side of things.

So as you can see, as we're going along, there's no Apple in my life. And then even with Apple TV, I've never gotten Apple TV. Yes, I know it's terrible. Stairable news.

I've not watched head lasso. I know it's just not right, right? But I did actually download the Apple app on my smart TV. And so I may be a subscriber this winter when the weather turns all cold and snowy here in Chicago, I may subscribe on so that I too can watch Ted Lasso and some of their other very good programming.

So Apple TV has surprised me, but I haven't quite yet dove in. So that's my Apple experience over all of those years. And as many of you already know here on the podcast, if you've been listening over the last seven years, when I have talked about Apple on many shows in the past, actually, I don't own it. I have never owned it in my own personal portfolio.

And I'm thinking about if I've ever owned it anywhere else, I don't recall ever buying it for the insider trader. So it was either no insider's were buying or it was not the right rank for me to be able to add it at the time they were buying. But it was never that I can recall in the insider trader. And I don't believe I've ever had it in the value investor either or maybe for a short time, but maybe 10 years ago.

Because if you remember, it was a cheap stock. It was a value stock there for many years after the Great Recession trading below 10 times. That's more and above it got in when it was trading super cheap in 2016. So but I just have not had it anywhere, either the stock or the products.

But why do I want to talk about it again today? Because I did have one experience with Apple. So if you recall, Steve Jobs died in early October, 2011. You'd have impacted all of us, obviously, because of his presence with all of the products from Apple and even Pixar.

But a couple of weeks after his death, you may not recall that the Walter Isaacson book just called Steve Jobs did come out. It was literally like three weeks after he died. And I did pick it up. I did read it right almost immediately.

And I still I'm reaching for it here on the video podcast. I still have it to this day. I went into my bookshelves and I was looking to do I still own it. I do.

It's pretty big as you can see. Look how thick it is. Very big. It's definitely worth reading.

You can get it in paperback, I'm sure, or obviously digital version. If you haven't read it yet, I really recommend it. Because after I read this book, I did announce in the office that I considered Apple to be doomed. That was my word.

Apple is doomed. And I considered it because Steve was just such a visionary. And he had that whole reality distortion field thing going on, which is talked about in the book, where even if something couldn't really happen, he wanted it to make it happen. Or he believed it was going to happen.

Or it is happening. Whatever you want to term it, it was kind of this drive that he had that influenced people who worked under him. So when he went with the design for the iPod, and if an engineer told him, oh, we can't really do this the way you've laid it out. He didn't care.

He's like, I'll give you six months. And his engineers to their credit always did give him the product that he ultimately wanted. Whether or not it was the iPod, the iPad, or ultimately the iPhone. All these things were game changing products, obviously.

But again, after I read that book and it was right after he had died, I thought Apple was not going to ultimately make it. Now, I didn't give any kind of deadline of, hey, in five years, they're going to go down or anything like that. But it seemed very clear after reading the book that without the visionary, this company that specialized in products, making hardware, was not going to be able to make it without them. So here we are, 12 years later.

And Tim Cook is still in charge of the company. He's been a great CEO. He's grown revenue. The stock has been terrific over his time period.

He's basically rolled out a few new products like The Watch and obviously Apple TV's gotten into the content side. And one area that I was not expecting to do what it's done is the services side on the subscriptions and everything on the service side. So here in the fourth quarter of 2023 that they just reported services was up 16.3% year over year to a record. I think it was over about 22 billion.

That part of the business continues to grow. But the iPhone, that product that Steve Jobs himself rolled out before his death was up only under 3% year over year, even though they continue to roll out these new phones. And so their main product is now finally slowing after what has been now 15 years since the iPhone rolled out. So it has been a phenomenal run.

Nothing wrong with that. But I'm still in the camp. Not that Apple is doomed. They make billions of dollars.

They're highly profitable. You know, that's all good. But the growth rate is really slowing now. And Tim Cook is in his 60s, unclear how long he's still going to be at the home.

And then who's going to take over? And who has a vision perhaps? But who is that? No one can be Steve Jobs again.

And the company is so different from when Steve was there, obviously. But you know, these are all questions I have for the stock. So I just wanted to talk about on today's episode, where are we? Is the 20 year bull in this stock, which has been a tremendous run?

It's been one of the best performing stocks in the S&P 500 during that time period. It's made many people rich. Is that over? And what do we have to compare it to for some other stocks that maybe have gone through this kind of similar thing?

So I wanted to look at Apple's actual earnings outlook and what is going on there. So for those of you on the video, I am going to share my screen. If you're listening, I'm going to have to tell you what we're seeing here. So I am looking at the detailed estimates and they just finished fiscal 2023 because they are in the fiscal year.

So now we're in 2024. I've highlighted in green here. So sales expected to be up 3.1% in this next fiscal year. That's okay.

They are growing it over the last four quarters. They've actually seen sales decline every quarter for four quarters. That was the first time since 2001 that sales have declined year over year for fiscal year. So now we're going to be back into possibly a growth mode.

You can see fiscal 2025, they have a little bit more bullish anticipation of 7% there, but that's a full almost two years away or at least one whole year away. Scrolling down earnings estimates for this year, up 6.69%. So 6.7% here. They made 613 last year and they're expected to make 654 this year.

The next year, growth of 8.7%, that's looking good. But my issue now with the stock and why I think the rally may be coming to an end, slowing down, not as bullish as it has been in the years past is this number right here, the PE 27.4 times. It's not a cheap stock. It hasn't been for a number of years, but you're willing to pay more for the higher growth.

But now sales at 3% earnings in the single digits, maybe up 6.5% to 7%. Is that enough to pay 27 times? I don't think so. So, for me, I think that the shares are going to tread water, which they've already kind of been doing recently, and then maybe pulling back until it gets with an evaluation where it makes sense for the growth story.

Let's take a look at what that longer term chart really looks like because I think that's really interesting too, just to get an idea of how good it's been. Whoops, I was on interactive charts. Now I'm on the comparative charts. I don't actually like using this chart too much because the line is so thin on this chart, but it has some interesting features.

So I'm changing the scale so we can get percentages here, and then I'm going to compare Apple to the S&P 500. You could do it to the NASDAQ too, but I'm going to go with S&P because so many people are looking at that. And you can see the S&P, I put in VOO for the S&P just because I feel like that's easy to put in the ETF. And you have that one in green, the Apple is in the blue, and this is just three months.

So Apple is actually outperforming the S&P 500 in the last three months, but it's up 2% while the S&P is down to 0.6%. But the broader years are more interesting. So we do have some good data on this chart, and it always takes a few seconds for it to load up. So we can look at two years.

Apple is up about 20%. And it is well outperforming the S&P 500 there too, which is in the negative still over the two-year track. But the more interesting on this chart is the 10-year chart, it's loading the data set for that because it takes a minute to get all of that data from the last 10 years, and now we're seeing it. It's not as clear on the S&P 500 because that hasn't gone up as much, but you can always kind of click on it here.

S&P 500, well, the VOO, up 203% over the last 10 years, whereas Apple up 1,029%. And this is the reason everybody's in the stock, right? Even going back to the bottom of the pandemic lows, it's very bullish, even there, over the prior years versus the S&P 500, it was already outperforming. And then it got the big rally during the pandemic as a lot of the Magnificent Seven Stocks did.

But let's go back to the 20-year chart, and this one's even more interesting because we know Apple was outperforming after the iPhone launched. A lot of people are like, hey, I like this product. I'm going to go buy this stock. And you can really see now, we're not even looking really at the S&P 500 is way down here, but let's see if we can get that through Tuesday, 413% on the VOO.

But Apple up way up here, 53,120% is that even right? It's like kind of all over the place. So let's just call it over 50,000% return. And interestingly, you've seen a couple of articles from the last couple of months talking about where Apple would be if you had bought like 20 years ago.

And one of those is from September, September 2023, $10,000 invested 20 years ago. So September 2003, with the dividends reinvested would be worth $5.08 million. That was as of September 2023. And that's annual growth rate of 36.6%.

And meanwhile, the S&P 500 was 7.4, which actually isn't all that bad over the 20 year period, either, considering we had a couple bear market big pullbacks in there, including the coronavirus and also the great financial crisis. So it definitely is outperformed. This is why everybody's in the stock, right? This is why we want to stay in it, especially if you've been in it, even just the last five years.

Heck, let's look at what the last five year stack is because that's on this chart too. And I have a feeling, well, obviously it's outperforming. Yeah, that's been pretty good too. So last five years, 262% versus the VOO at 70.5%.

So definitely outperforming there. This chart is without the dividends reinvested. So it's been even a little bit better. Although Apple's dividend is now yielding just 0.5%, but every percent helps, every little half a percent in this case will help your returns as that will compound over the years that it's paying it out too.

So what's my worry? Right? Like what's the problem here? It seems to be outperforming.

Just two years ago, it was hitting new highs, new all-time highs. Well, again, it's really the visionary being gone, the growth rate slowing pretty dramatically now for this company, at least. And where they're going to get the growth for this valuation going forward. Now some of this kind of reminds me of a few of the other big tech companies that have been around a while.

They kind of go through cycles of having the hot product, then having it not, then having to kind of reinvent themselves. Heck, even Apple itself was 30 days away from bankruptcy in the 1990s. That's when Steve Jobs decided to come back. That's when they were only in the personal computer before the iPod started to turn things around.

But that took a couple of years for the iPod to even come into play. So I feel like we're in multi-years here of the stock reevaluating where it needs to be for this kind of growth trajectory. Now, again, another example that this kind of reminds me of is Sony, ticker SONY. It had one of the hottest products in technology starting in 1979 when it launched the Sony Walkman.

Yeah, we can kind of be like the Walkman, haha. But the Walkman sold almost 200 million, you know, Walkmans over just the first 20 years of its existence. Then it did start to get pushed out by the CD players and then ironically by the iPod and those other MP3 players that came along and then digital. And then they did discontinue the Sony in the early 2000s.

So it's no longer made. But the Walkman itself, that concept of a basically a very small mobile cassette recorder that had your own private earphone. So no one else could hear what was going on. That product was made and copied by plenty of other companies.

But it became, the Walkman name became synonymous for that actual product, whether or not it was actually a Sony Walkman or not, kind of like Kleenex or Band-Aids also became synonymous for that product, even though it's really a tissue, not the Kleenex. But we all call it the Kleenex. So Sony really benefited from the Walkman. But it made other things, televisions, cameras, which it's still big in.

It's in entertainment. It obviously has the PlayStation. It has movies. It's a big conglomerate of many technologies.

But let's look at its chart now, because that is kind of going to tell us some interesting things as well. These shares have gotten cheaper over the years. I've actually did own it in the Zax Value Industrial Portfolio for years, but we had to get out in the 2022 sell-off. I believe it was when we finally got out after about five years of owning it.

But let's take a look and see what's going on with this one over the longer time period. So the Walkman, that was over a couple of decades ago. And the company has been kind of struggling to write itself and figure out where its next top product is going to be. It's had like a five-year strategy, which it has put into place.

It's moved into semiconductors. And it seemingly has figured out its new business model over the last couple of years. So we're looking at the 10-year chart here. Let's add the VOO again so we can just kind of have something to compare it to.

And it's adding, oh, it might not like it. There we go. So, wow, this is kind of shocking. So the S&P 500 has outperformed Sony over the last 10 years.

And this is kind of the result of what happens with some of these tech companies that have to go through this new transformation, the stock wheel lag. So it's only up, it looks like about 87% over the last 10 years, the VOO up 401% in that time period. But I owned it after things were looking not so great and the shares were really cheap five years ago. But no, it's still underperforming.

Nope, that's not giving it to me. Let's see. We need the data is loading. I guess this is going back.

So it is still only up. It's the 10 year then. Let me click on the 10 year. Maybe we don't have, but we should have the data.

But I guess that data was for the five year and it's just kind of holding in this line here. All right. Well, maybe it's just not liking the Sony at the moment in my data. But I'm going to get rid of the VOO because this might, oh, I know why it's not doing it.

That's the scale. This is what happens when you aren't changing it to the percentage. Okay. So, this is, this is Sony with the percentage changes.

And it should be, okay, it's more in line. So this is only three years back and it is underperforming the S&P 500 over the three year stack. But it was kind of moving in tandem for much of the early portions of the pandemic and now has fallen back a bit because the tech has seemingly kind of repriced itself. And then looking over the five year here, we can see it's moving almost in tandem again on the longer five year chart here with the S&P 500 almost identical.

In fact, Sony a little bit underperforming 70% versus 63% on five year. And then 10 year, we're going to see what's happening there because Sony was expensive earlier. But again, it's gone through this kind of turnaround. But you can see the 10 year it is really outperforming now up 452% versus 203 for the VOO.

And this stock has gotten much cheaper. So a lot of these big tech companies have to go back into the revaluation kind of mode where they're no longer trading at 26 times. They're going to go down to 10 or 11 times like Apple itself did by the mid 2015-2016 period. And I believe it's going to go through that again.

So we have the Sony now trading. Let's see. I wrote it down here trading at 15.7 times. Price to book is just two.

Price to sales is only 1.3 versus Apple's price to sale. I believe is like seven times. Yeah, 7.3 times. Price to book for Apple is 44 times.

So none of this is cheap for Apple. If you're just talking about a bigger tech company that has the slow growth. And another one that you don't really want to compare it to, but I can't help myself, is IBM. Although IBM is so much older, founded or in 1911, its big period was the 60s and the 70s.

Then in the 80s, it was doing the personal computer. It sold about 80% of the personal computers. I think worldwide or something in the 1980s. But it kind of fell behind on operating system.

And Apple was making the Mac. Microsoft came out with Windows and then they ended up selling off their PC business by 2005 to Lenovo. And they're not in that business anymore. So IBM, a little bit different creature now because it's been around over 100 years now for IBM versus Apple just 1980.

But it's still as interesting to look at because this is a stock that Warren Buffett himself was buying only about 10 years ago thinking that this is the one that was cheap enough and was finally going to come out of its kind of reevaluation. But then it never did. And it still hasn't. I was writing down what was going on with IBM.

So I was able to go on their reinvestment calculator and I went back to October 1st, 2003. So the Apple one was September or 2003. This is October 2003. 10,000 invested would only be $17,228.

But that's without the dividends. And IBM is paying the big dividend yield now because it has to to keep us in it, right? So that dividend is yielding 4.5% right now. And so that's going to add on a lot of special if you compound that over the years, but their investment calculator did not have it without the dividends.

And over the 20 years, that is a compounded annual growth rate of just 3.6% again without the dividends versus 36.6% for Apple. But that's with their dividend. But they didn't pay the dividend until after Steve Jobs had died in 2011. So and then it was a couple of years after that.

So keep that in mind. There are a little bit different. If you're comparing them, it's not completely Apple to Apple's. You've got some oranges in there.

But now let's look at IBM. I have changed it to percentages this time. So we got that going for us. And I am going to compare it to the OO again.

This is a three month. This chart always defaults to the three month. And it is beating this in P500 over the last three months here up 3% versus VOO down 2.6 as we've commented. But let's look at the two year stack out.

It's beating on the two year stack too. Not badly either. Actually, this is beating Apple's two year return up 32% versus Apple's was about 20 over the two year period. But again, as we know, as I just mentioned, over the 20 year period is where you're really going to see the difference here.

And it's not even close. It's taking a minute for the data set to even load because it's going to be well below the S&P 500 here. And it is, you can see, oh, I can see the VOO doesn't go back as far as the 20 year here. But you can see it's well below, let's do the 10 year because that will go back.

It's well below the VOO on the 10 year, I'm sure, because the S&P 500 has had a pretty good run here. And it is. So you can see S&P 500, well, VOO 203% over 10 years, IBM still just 30% over the 10 years. How could that be possible?

But this is trying to find evaluation and a low growth stock now on top of it. What is it looking like on valuations? Let's look at that because, you know, IBM, everybody knows it has, it is a much slower growth company now. It is over 100 years old.

It's had a change its business model several times. It is trading with a price to sales ratio of 2.2. That's pretty low, but that's not even in the value area I look for, which is under one. But that's pretty low and definitely lower than Apple.

Most of the book is at 5.9. And then I just looked on the quote page, forward PE of 15.8. So that's pretty cheap, but that's right around where Sony is, but is that dirt cheap? No.

And remember the reason why Warren Buffett said he was selling IBM when he finally did get out at a loss was because he said it wasn't doing what he thought the company would do. So maybe did think the growth would improve. Let's see what that growth looks like. Sales growth for this year, 2023 up 1%.

Next year, 2024 up 3.3%. But you are paying less for those sales than you are with Apple and then earnings growth 3.3 for this year and 3.6 for next year. But comparing it to Apple, yes, Apple is better. The growth is a little bit stronger there on both sales and on earnings.

But again, you're paying 27 times those earnings. So I feel like there's going to be some consolidation here, some reevaluation of the actual price investors are willing to pay for Apple. But I've said this for quite a number of years, as I mentioned, because ever since I read the Steve Jobs book or the Isaac's book on Steve Jobs, I felt like Apple would ultimately not be able to be the company it was while Steve was alive, just because he was the visionary push behind all of their great products. They're still making billions of dollars.

Like I said, but I've just got to get the stock much cheaper. So one of two things has to happen for Apple stock. Either the earnings have to really catch a bid, have to turn it around more so than what the analysts are seeing for next year or the stock has to come down to make the valuation in line with what that growth trajectory looks like. I never bet against Apple.

I never have. I never shorted it. Nothing like that because it is a great company with great products. It's got that great services side revenue that is still growing quickly.

Apple TV, like I said, surprised me much more, but they kind of have the initial out with that product. And now this is where it gets hard to make content. This is why I also don't like Netflix. You have to continuously have another Ted Lasso.

And so far they don't appear to have that. They're going to spend a lot of money trying to find another Ted Lasso. And recently they did raise the price on Apple TV. It was really cheap before.

Actually, I was kind of surprised at what they were charging for it. So not surprising. They're more in line with peers now because people are willing to spend it and apparently they are probably willing to spend it on Apple as well. So we'll see how that part of it turns out.

But you should always be looking at your company, even if you've owned it for many years, especially technology where things can change, but even outside of tech, suddenly there could be a competitor like Sony did. I'm sure in the 1990s was not thinking, hey, Apple's going to come out with this product called iPod and it's really going to crush whatever sales we had left in our iconic Walkman product. And they did and it did. So always be on the lookout for these things.

Warren Buffett so far is holding on to his big stake in Apple. He loves companies with great free cash flow, which Apple still does have. It's buying back stock. It pays a small dividend, like I mentioned.

So he'll stay in it. But if you're a new investor, someone like me who doesn't own it, I'm on the sidelines waiting to get it at a better valuation. And I'm looking around for other kind of value stocks and keeping some of those on my watch list while I'm waiting to see what happens with Apple because who knows? Maybe I will ultimately be a buyer of Apple stock when it comes back into the value range.

But for now, I'm on the sidelines because the growth just isn't there. And I'm going to wait to see if I can get it cheaper. So as always, let me recap the stock I talked about on this episode. There was, of course, Apple.

The APL is that ticker. Sony, S-O-N-Y is that ticker, an IBM, IBM. And I also mentioned the Vanguard S&P 500 ETF, which I was using as a comparison. That ticker is V as a Victor O-O.

And I do own that one in my own individual portfolio because it's just the S&P 500 and it's got that cheap. It's cheap. You don't pay much in any kind of fees with the Vanguard funds. So be sure to subscribe so you don't miss a single one of these podcasts and bringing them to you every week.

And I'm heading into the end of the year where I'm going to have my popular and famous shows on, will we have a recession in 2024? I have the show every year, will we have a recession coming up in the next year? And I'll have John Blank on board to talk all about it. And this year, I don't know.

We might have one. I don't know. But I'm going to have a mind to talk all about that. Then we're also going to have some episodes on what worked here in 2023.

And what our outlook is for 2024. That's always an interesting show as well because we all want to get our portfolios in position for what may happen in 2024. Will we get rate cuts? Will we have a booming stock market in 2024 as the Fed eases?

Will the Fed ease? We don't know. So these are all the topics I'm going to be talking about as we head into the new year. But also November, December, usually pretty good for stocks.

So I'll be covering whatever else is happening out there on stocks and ETFs. Be sure to get us on Apple. Of course, that is one area we are in here, Apple Apple Podcasts and get us on Spotify, get us on Amazon Music, get us on SoundCloud. And you can also get us on YouTube on our regular YouTube channel for this video podcast.

And you can also get us there at zacks.com slash YouTube. It'll take you right there where you can subscribe and get all of our videos. But be sure to get us somewhere and I'll see you again next time on the podcast. This material is being provided for informational purposes only and nothing herein constitutes investment legal accounting or tax advice or a recommendation to buy, sell or hold a security.

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