Apple hits all-time high and Buffett posts +80% return! Why does the stock market rise despite revenue and profit declines?
U.S. stocks are performing well. On November 1, the Nasdaq Composite, which is heavily weighted toward tech names,reached an all-time highand the S&P 500 and Dow Jones both traded near their highs.
What stands out is that a large portion of all three indices is made up ofApple (AAPL) stock. It reached a record high, driving the index up.
Apple’s extraordinary strength driving the rise in U.S. stocks
The company reported earnings on October 30. The result was “revenue decline and profit decline.” Yet it still hit a new high. How can that be?
One reason is thatits results exceeded market expectations. Amid worries about China sales due to the U.S.-China trade war, the market had been cautious. The低 = low hurdle before the report created a “positive surprise.”
Another reason lies in thedissection of the earnings. The following chart shows revenue by category.
The flagship iPhone saw a 14% decline in revenue. This correlates with a global slowdown in smartphone growth. It’s reasonable to say the peak has passed.
On the other hand, it’s offset by the “Services” and “Wearables” segments.Of particular note is the “Services” category. This refers to subscriptions for iCloud, music, news, and other services.
When you think of Apple, you think of hardware like iPhone and Mac,a company that makes and sells physical goods. The company grew explosively as people worldwide adopted smartphones, but there are limits. In fact, iPhone revenue has started to decline.
However,Apple was already ahead of the curve. That is, it was the “Services” category, i.e.,software.
Unlike Android, Apple did not open up its OS; instead, it gated it. Beyond that laycloud and music. If you own a smartphone, you eventually want to carry your data and music with you.
If those services are offered in a subscription format,most people will have them pre-installed on their devices and use Apple’s convenient services.
This is precisely amoat—an economic moat that keeps others at bay. Apple didn’t let the iPhone simply end as a hardware sale; it kept monetizing it as a “partner” consumers can’t easily part with.
Recently,camera and wireless earphone (AirPods) performance have been rapidly improving. As cameras become higher quality, data storage increases; as earphones evolve, people will want to listen to more music.
Thus,the loop of consumption from hardware to software and back to hardware continues infinitely.
Software carries little to no cost.Even if revenue declines, profit margins are likely to improve significantly. Apple is, in my view, a remarkably formidable company. A second-largest market cap in the world is no accident.
Buffett already has an 80% return on Apple stock. Why could he buy it?
There are notable investors who had long bet on Apple. The well-knownWarren Buffettis one of them.
Since 2016, he began buying the company’s stock in earnest,and today it accounts for 24% of his portfolio, the top holding.
With an average cost of about $141 and a current price around $255,it has already delivered approximately an 80% return. It’s remarkable that such a large stock could be bought up to a quarter of the portfolio and still generate this level of return.
When Buffett began serious purchases of Apple,many investors were not valuing Apple at all.
The smartphone market was showing signs of saturation,growth was slowing. The improvements in performance were leveling off, and consumer replacement cycles were lengthening.
Meanwhile, at that time,the P/E ratio was around 12–13x. Buffett saw that as a bargain. He bought aggressively when prices fell and simply waited. Now, three years later, it has blossomed.
We cannot know how far Buffett foresaw this future. But there is no doubt he stayed faithful to the principle:“to buy high-quality stocks with an economic moat when they are inexpensive”.
With new services like Apple TV, Apple will likely continue expanding the Services category in the future,and it is worth watching how far the powerful moat can expand earnings. I will continue to monitor with caution.
