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How I Learned to Stop Worrying and Buy (Not Trade) Apple

By Leo Sun – Apr 7, 2018 at 7:45AM

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Apple is still one of the greatest consumer goods plays of our time.

I bought and sold Apple (AAPL -3.00%) many times over the past several years. I made some decent profits, but I also learned a painful lesson -- that my profits would have been much higher if I had simply held the stock instead of trading it.

That's why I recently started a brand new position in Apple, and I plan to hold the stock for at least five to ten years. Here are my top four reasons for doing so.

An Apple store.

Image source: Apple.

1. It's a consumer goods company

Many tech investors, myself included, often can't see the forest for the trees with Apple. We become so concerned about technical details, like the specs of the processor and camera, that we don't recognize that Apple is more of a consumer goods company than a tech one.

Warren Buffett, who famously avoided tech stocks for most of his career, repeatedly called Apple a consumer products maker. Speaking to CNBC in February, Buffett stated that Apple has "an extraordinary consumer franchise" and that the iPhone "is a very sticky product."

2. The stock is ridiculously cheap

When we think of Apple as a consumer goods company instead of a tech one, the stock looks incredibly cheap. Analysts expect Apple's revenue and earnings to rise 14% and 24%, respectively, this year. Yet the stock trades at just 14 times forward earnings.

That forward multiple looks ridiculous compared to other "defensive" consumer staples stocks. Procter & Gamble trades at 17 times forward earnings, but the analysts expect its earnings to grow just 7% this year. Colgate-Palmolive trades at 22 times forward earnings, yet Wall Street expects its earnings to only rise 11% this year.

3. Apple has remarkable pricing power

Last May, Buffett told CNBC that he compared Apple to furniture makers to gauge its true value. That comparison might seem absurd, but it makes a lot of sense. Like the furniture market, the smartphone market is a commoditized one.

Apple's iPhone X.

Image source: Apple.

For example, a consumer can buy a sofa for $100, but there's still room for premium sofa makers to sell $2,000 sofas. The maker of a $100 sofa would likely struggle more against its competitors in the low-end market. Meanwhile, the maker of the $2,000 sofa could dominate the high-end market with its reputation and brand strength.

"People want the product," Buffett stated. "They don't want the cheapest product." The Oracle of Omaha is right. Last May, a Morgan Stanley study found that the iPhone had a retention rate of 92%, up from 86% a year earlier. Samsung retained just 77% of its customers.

Apple's reputation as a luxury brand gives it the power to charge much higher prices than its competitors. That's how Apple -- which controls a fifth of the world's smartphone market (IDC) -- gobbled up 60% of its smartphone profits in the third quarter of 2017, according to Counterpoint Research.

4. Apple will not live and die by the iPhone

The bears usually claim that Apple's heavy reliance on the iPhone, which generated 70% of its revenues last quarter, is its Achilles' heel. But that argument is flawed for three simple reasons.

First, Apple still has room to raise prices to offset shipment declines. That's what it did last quarter, when its iPhone shipments slipped 1% annually but its revenues still rose 13%.

Second, Apple's Services unit -- which includes Apple Pay, Apple Music, AppleCare, iTunes, and other services -- is rapidly growing. Revenues from that business rose 18% annually and accounted for 10% of Apple's top line. Those services lock in Apple's customers and boost its revenues per user -- which could offset its slowing iPhone shipments.

Lastly, Apple plans to repatriate almost all of its overseas cash (over $250 billion) in the near future. Apple could apply that cash to buybacks, dividends, and domestic acquisitions -- which would make its stock cheaper, attract more income investors, and give it new ways to reduce its dependence on the iPhone.

The bottom line

Many investors seem to dismiss Apple as a slow-growth tech stock. However, I believe that it's a high-growth consumer goods stock that trades at a ridiculously low multiple. That's why I finally decided to buy Apple for the long term.

Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$138.20 (-3.00%) $-4.28
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
$126.25 (-1.90%) $-2.45
Colgate-Palmolive Company Stock Quote
Colgate-Palmolive Company
$70.25 (-2.12%) $-1.52

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