Don’t believe the gloomy stories about tech valuations.
Investors have a once-in-a-generation opportunity to invest in real tech businesses.
And one digital transformation dominator that still looks like the ripest fruit on the tree is Apple (Nasdaq: AAPL).
Last week, executives reported that sales in the fourth quarter rose to a record $123.9 billion, with gross margins of 43.8%.
Even more impressive? The gains came despite a tangled supply chain.
The evolution of Apple occurred in October 2018 when CEO Tim Cook began building a platform around user privacy.
Speaking at a privacy conference in Brussels, Cook made an impassioned case for privacy as a human right.
The idea redefined smartphones … and the iPhone became a platform with a distinct competitive advantage.
That is the difference between most of Big Tech and the rest.
Pundits keep comparing current tech valuations to the Nasdaq Composite index in 2000. Although this is certainly fair in some ways, the concept is fundamentally flawed.
Some tech valuations — specifically shares of disruptive innovation companies — became outrageously expensive.
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3D printing, blockchain and other emergent technologies have bright futures … but it’s far too early to pick top winners, let alone value small companies at 50 times sales.
- Most of these businesses will ultimately fail.
Blame the investment bankers and special purpose acquisition company (SPAC) propogandists. Like the height of internet boom in 2000, snake oil was an easy sell in 2020 and most of 2021.
That’s where comparisons with the tech boom two decades ago end. Period.
The businesses that now make up the lion’s share of the Nasdaq are platform leaders like Apple, Microsoft (Nasdaq: MSFT), Alphabet (Nasdaq: GOOGL), Amazon.com (Nasdaq: AMZN), Meta Platforms (Nasdsaq: FB), Tesla (Nasdaq: TSLA), Nvidia (Nasdaq: NVDA) and Adobe (Nasdaq: ADBE).
- The shares of these companies account for 48% of the index ... and they are still relatively cheap.
The numbers speak for themselves.
On Wednesday, Microsoft executives announced that revenues in the second quarter surged to $51.7 billion, up 20% year over year. And the gross margin was 68.9%.
Earlier in January, Microsoft offered to buy Activision Blizzard (Nasdaq: ATVI) for $75 billion, using cash on hand. I mention this because ...
- The biggest tech companies generate obscene amounts of free cash flow. They dominate their respective niches with overwhelming scale.
In many cases, like cloud infrastructure, the end markets are worth hundreds of billions and growing quickly as all the world’s largest companies transition to digital business strategies.
Apple is benefitting tremendously from this transformation, too.
At the Worldwide Developer Conference in June 2019, the Cupertino, California-based company began offering Mobile Device Management.
The software tool lets IT managers assign a corporate Apple ID that lives side by side with an employee’s personal ID; has a cryptographic separator for personal data; and limits the device-wide capabilities.
The latter is perfect for employees who decide to bring their own devices to work. The response has been remarkable.
- When large companies offer devices to employees, iPhone is the overwhelming smartphone of choice.
Although the device commands only 15% of the global smartphone market, its use in the corporate world is without rival.
From Capital One (NYSE: COF) and International Business Machines (NYSE: IBM) to Procter of Gamble (NYSE: PG), iPhones are ubiquitous across the Fortune 500 … and it all makes good sense.
- iPhone is considered a premium device. Getting one for work is a perk for employees.
It’s also an easy sale to employers given iPhone’s reputation for longevity, software updates and privacy.
Then there is the halo effect.
iPhone is the center of the Apple ecosystem. iPads, Mac computers, Watches and AirPods all work seamlessly within the iPhone platform.
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When Apple reported results on Friday, every category except iPad showed double-digit improvement. Talk about a cash cow.
Mac revenue jumped to $10.85 billion, up 25% from a year ago, helping profits surge to $2.10 per share, up 25% year over year.
Astonishingly, Cook said that supply chain issues continue to constrain production. December was worse than the September quarter.
- Business leverage at big tech is the big story being lost in the gloomy headlines about tech because it doesn’t fit with the narrative that tech stocks are as expensive as they were in 2000. This is simply not true.
Apple shares trade at 26 times forward earnings and only 7.1 times sales.
These metrics look cheap given the stickiness of Apple’s ecosystem and its considerable competitive advantages.
Longer-term investors should consider buying the shares into weakness.
Best wishes,
Jon D. Markman
