Apple, which reported disappointing earnings Wednesday, is still strong, but it’s unrealistic to expect a company of that size to maintain astronomical growth rates, says David Nelson, chief strategist of Belpointe Asset Management.
“What shareholders have to understand here is that this is a very large company and what plays here is the law of large numbers,” the Moneynews contributor tells Newsmax TV in an exclusive interview.
“Companies this big, over $400 billion in market cap, they can’t grow at 30, 40, 50 percent like they’ve become accustomed to.”
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Apple had a market cap of $433 billion early Thursday afternoon.
“Apple is cheap on any metric that you look at, but the shareholder face is changing,” Nelson notes. Momentum investors looking for earnings growth of 30 percent are selling, and value investors will keep buying until Apple achieves a sustainable growth rate of 5 to 15 percent, he says.
“Until that is established, and the estimates stop coming down, I’m not sure it’s investable, because I’ve been hearing that argument all the way down from $700.”
Apple shares hit a record high of $705 Sept. 21 and have since dropped 35 percent to $460 Thursday.
Not all was bleak in Apple’s profit report for the quarter ended Dec. 29. Sales of its two biggest products — iPhones and iPads — soared 29 percent and 49 percent, respectively.
“But when you dig deeper you could see where some of the problems are,” Nelson explains. “Margins are starting to decline, and that’s basically because Apple now has competition in the likes of Samsung and Nokia. So, it’s going to be tough.”
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While revenue rose 18 percent in the latest quarter, net income gained only 0.1 percent. The competition, which is reportedly forcing Apple to develop lower-priced phones, is depressing the company’s earnings growth, Nelson says, adding that he’s reluctant to buy Apple shares until they clearly hit bottom.
A cheaper phone is a necessity for Apple, especially in emerging markets, although it will probably depress the stock price for a while, he maintains. Apple has benefited from companies like Verizon and AT&T subsidizing sales of iPhones.
But that’s having a damaging effect on the carriers’ earnings. So “in the future, you’ll see those subsidies are going to be far smaller, and that will force Apple to lower the prices a little bit more, and that hurts the bottom line a little bit more.”
Mac computers are a problem for Apple too, Nelson says. Mac sales totaled 4.1 million in the latest quarter, well short of the 5.1 million expected by analysts. “Just as the number of people going out and buying computers has been in decline, it’s pretty obvious that Apple is seeing that a little bit as well,” he says.
“It’s pretty clear, the iPads are extremely popular, but even in this quarter, in some ways, Apple was a victim of their own success. Because the iPads are doing so well, the big shortfall that surprised a lot of analysts was in Macs, Mac computers, MacBooks and computers across the board,” he notes.
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