Sell Apple Stock. Buy Facebook. Eat McDonald’s.
Apple stock is finally getting the respect it deserves. Consider selling.
Facebook remains the Big Mac of media services: eagerly devoured year after year, even though everyone claims to be too good for it. Grab a napkin and hang onto the shares for longer.
Both companies are coming off quarterly reports that goosed shares nicely: 5% for Apple (AAPL) this past Wednesday, and nearly 6% for Facebook (FB) the prior Thursday. Both are running well ahead of a year-to-date rally that has sent the S&P 500 index up 16% and its largest sector, tech, up 26%.
And of course, both companies enjoy preposterously large user bases, giving them powerful competitive advantages.
The similarities end there.
Barron’s turned sweet on Apple five years ago at $76 a share, split-adjusted. Our argument was simple. Spacious Samsung phones were giving iPhone fans big-screen envy. Apple was preparing to expand its screen acreage. A bumper year for upgrades looked likely. Admission for investors was cheap, with shares at 12 times earnings, or eight times after subtracting for cash and investments.
Then came a 37% up-year for iPhone volumes, followed by an 8% decline, and a new reason to pooh-pooh the stock: Apple would never again come up with a reason that compelling for upgrading. It hasn’t, but it doesn’t much matter. Customer loyalty is exceptionally high, and even if users are no longer compelled by tech lust to buy phones often, they still do it eventually—every three years on average, judging by recent data.
Don’t tell me about better cameras and screens on competing phones. Apple’s Retina displays are already better than my actual retinas deserve. What matters most is that half my life is set up on my phone or the Apple servers it talks to, including 20 or so photos documenting my childhood, college life, world travels, and general existence, plus 35,000 of my children blinking.
I pay $10 a month for cloud storage, and another $15 to be able to ask Siri to play “Fortunate Son” while I’m holding a chicken leg in each hand, which usually doesn’t happen more than once a day. I have a similar arrangement with Alexa from Amazon , and for now, everyone seems OK with our voice-activated polygamy.
This rising, high-margin services revenue for Apple has smoothed out swings in earnings and kept Barron’s bullish on the stock. Like any consumer staple seller, it deserved a market multiple, if not a small premium, we wrote. But earnings estimates have slipped, and the stock recently traded at 17.1 times forward estimates, a whisker more than the market. At $209 a share, Apple has tripled, with dividends, since our 2014 story.
Although there’s more to Apple than new phone features, the shift to 5G gives me pause. It could be the next big reason for upgrading. The iPhones coming this fall won’t have it, but the ones next year likely will. Wedbush Securities analyst Daniel Ives—who rates Apple stock at Outperform—tells me 5G could shift 5% to 7% of this year’s phone demand into next year, but that the pool of potential upgraders is vast enough to offset this concern.
Long-term investors could make out fine in Apple from here. For those who take a more tactical approach, consider taking profits and sitting out this fall’s phone release, especially with shares now looking fairly priced. After all, revenues slipped 5% last quarter and earnings per share fell twice as much. The stock rose only because investors had feared worse. That’s cause for only muted celebration—maybe blow a wet party horn into a pillow.
Facebook is basically a tobacco stock without the cancer, only tobacco didn’t grow its top line at anything close to 26% last quarter. Daily active users hit 1.6 billion in March, up 8% from a year ago, which means either some of you have trained your pets to post selfies, or all those people who said they’re fed up with Facebook have mostly been complaining about it on Facebook. Or its corporate siblings, Instagram and WhatsApp.
Yes, Facebook puts the personal details of its users to work to sell advertising, which privacy advocates decry as a digital pantsing. But television has done the same thing for decades, if not nearly as well, and since the spread of cable it has charged for the privilege. So have other, ahem, media. And yes, Facebook is a platform of choice for the unscrupulous to convince the innumerate of the absurd. But chief Mark Zuckerberg is responding. He spent much of his latest earnings call talking about plans to offer both “public spaces like the town square and private spaces like our living rooms,” while increasing data security and allowing for conversations that don’t live forever online.
The growth outlook here is straightforward. There’s a massive disconnect between time spent online and ad dollars spent there. Spending will continue to shift online, and Facebook will sop up much of it.
Barron’s warmed to Facebook stock late, at $124 nearly three years ago. It recently sold for $192. Spending on self-improvement is cutting into earnings, so the share price works out to 26 times this year’s forecast. But earnings could double within four years.
I’m not on Facebook, by the way, but not because I’m too good for it. Only because I already overshare here for a living.