Apple: Defying gravity

Apple is a gift that keeps on giving – to investors anyway. Last week they unveiled the latest versions of their greatest hits - iPhone, Airpods…yada…yada. But at this point, improvements seem marginal, even unnecessary. Or maybe we’ve reached that age where we refuse to

replace our phones unless they absolutely stop functioning? Hope not. The new Apple Watch Ultra, however, seems like actual progress – it’s basically a proper tool watch now, a la Garmin or Polar, but fancier. It makes quartz and mechanical watches look properly foolish, as if they weren’t already…on paper. Reality is more complicated. Has an Apple Watch ever made your heart race at first glance? Probably not. But we digress. Back to business.

We’ve maintained a 3% position in Apple for a long time – since 2019, and at 5% consistently before that. When we bought the stock in 2008, we knew it wasn’t all about the iPhone. That turned out to be true. We thought that they would make Entertainment the cornerstone of their business. Or Autonomous Cars. But it turned out that devices (including several versions of the iPhone) keep selling like hot cakes. Apple’s overall revenue growth over the last few years has surpassed our expectations (and the market’s):

Apple’s core strategy has become clearer over the years – they want to sell the s*** out of their competitive advantage – sexy, reliable devices running on in-house software. That reminds us of fancy schmancy Swiss watch companies that scream from rooftops about their “in-house movements”, mostly so they can charge obscene premiums for their obsolete products. Apple’s products are not obsolete, not even close. But every time they release something less than spectacular, with marginal improvements, the thought of selling the stock does cross our minds. Sure, the Apple Watch Ultra is cool, but do you really need a professional Dive Computer on your beach vacation? If you do, we salute you.

What will they invent next – a car running on Macintosh or an iMac with a hologram monitor? Honestly, we would love the latter. Whatever they’re cooking up in Palo Alto, we do consider Apple to be a true Global Dominator – a company with no direct competition. They make their own computers (in various form factors) with in-house software deployed in varying flavors. But with every passing year, they’re getting closer to Apple Singularity – a unified software ecosystem for all their devices. Even the likes of Google and Microsoft simply cannot achieve this – they don’t make all the devices or software versions required for such an intergalactic singularity. One Macintosh to rule them all!

Sorry, the point is that we haven’t been trigger-happy to sell AAPL for good reasons. But how does it look now? Everything has a limit. Should we still hold on to it?

Our first crack at that question starts with our Apple Buycast – what do we need to believe about the future of the company to keep holding the stock? We measure this in terms of revenue growth we need to believe. Revenue growth is easy to understand and it’s undeniably useful. There are many layers behind (see Appendix) this simple looking barometer, which we will explain in our deep dive (for subscribers only). But for now, we’ve tacked on the Buycast to the revenue growth chart you saw just a minute ago.

Let’s take the midpoint of our Buycast range. Let’s say we need to believe that Apple will clock in about 15% in ANNUALIZED revenue growth over the next 5 years. Should we believe it?  Seems a little rich to us. But we’ve underestimated Apple before. We tend to underestimate Global Dominators in general. This one requires a deep dive. A new, updated Apple investment thesis is on the cards.

Disney: Epic Plans

If you’re invested in Disney like us, you’ve probably hinged much of your thesis on Disney DTC – the unimaginative, clinical name given to Disney’s streaming products: Disney+, ESPN+, Hotstar, and Hulu.

If you have attributed much of the potential upside in DIS stock to DTC, then you have undoubtedly factored in some epic growth in Asia. As Netflix has shown us, the upper limit to the number of subscribers in the US is about 80-90 million. Both Disney and Netflix are shooting for a target of about 400 million paying subscribers worldwide. That gap cannot be filled without snagging some serious market share in Asia.

India is obviously a big market. It has a young, growing population that is almost always entertainment hungry. Obviously, Bollywood and regional cinema are huge, which gives companies like Disney and Netflix a whole new vector in their growth strategy for the country. This vector is absent is most countries. India is one of maybe 5 countries (if not the only one) where the sheer length and breadth of local movies and shows runs laps around anything coming out of LA. Most Indians love melodrama, theatrics, escapism, song, and dance, and they do it much better than La La Land.

Unsurprisingly then, Disney has recently green-lighted an animated series on Disney+ Hotstar which is literally epic – it’s the Mahabharata, a 2,000-year-old epic poem. It’s a story that almost every Indian kid knows, at least partially. It’s a bid budget production with a captive audience. Imagine the Lord of the Rings, the Avenger series, and Game of Thrones all simmering together in a 2,000-year-old recipe. This is a good move by Disney. We’ll continue to hold DIS at 5%.

Here’s our Buycast from our recent Disney thesis. We still find this believable.

Chippin’ Away

Our chips stocks – our core AI & Big Data bets – have been battered this year. First, it was the great risk-off trade that started with Putin’s invasion in March this year, followed by the great interest rate scare of the summer. We recently felt compelled to do a reconnaissance deep dive. But since then, the Biden administration has put another wrench into the heart of the US semiconductor industry. The intention is to limit US logic semiconductor exports to China – as part of a carrot and stick approach vis a vis China’s stance on Taiwan. Champions such as Nvidia and AMD have made it clear that they don’t see meaningful fallout effects. But the market disagrees.

The next item in our Analysis pipeline is Semiconductors. We will take another look at this part of our portfolio. We’ll be focusing on what each management team says about the future of their respective companies. We’ll collate that information and stack it up against our Buycast for each company.

As of today, here’s how they look:

Compared to the recent past, we don’t need to make any ludicrous growth assumptions. This is a good start. The Buycast – what we need to believe to buy/hold – is either less than or roughly the same as the historical 3-year annualized revenue growth number. But we need to dig in more. Coming soon.

Many Happy Returns.