Are You Ready for the New Apple Stock?

Apple (NASDAQ: AAPL  ) is about to transform again. The results of this chrysalis-to-butterfly moment won't be as pretty and profitable as the current model, but the new Apple might be a great play for income investors.

The company has gone through a couple of drastic changes in recent memory. More than 15 years ago it leveraged a $150 million cash infusion from Microsoft (NASDAQ: MSFT  ) , of all sources, to step away from the brink of bankruptcy and become a healthy computer systems builder again -- with a side of high-quality audio players and a brand new retail store network, of course.

The next radical move came when the original iPhone made it cool to have a smartphone. The device was not only fashionable and functional, but also extremely profitable. The resulting boom turned Apple into the world's most valuable business, and was fantastic news for shareholders.

Apple's market cap surpassed Microsoft's in 2010. The very idea would have been laughable in 1997, when that $150 million olive branch was extended.

AAPL Market Cap Chart

AAPL Market Cap data by YCharts.

But now we're looking at another huge change. This time, it's not driven by a fantastic Apple product or visionary leadership. This time, market realities are making their mark on Apple rather than the other way around.

Take a look at the two charts below. They cover the last three and a half years of Apple's financial growth, or roughly the iPad era. You'll see the most dramatic part of Apple's rise to power, followed by a clear peak and an inevitable decline.

Data from S&P Capital IQ.

The first chart shows you how Apple's financial growth has reversed in recent quarters. In four of the last five reporting periods -- including the report filed this week -- Apple actually reported shrinking cash flows. The last two quarters also included falling earnings, and top-line revenue growth has stalled to just 1% year over year.

Apple is not hitting a brick wall here, but the days of fantastic growth are over.

The second chart smooths out seasonal effects by looking at trailing-12-month numbers. Again, the overall trends are pretty obvious. Apple delivered its finest hour of growth across the board in 2011 and early 2012, fueled by the last iPads and iPhones touched by rainmaker Steve Jobs. The growth engine has been stalling ever since.

I called the Apple peak a few months early in market terms, but the call was spot on when you look at these charts. It just took a couple of quarters for investors to realize how empty this growth engine's fuel tank really was. My bearish CAPScall on Apple has been cheerfully green for a while, even though I missed the actual top. That's OK; Fools generally don't worry about perfect market timing.

And now it's time to remove that bearish CAPScall. At this point, Apple looks set to trade sideways for years to come, and that thesis isn't worth a virtual "short" investment. So I'm taking this chip off the table to lock in my positive CAPS score from Apple.

This is where Microsoft steps right back in the discussion again. You see, Redmond's shares have been stuck in neutral for so long, the only way to have made any long-term gains on the stock would be to reinvest the dividend (or just pocketing the quarterly payouts).

If you bought Microsoft shares at the start of 2003 (just before Redmond's first ex-dividend date), you'd have gained $5.48 in share price increases over the last decade. Meanwhile, dividend checks added up to $5.23.

Microsoft suffered a creative crisis over the last decade, where every new product seemed to be just a refined version of something Redmond already had on store shelves. Customers caught on and slowly stopped paying a premium for the Microsoft brand. And the stock transformed from a red-hot growth vehicle into a safe, predictable value and income play.

MSFT Revenue TTM Chart

MSFT Revenue TTM data by YCharts.

That's the kind of future Apple investors should expect at this point. Cupertino has been playing the refining game for years already, focusing on different sizes of the same iOS-based slate concept.

Consumers will keep buying them for years to come, mostly because it's what they're already used to. Kind of like buying Microsoft Windows PCs because it's familiar, not because it's better than MacOS or other alternatives. But the market for this particular type of mobile gadget, with this particular user experience, is getting mighty saturated.

The proof is in the financial pudding above, not to mention Apple's stagnant unit sales. In the third quarter, Apple sold 45.8 million iPhones and iPads combined, just 6.5% above the year-ago quarter's 43 million.

So it's time to accept that Apple is becoming the Microsoft of the next 10 years. The company is far too big and rich to die entirely, but margins will shrink and P/E ratios will compress. This is a value and income stock now, and hardly the growth play of years past.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped by just a handful of companies. Both Apple and Microsoft still rank among this elite set. You can find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.


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Comments from our Foolish Readers

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  • Report this Comment On July 25, 2013, at 8:54 PM, spakklal wrote:

    This is one of the dumbest article I have ever seen.

    According to most of the analysts Apple is expected to grow 15-20% for the next 5 Years. If you have noticed that the Apple is the only Large Cap Company had a growth rate of 72.8% for the last 5 years.

    This guys will say anything to get attention. Apple with just 2 or 3 Products has 170 billion in revenue and has operating margin & net profit better than google. Apple is the only retailer who has 575 million customers on file with their credit card information. The growth of customers is 30% YOY. Apple still has around 75% of the market share in the $600+ segment of the market. Apple still enjoys around 70% profit in the Smartphone & 85% Profit in the Tablet Segment. Apple has a brand advantage over all competitors. Google as a brand has almost no hardware footprint and the Samsung brand still lags behind Japanese brands like Sony. People will pay more for products because of the brand recognition, implied quality and physical appeal. Apple also has the highest brand loyalty and largest direct customer base. Apple owns the high value customers, which is obvious if you look at spending after purchase of apps and services. Apple's strategy of growing their base of loyal high value customers is working. Apple iTunes & Software Services is growing at 30% and Google's AD Revenue which is growing at 15% will soon have negative growth because of the competition. Facebook today announced revenue growth more than 30%. Apple's Net Profit & operating Margin is higher than google's for the last 12 months.

    Some dumb analysts will pay up for companies like amazon, Google, Netflix whose profit margin is going down and have stiff competition.

  • Report this Comment On July 26, 2013, at 2:13 AM, Yorky12345 wrote:

    I hate it when writers brag about calling a peak, as if it now means the story they are writing/forecasting now has to be true.

    In the same way they went from broke to beating out MSFT, Apple can and probably will make a fool of this story above.

  • Report this Comment On July 26, 2013, at 4:05 PM, vireoman wrote:

    And NOTHING on their history of innovation?! Who knows what they'll pull out of their hat? Who knows what the Apple of twenty years from now will be like? I expect it will be strikely different from the Apple of today, and it most definitely won't be plodding along like the current version of Microsoft.

  • Report this Comment On August 12, 2013, at 10:49 PM, vaporzee wrote:

    This site uses a very old method of journalism, called 'yellow journalism.

    Here is a very interesting wiki page on the method...

    http://en.wikipedia.org/wiki/Yellow_journalism

    I just reinstalled my router, so I need to add fool.com, to the block list again.

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