166: America’s Companies: Should You Invest in Apple Stock?

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson. 

Austin Wilson: 

All right. Hey, hey, hey. Welcome back to The Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. I am Austin Wilson, Research Analyst at Hixon Zuercher Capital Management. 

Josh Robb: 

I’m Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. Austin, how can people help us with this podcast? 

Austin Wilson: 

We would love it if you would subscribe if you’re not subscribed. So hit that follow plus whatever subscribe button you have on your device. We would also love it if you’d visit our website and sign up for our weekly newsletter to get notified each and every Thursday when a new episode drops with a nice little summary and a direct link to listen there. So, Josh, today. 

Josh Robb: 

Yes. 

 

[0:52] – Introducing A New Series! 

 Austin Wilson: 

We’re going to be starting a new series. I’m excited about this series because this is kind of in my wheelhouse. 

Josh Robb: 

This is you. 

Austin Wilson: 

This new series is where we are going to be highlighting some of America’s largest publicly traded companies. So we’re going to give a little bit of background, talk about what the company does, how and where it makes money and a little bit about their financials. 

Josh Robb: 

Now, we’re going to be talking about companies- 

Austin Wilson: 

We are. 

Josh Robb: 

Which they’re going to be publicly traded- 

Austin Wilson: 

Perfectly, publicly traded. 

Josh Robb: 

This is not a recommendation. 

Austin Wilson: 

None of these are. 

Josh Robb: 

We’re going to be highlighting random companies from different sectors and industries. But before you make a decision whether you want to own this company, make sure you talk with your advisor before doing anything. We’re not recommending, just because we’re highlighting one doesn’t mean it’s necessarily the right investment for you. 

 

[1:36] – What is Apple Inc.? 

 Austin Wilson: 

Absolutely, and with Josh’s compliance hat firmly on his head, we’re going to keep going here. So, let’s start with a company everyone knows: Apple. Apple is a $2 trillion behemoth- 

Josh Robb: 

Big. 

Austin Wilson: 

In the US stock market. It also represents six to seven percent of the S&P 500. A lot. So, it’s a large company. So, let’s get our head around Apple, what they do, talk about their financials, leadership, everything. So, Apple designs, manufacturers and markets smartphones, personal computers, tablets, wearables and accessories. The company also offers and sells a variety of related services. Apple products include, obviously the iPhone, team iPhone right here, the company recently released its iPhone 14 product line. Other Apple products include Mac computers, iPad tablets, Apple Music, Apple Watch. There’s services they do as well. AppleCare, Cloud, digital content, payment services like Apple Pay, and they recently got in to entertainment with Apple TV+. 

Josh Robb: 

They were also starting to do some debt services. They’re going to call it the IOUs. 

Austin Wilson: 

The IOUs. I like it. I like it. More than 60% of Apple’s revenue comes from outside the Americas. That’s a large chunk outside of the US. Let’s talk about how the company operates. They rely on the iPhone for more than half of their sales, while other hardware products, Mac and tablets, so iPads, account for about 10% each. Services that we already talked about, that’s the second biggest revenue producer, about 20% of sales, and that’s really grown a lot recently. The wearables home and accessories segment, which includes the HomePod and the Apple Watch, that’s another 10%. So their operating systems are kind of all intertwined with all these products. You’ve got iOS for mobile devices, macOS for computers, Apple Watch OS for the watch, iPadOS for the iPad, catching a theme, that’s how- 

Josh Robb: 

I didn’t realize that the iPad had a different operating system. 

Austin Wilson: 

It recently went to that last year or so, where they split iOS and iPad OS. And the iPads now have a bit of a different… There’s more capabilities really within an iPad. So geographic wise, Apple the company, they’re based in Cupertino, California. They generate more than 40% of their sales in Americas. So that would be, that’s 60% we talked about elsewhere. While Europe and Greater China contribute a quarter of revenue, and about 20% from China. Japan, that’s about 10% of revenue there. The company has facilities and land for corporate functions, R&D data centers, retail and other purposes throughout the US and in various places.  

 

[4:08] – How Does Apple Sell Their Products? 

 Austin Wilson: 

So how do they sell products? Is the question that you probably wondering, Josh? 

Josh Robb: 

Yeah. How do they do it? 

Austin Wilson: 

Well, they sell their products and resale third party products in most of its major markets directly to consumers. They do that for small and mid-size businesses, education companies, enterprise, and government customers, through even its own retail source and website and a direct sales force. They employ a variety of indirect distribution channels as well. Like third party sell companies like AT&T, Verizon, those sorts of things there. Wholesalers, retailers, resellers, you can get things like iPads and stuff at Best Buy or Costco or Walmart and stuff like that. Direct and indirect channels, so that’s whether they’re going direct to the customer or indirectly to the customer, to a third party. That accounted for more than 35 and 65 percent of Apple’s sales. 

Josh Robb: 

Indirect is the bigger those two? 

Austin Wilson: 

Correct. 

Josh Robb: 

Yep. 

Austin Wilson: 

Yep. So direct is 35%, indirect will be 65%. But that direct piece is growing as well, faster. So how do they do this? Well, first of all, they’re doing this through launching new products and investing heavily in R&D, which is driven by headcount. So they’re spending a lot of money investing in people to develop products and services for customers. And because the industries in which the company competes are characterized by rapid technological advances, the company’s ability to compete successfully depends heavily on its ability to ensure a continual and timely flow of competitive products. If you’re an Apple iPhone user, they want you to continue to be an Apple iPhone user, or Mac or whatever, so you must constantly be creating a better one and getting more people to upgrade and stuff like that over time. So that’s how that works.  

 

[5:47] – How Apple Came to Be Where They Are Today 

 Austin Wilson: 

So, let’s get into the background a little bit of the company. Steve Jobs and Steve Wozniak, notably college dropouts. 

Josh Robb: 

Both Steve’s. 

Austin Wilson: 

Both Steve’s, they founded Apple in 1976. The duo built the Apple I in his garage and sold it without a monitor, keyboard or casing. 

Josh Robb: 

Wow. 

Austin Wilson: 

Demand convinced Jobs that there was a distinct market for small computers and the company’s name, which was a reference to job stint on an Oregon farm, and the computer’s user-friendly look and feel set it apart from others. 

Josh Robb: 

Interesting. 

Austin Wilson: 

So, the company’s Macintosh, which is where we get the term Mac, made a splash in the mid-eighties, driven by a Super Bowl commercial, actually, in 1984. As the company grew- 

Josh Robb: 

I remember that Super Bowl commercial. I was only one year old, but I’ve seen it, because it’s very popular. 

Austin Wilson: 

I’ve seen it too. Yeah. It’s like one of the most popular YouTube videos out there. It’s a really fantastic, it’s like spacey and- 

Josh Robb: 

Yes. 

Austin Wilson: 

It looks awesome. 

Josh Robb: 

Futuristic. 

Austin Wilson: 

Yeah. So as the company grew, Jobs was actually forced from the company. Crazy. Apple never really matched IBM PCs in total sales and had a cultural cachet and ease of use that led to its foothold in education, publishing and creative industries that were kind of the niche markets for Apple computers. And that actually holds through to today. A lot of the creative side of things, and education, but a lot of the creative side of things those people use Macs. That’s pretty much what most people use. 

Josh Robb: 

Love them. Yep. 

Austin Wilson: 

In the nineties, a succession of CEOs tried different strategies to increase sales, even including licensing the company’s technology to third parties to produce Apple clones. 

Josh Robb: 

Interesting. 

Austin Wilson: 

That did not pay off. 

Josh Robb: 

No. 

Austin Wilson: 

Nor last very long at all. And Steve Jobs returned to Apple in the late nineties, right when the company was on the brink of bankruptcy. 

Josh Robb: 

Pause, real quick. 

Austin Wilson: 

Yeah. 

Josh Robb: 

One of my first memories of an Apple computer was at my grandparents’ house. He had an old McIntosh computer. 

Austin Wilson: 

Oh, yeah. 

Josh Robb: 

Gray. Just a square box. No hard drive. You had those big floppy disks. 

Austin Wilson: 

Oh, yeah. 

Josh Robb: 

You put one floppy disc in to boot up the computer and pulled that out, then put a floppy disc in for whatever you wanted to do, which didn’t do much. But I do remember, for instance, one time we were at their house and he’s like, oh, I have a fun project for you. And so he booted up his computer with one pulled out, put it in the new disc, and it was, I’m going to say an early version of a Microsoft Word… Obviously wasn’t, but it was some sort of spot where you could type. And he created for each of us kids kind of a sheet that we filled out, like a trivia type of thing. But he made it himself. But I mean, if you could think back, there’s no operating system really. 

Austin Wilson: 

No. 

Josh Robb: 

Just this… Probably took him forever, but he had it. Then he hit print and it printed out this old paper where you had to pull it, rip it off each time. It was like papers were all connected together. 

Austin Wilson: 

You know what? 

Josh Robb: 

I remember that. That was an old Macintosh. 

Austin Wilson: 

That old Macintosh computer’s probably worth big bucks- 

Josh Robb: 

Probably. 

Austin Wilson: 

If you’re able to get your hands on it today. 

Josh Robb: 

It’s gone, I think. 

Austin Wilson: 

Yeah, I’m sure. I’m sure. Most of them were. But yeah, those early Apple products. Woo. Major bucks. So yes. Like I said, Jobs, Steve. Steve Jobs came back in the late nineties. The company was on the brink of bankruptcy. What they were doing was not working. He slashed the portfolio in a fraction of what they did and really focused on launching a new Macintosh. 

Josh Robb: 

Do you remember those? 

Austin Wilson: 

An iMac? 

Josh Robb: 

Yes. 

Austin Wilson: 

The first iMac- 

Josh Robb: 

Colors. 

Austin Wilson: 

All those crazy colors. 

Josh Robb: 

Yeah. They’re like, it was all in one box. 

Austin Wilson: 

It was a big box. 

Josh Robb: 

One screen. 

Austin Wilson: 

All-in-one. The tower. 

Josh Robb: 

Everything was in there. 

Austin Wilson: 

And the screen was in one. And I do remember those. We didn’t have one. 

Josh Robb: 

We never had one. 

Austin Wilson: 

We had Windows, whatever back then, but they were so cool looking. A lot of schools had those. A lot of schools had those. So that is kind of what brought Jobs back. And then he launched the iPod music player, which led to, technology wise, the iPhone, which became one of the world’s most successful products. Then the iPad tablet. And I remember when the iPad came out, I was a freshman in college, and it was a huge deal. One of my buddies had one, and I was like, whoa, what is this witchcraft? It was really cool. 

Josh Robb: 

It’s so skinny. 

Austin Wilson: 

More than 2 billion devices running on Apple’s operating system, iOS, have been sold. That’s a lot. While iPhone sales have been surpassed by Android devices. 

Josh Robb: 

Oh, look at that. 

Austin Wilson: 

I know. The premium Apple charges for its products has driven record sales and profitability. Now, Steve Jobs died in 2011 from pancreatic cancer. He obviously left his mark on the tech industry and has rather a cult following on the way he did things, the way he led, what he wore, all of these things. And in fact, if you can get ahold of… I think I saw his old shoes or something, sold for like a hundred thousand dollars or something. I don’t know. It was crazy. But his successor, Tim Cook, has been running the company ever since. So that’s a little bit of a background on Apple. 

 

[10:39] – Dad Joke of the Week 

 Josh Robb: 

All right. I’m going to pause and do a dad joke of the week for you. And here’s a question, and it’s about apples actually. All right. So, you have a green apple and you throw it into the Red Sea. What do you think happens? 

Austin Wilson: 

Oh, no. I don’t know. 

Josh Robb: 

Oh, the apple gets wet. 

Austin Wilson: 

That’s good. 

Josh Robb: 

That’s it. 

 

[11:02] – Competitive Advantages of Apple 

 Austin Wilson: 

Good joke, Josh. All right. We’re going to dig into a couple other aspects of the company. First being the competitive advantages. 

Josh Robb: 

Yes. 

Austin Wilson: 

So when you think about competitive advantages, you want to think about ways the company is set apart from its competitors. Now, customer-switching costs, like what it would take for me to switch to an Android and an Android user to switch to an iPhone. That’s what a switching cost would be. The difficulty around that, the actual cost behind all of that, that is one major reason that the iOS lifestyle is very sticky, or the Android lifestyle. Everything integrates real well, and it’s really hard to transition from one to the other. 

Now, if you are in the Apple ecosystem, which I am, it all works together. One login does everything. Your iPad, your Apple TV, your Apple Watch, your Air Pods, your iMessage, FaceTime, Apple Pay, all of these things suck you in and make it a really great experience, really easy to set things up and link things and do all of that stuff, but also make it really, really hard to even consider changing. In fact, recent survey data shows that iPhone customers are not even contemplating switching brands. Now, this is a little older survey, but in December 2018, in a survey, 90% of US-based iPhone users said they plan to remain loyal to Apple devices in the future. Now, a more recent survey, so that was December 21 from 451 users of Apple Products, iPhone users, said that customer satisfaction was 98% for the iPhone 13 product family. Now, the 14 was a rather small upgrade, at least for the regular line. Those numbers haven’t been published yet, because it just kind of came out. 

Now, another way that this is so interesting is that things like the Apple Watch, things like Air Pods, they can work, but they don’t have full functionality if you’re using them with an Android. So if you want that product, pretty much keeps you in the iPhone cycle. 

Josh Robb: 

Once you pay for it, you’re like, well, I already spent money on this, this and this. 

Austin Wilson: 

But then you get to watch, now I need a new iPhone. It’s just a cycle. 

Josh Robb: 

Oh, man. 

Austin Wilson: 

That’s how that works. So that’s called stickiness. And they have a very sticky product base. The active installed base of Apple devices, 1.8 billion at the end of ’21, which was up 9% from the year earlier. Apple notably also has cost advantages with suppliers because they’re very, very, very, very large and a plethora of licenses and patents over their technology, so that protects their profit over time. 

 

[13:23] – The Company’s Supply Chain & Fundamentals 

Austin Wilson: 

Now, let’s talk about their supply chain. Because they do have cost advantages with suppliers, but it is noteworthy that the company, 60% of Apple’s cost of goods sold is attributable to one company, Taiwanese leader Han Hai Precision Industry company, also known as Foxconn. So if you’ve heard all of the drama going on with lockdowns in China and iPhone manufacturing backlogs or whatever this is, that’s who makes Apple’s products, their phones, their tablets, their computers. And because I’m a nerdy guy and that’s what I do, you got to talk about the fundies, not Funyuns, fundies. Fundamentals of the company. Apple’s a pretty fundamentally strong company. I mean, they are obviously huge, but they’ve grown well too. So revenue, top line, they have grown revenue at a 13% compound annual growth rate over the past decade, to $366 billion in 2021. 

Operating income has increased at a 12% compound annual growth rate over that past decade, to $109 billion in 2021. And adjusted earnings per share, which kind of makes it like for like, you can compare it that way, have increased at a 19% CAGR over the past decade as well to 561 in 2021. All this time, they’ve also been growing their dividend. They’ve been increasing their dividend at a compound annual growth rate of 28%, to 87 cents per share in 2021. Cash, they’ve increased their cash at a 14% compound annual growth rate to $35 billion on their balance. Long-term debt, actually $119 billion at the end of 2021. One of the reasons for this is the company has so much cash offshore, because 60% of their company is generating revenue outside the US. It’s very hard and very expensive to bring that offshore cash back to the US and pay taxes on it. 

So, they can take on cheap debt, or they had been able to until recently, here in the US, fund operations, but keep that cash offshore and not have to repatriate it. So that’s one of the reasons for that higher debt load there. Capital expenditures, so investments in the business have increased in a 10% CAGR to $11 billion last in 2021. Free cash flow, 7% growth per year to $93 billion in 2021. And here’s one interesting fact. 

Josh Robb: 

Yes. 

Austin Wilson: 

Diluted shares outstanding. So just think about the numbers of shares out there, and then this takes into consideration things like stock options and stuff like that, have decreased at a 4% compound annual yield growth rate over the past 10 years. 

Josh Robb: 

Which is a good thing for a shareholder. Because if you have fewer shares out there, each share potentially has more revenue- 

Austin Wilson: 

Your earnings per share are more- 

Josh Robb: 

Per share. 

Austin Wilson: 

Yeah. 

Josh Robb: 

So, when you see a decrease of 4%, that’s actually a positive for any shareholders, fewer shares out there that are splitting the revenue. 

Austin Wilson: 

So, Apple has been the leader, really in the entire market, of buybacks, and much to the eyebrow raising to people in Washington, they have been doing it quite well, until recently, which it still is, but it has changed a little bit. But a very tax efficient way to return cash to shareholders in lieu of more dividends and- 

Josh Robb: 

Because dividends are taxed. 

Austin Wilson: 

Dividends are taxed. Yes. So, here’s another interesting component of their fundamentals. They have a AA+ credit rating from Standard and Poor’s, with a stable outlook, which they have not changed for a long time, and ranked AAA with a stable outlook from Moody’s. So good credit ratings. That’s why they’re able to have so much debt because they’ve not missed anything. They’re very stable. They have a lot of cash. They have a growing business. 

Josh Robb: 

Well, you say a lot of debt, $119 billion is long-term debt, but their revenue is $366 billion. 

Austin Wilson: 

Exactly. 

Josh Robb: 

And they have $35 billion in cash just hanging out. 

Austin Wilson: 

Exactly. 

Josh Robb: 

Okay. 

Austin Wilson: 

So as we mentioned earlier, their CEO, his name’s Tim Cook, he’s 61 years old. He’s been Apple CEO since August 2011. Before that, he was the Apple’s Chief operating Officer since October 2005. He joined Apple in March of 1998. So around that time, those sweet iMacs came out and served as executive vice president. Worldwide Sales and Operations was the segment he was in charge of there from February 2002 to October 2005. From October 2000 to February ’02, he was Senior Vice President of Worldwide Operations, Sales, Service and Support. And from March ’98 to October 2000, he was the Senior VP of Worldwide Operations. So he has had a long relationship with Apple. 

He’s worked there for a long time, held a lot of leadership positions. It really was not a surprise that he was CEO appointee when Jobs passed away. 

Josh Robb: 

Yep. It wasn’t a surprise. 

Austin Wilson: 

It was not a surprise. 

Josh Robb: 

Where are they headquartered? 

Austin Wilson: 

California. 

Josh Robb: 

California. They built that funny-looking building, right? It was like a donut. 

Austin Wilson: 

It looks really cool. 

Josh Robb: 

Yeah. 

Austin Wilson: 

I’ve never been. 

Josh Robb: 

It’s like a circle, though, right? 

Austin Wilson: 

I know. It is. 

Josh Robb: 

Am I right on this? 

Austin Wilson: 

It is, yeah. Yeah. That is a little bit about Apple The GOAT, the biggest company by market cap and one of the most well-known companies in the world. 

Josh Robb: 

I think it’s a boat, not a goat. 

Austin Wilson: 

Boat. 

Josh Robb: 

Biggest of all time. 

Austin Wilson: 

Biggest. Ooh, biggest of all time. Greatest of all time. You call it what you want. Again, not a recommendation. 

Josh Robb: 

Yes. 

 

[18:27] – Should You Buy Apple Stock? 

 Austin Wilson: 

But the question is, because we’re on the not a recommendation topic, is Josh. 

Josh Robb: 

Yes. 

Austin Wilson: 

Should you buy Apple Stock? 

Josh Robb: 

Well, you know what I’m going to say. 

Austin Wilson: 

Talk to your advisor. 

Josh Robb: 

Well, I always say that, but also- 

Austin Wilson: 

It depends. 

Josh Robb: 

It depends. 

Austin Wilson: 

In moderation. 

Josh Robb: 

Moderately depends on your style. It really comes down to this. Now, if you have exposure to the United States stock market. 

Austin Wilson: 

Yep. Large caps, specifically. 

Josh Robb: 

Whatever thing, chances are you probably own a little bit of Apple just because of its size in the US market. 

Austin Wilson: 

Yes. 

Josh Robb: 

So, if you own any kind of index fund that tracks the large cap here, like an S&P 500 fund, it makes up a portion of it. 

Austin Wilson: 

Well, and even an active managed mutual fund, a manager is likely, in the large cap US space, going to own a significant chunk, because it’s such a big company that not owning it is a big risk if it did well. 

Josh Robb: 

Yeah. 

Austin Wilson: 

So, you can either actively underweight or overweight it compared to the market. But that’s kind of how you would… 

Josh Robb: 

So, it depends. Again, we’re not making a recommendation either way. 

Austin Wilson: 

No. 

Josh Robb: 

Chances are, most people who have US stock exposure will have some exposure to this company, just because of its size. But it really comes down to what your goals are, like always, what you’re trying to accomplish with your money. But when we’re talking about these, and we’ll do some more in the future, every once in a while, with different companies, it really just comes down to is, what are my objectives and where am I trying to go? But what is interesting, what we’re trying to point out here is just you look at what they do, and they found they weren’t the only one that was making these products. There were other computer companies out there. 

Austin Wilson: 

Right. 

Josh Robb: 

In fact, they struggled for a while when they came out with the phone. They weren’t the first cell phone. 

Austin Wilson: 

Nope. 

Josh Robb: 

They weren’t the first of anything really. 

Austin Wilson: 

And in fact, they lagged Blackberry for a while. 

Josh Robb: 

Yes. What they did was they found a product and did their best to make it the best product that they could. And at this point, they are able now to charge a premium for their product based on the brand that they’ve created. And so we wanted to highlight that and kind of the history there. It’s very interesting. Thank you, Austin. 

Austin Wilson: 

Yeah, absolutely. So, thank you for listening to this first episode in this new series. If you had someone wondering about Apple, share this episode with them. And again, we’d love it if you’d subscribe and if you’d leave us a review on Apple Podcasts, an Apple product as well, or Spotify or wherever you’re listening to this. And if you have any ideas of companies you would like to know more about that might fit this series, shoot us an email to hello@theinvesteddads.com. And hey, we might make that into an episode. So, send us any ideas you have. And until next Thursday, have a great week. 

Josh Robb: 

Talk to you later. 

Austin Wilson: 

Bye. 

Thank you for listening to The Invested Dads podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review. Click subscribe and don’t miss the next episode. 

Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecast provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.