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Why I Just Sold Half of My Apple Shares

By Nicholas Rossolillo – Updated Jun 10, 2020 at 5:26PM

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A new decade is calling for a new portfolio investment thesis.

It's no secret that Apple (AAPL -1.51%) was one of the best investments of the 2010s. The company was key in evangelizing the smartphone and was a leader in the decade that will become known for the rise of consumer mobility.

But my investment thesis is changing, and Apple stock recently reclaiming all-time highs seemed like the right time to rebalance accordingly. Now that the smartphone is all but ubiquitous, the next decade will be marked by a rapid rise in services that mobility supports -- rather than the hardware itself. Thus, I sold half of my shares to free up some cash to invest elsewhere. Apple is still a core position (2% of my portfolio, excluding the Apple component in a couple of Vanguard ETFs I own, which bumps the total to about 5%), but for investors looking for growth stocks (versus the value stock Apple has become), I think there are better options.

Four people use smartphones as they lean on a red wall.

Image source: Getty Images.

New decade, new growth stories

Apple, which at its core is a hardware company, has evolved over the last 10 years. First was the boom in smartphones as consumers quickly adopted mobile tech. Then came the addition of wearables, including the Apple Watch and the acquisition of headphone designer Beats. And as the smartphone industry started to mature and new unit sales growth petered out, Apple was able to continue growing via higher average device pricing.  

It seems that the all-out growth of the mobile hardware industry is officially over, though. Mobility around the globe will continue to average up over time, especially as the internet grows in emerging economies, but the up years will get increasingly offset by the down years in the next decade. The last year and a half has been a sampling of that. After revenue surged 16% in fiscal 2018 (which ended September 2018) driven by higher iPhone revenue, Apple's top-line trajectory has started to flatten. In fiscal 2019 sales declined 2% (due to a 5% tumble in device revenue); and while revenue in the first half of 2020 was up 6%, the balance of 2020 will likely be a mixed bag. Demand in the smartphone and wearables markets is expected to decline, offset by a bump in sales for iPad and Mac due to shelter-in-place rules and the surge of working from home.

Long story short, Apple is a massive company, and with so many moving parts, it's unrealistic to expect it to deliver massive double-digit sales growth every year as it has in the past. The investment thesis has increasingly shifted in recent years as the company's returning of capital to shareholders, primarily via share repurchases, has become a key driver for the stock. For example, diluted shares outstanding at the end of March 2020 were 4.4 billion compared to 4.7 billion a year ago due to the company's generous repurchase program; share repurchases totaled $18.5 billion during the second quarter of fiscal 2020 alone. With cash and equivalents net of debt still at $83 billion, there's plenty of room for Apple to continue returning excess funds to owners of the stock. But that's less of a growth story and more of a value stock proposition.  

Not totally bailing on Apple

Don't get me wrong, I still want plenty of exposure to Apple. The company's mobile hardware business is still a cash-generating machine like no other, and in the next decade, cloud-based services should be a big growth story. Apple's services segment is more than respectable, growing 17% in the first half of fiscal 2020 and accounting for 17% of total revenue. But a position fast approaching 10% of my total portfolio (when including ETF holdings) was a little much.  

And speaking of cloud-based services that will further propel mobility and digital transformation in the decade ahead, the fact that Apple's services segment -- which had a huge $26.1 billion haul in the first half of the fiscal year -- was able to grow 17% year over year speaks volumes to how massive a movement this is. I think there is no better value stock than Apple right now, but I also want ample exposure to smaller cloud and service companies that have the potential to yield the kind of returns Apple did in the 2010s.  

It was therefore time for me to reduce my holdings in this longtime winner to prepare for the next bull market -- driven by a fast migration to software-based service hastened by the coronavirus crisis and ensuing economic lockdown.

Nicholas Rossolillo and his clients own shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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