This weekend I have piled through the research for both companies and I believe we are at the perfect moment where a long position in both companies is warranted.
Let me explain!
The Macro Picture
The S&P 500 Index has sold off between 3rd September and the day before yesterday, Thursday 24th September. As of writing the index is off -7.98%.
Apple is of course so huge, that it now represents 6.5% of the entire S&P 500, which is huge. Apple is down -16.3% and has undergone a technical recovery as of yesterday.
There are plenty of things to worry about: the election is coming in November, it looks like Trump could lock the doors and decide to stay in the Whitehouse, and hell be damned if Covid-19 doesn’t continue to run its course throughout the winter months.
Apple is Undergoing a Major Upgrade Cycle
I probably don’t have to write too much on this basic thesis: I am sitting in front of my laptop, with my iPhone 7 at my side, and frankly my wife and I both are in need of an upgrade. We are your more conservative consumers and we don’t buy every new model. We tend to wait until our phones start to look and feel out of date, then make a big purchase, and hold onto the phone for 3-4 years.
Apple knows this.
Originally the forecast was for 100 million phones to be sold in total during the next upgrade cycle. Due to Covid-19 and the global pandemic that has dropped, and analysts currently forecast between 63 and 68 million phones sold. That represents a 7% drop year over year and it is down by 5 million units.
I like when this happens: you’ve got a big earnings driver coming up, and analysts have lowered their forecasts, but in such a way that it means there is plenty of upside to beat the forecast. It’s a lot harder to “beat” a 100 million phone target than it is to “beat” a 63-68 million target.
Let’s review the business itself and the fundamental picture:
P/E TTM 34.1x
Market Cap 1.9T (USD)
EPS TTM 3.29
Latest dividend 0.205
Ex-dividend date 8/7/20
Annual dividend 0.82 (USD)
Apple trades on a pretty robust 34.1x earnings, has a fairly low dividend yield, and it is already worth a $1.9T market cap.
Profit wise do the forecasts line up and are we expecting decent growth? See below:
What is interesting is how Apple’s stock price ran away so much in 2018-2019 – after all it hasn’t really posted decent growth for nearly 5 years.
As you can see though forecasts for 2020-2022 are higher – that is mainly driven by the fact that analysts have factored in this new upgrade cycle.
Frugalist Investors conclusion: this is a good time to go long Apple. It could easily fall further, into November, while we sort out the election. But ease yourself into a position and start getting exposure here, either by buying the S&P 500 index or Apple stock directly.
For the experts out there, consider a synthetic long stock position, by buying forward Apple $110 Calls out to 2022, and selling Apple $110 Puts out to 2022 for the same date.
Qualcomm is red hot
I find it interesting that more speculative plays in the 5G space get a lot of attention: companies like Qorvo, Skywarks and American Tower. All good stocks and companies that will no doubt benefit from 5G.
However, the obvious plays frankly offer you a better risk reward and still a strong possibility of making serious money.
In August 2020 Qualcomm was handed a huge win, after a long lawsuit that was the equivalent of “going and suing your boss at work.” Now that this is settled the company can go back to doing what it does best: providing the wireless technology and network equipment that sits inside 5G phones. Qualcomm supplies Xiaomi, Oppo, Apple and Samsung and therefore is well diversified to benefit from ALL phone sales over the next few years.
Looking at the stock you can tell because it is fairly valued:
|P/E TTM 48.4x|
Market Cap 129.2B (USD)
EPS TTM 2.37
Latest dividend 0.65
Ex-dividend date 9/2/20
Annual dividend 2.60 (USD)
It is important to remember though that 48.4x earnings may seem rich, we have to compare this against the growth on offer. So let’s look at the “PEG” ratio or price-earnings-growth measure. This allows us to see how much we’re paying against the future growth of the business. Next year’s PEG is 0.76 (anything below 1 is very good!)
The full picture is clear when you see the profit forecasts:
Qualcomm is set to deliver blockbuster growth in 2021 and 2022 – again this is driven by the upgrade cycle and the fact that it is about to deliver a HUGE amount of product to the market as all of those phone and tablet providers start cranking out their 5G devices.
Investing is not about absolutes, and the sooner Frugal Investors learn that, the better they will do when putting money to work in high quality businesses.
Here we have a classic example of two forces: stock prices have fallen, especially for Apple, as investors across the world start to worry about growth and the impact that the election and virus will have on phone sales. Check. At the same time value is rising because we are about to get an update on Apple’s (and by extension Qualcomm’s) next upgrade cycle in October 2020 (a month or less away). Check.
At some point these two forces collide and create a very solid buying opportunity to invest in the company at reasonable levels. I argue that we are pretty close to, if not at, that point already.