If you are looking for the best ideas for your portfolio you may want to consider some of RiverPark Advisors top stock picks. RiverPark Advisors, an investment management firm, is bullish on Apple Inc. (NASDAQ:AAPL) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Apple Inc. (NASDAQ:AAPL) stock. Apple Inc. (NASDAQ:AAPL) is a technology company.
In July 2019, RiverPark Advisors had released its Q2 2019 investor letter. Apple Inc. (NASDAQ:AAPL) stock has posted a return of 98.6% in the trailing one year period, outperforming the S&P 500 Index which returned 10.2% in the same period. This suggests that the investment firm was right in its decision. On a year-to-date basis, Apple Inc. (NASDAQ:AAPL) stock has risen by 49.5%.
In Q2 2019 investor letter, RiverPark Advisors said the Large Growth fund posted a return of 7.4% in the second quarter of 2019, outperforming fund’s benchmark the S&P 500 Index which returned 4.3% in the same period. Let’s take a look at comments made by RiverPark Advisors about Apple Inc. (NASDAQ:AAPL) stock in the Q2 2019 investor letter.
“A similar bout of selling pressure befell Apple shares late in 2018, despite reporting its best fourth quarter results ever. The stock declined sharply (falling 39% in a few short weeks from its all-time high of nearly $230 in early October of 2018) as the company gave revenue guidance for the December quarter that disappointed investors (a range of $89-$93 billion in sales v. the street estimating $93 billion), while also announcing that it would no longer provide unit level hardware details in it financial reports. This was followed by a round of Apple suppliers that began reporting a material slow-down in orders throughout the iPhone supply chain. The perception that iPhone sales for the December quarter were light was then confirmed in the first days of 2019 as the company pre-released results that were below even its initial disappointing guidance. The company guided to a preliminary revenue number of $84 billion (which would be about 5% below the December quarter last year) with the majority of the short-fall coming in the company’s China iPhone business (“most of the revenue shortfall to our guidance, and over 100% of our year-over –year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”)18 The company also pointed to other pockets of weakness both in other emerging markets as well as related to capacity constraints in some of the company’s newest product launches but lower iPhone revenue, primarily in greater China, was the lion’s share of the decline. Although the company highlighted some bright spots – such as categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) growing almost 19% year of year, and generated strong results for the fiscal year as a whole19 – the sharp deceleration in iPhone sales in China and the magnitude of the miss to guidance (Apple’s first guide-down in years), reignited the debate as to whether the iPhone’s dominance (currently over 60% of the company’s revenue) and Apple’s history of innovation and growth are each coming to an end.
This most recent sell-off marked the seventh decline of over 20% for Apple’s share price since the introduction of the iPod – which began the company’s transition to an “ecosystem” of interconnect products and services – in 2001. That’s roughly once every two and a half years. In each case, Apple’s future relevance was similarly called into question as its hardware dominance was thought to have surely peaked. And, in each case, as the company continued to update its current products, launch new platforms and take share in new geographies, a new cycle of revenue and profit growth ensued. This disappointment is also, to us, directly reminiscent of the company’s 2016 results in which, following the enormous success of the iPhone 6 and 6 plus which drove a $50 billion year over year increase in revenue in 2015 (28% growth) but resulted in a nearly $18 billion (-7.7% year over year) decline in revenue in 2016 as the iPhone 6s was less well received. Although for the year, Apple’s stock declined 5% in 2015 and rose 10% in 2016, the stock suffered a peak to trough decline of over 34% (which compares to the more recent decline) as the Street digested the lack of linearity in iPhone sales. Notably, over 2017 and 2018, revenues again expanded by an additional $50 billion as the company continued to innovate its flagship iPhone franchise while also reinvigorating growth in iPads, iWatch and a host of services and accessories. Although its stock has rarely traded in line with, much less at a premium to, the market during any of these past 17 years, it has risen more than 12,000% over this period (a 32% per year compound annual rate) as each period of doubt was replaced by renewed cycles of innovation and growth.
We believe the current predictions of the company’s demise are similarly premature and Apple remains the dominant and most innovative consumer IT vendor in the world with an unmatched product line-up, global retail footprint and commitment to customer service that creates an ecosystem of loyal users and repeat purchasers of its products. While the dominance of the iPhone (60% of the company’s revenue) as a growth engine may be waning (we expect moderate iPhone growth revenue growth over time, though likely ebbing and flowing around the company’s release schedule, in coming years) we believe that a transition to strong services, accessory and ancillary revenue growth, combined with substantial share repurchases from the company’s prodigious free cash flow, can sustain double digit earnings growth for the company for years to come.
Apple now has an active base of 1.4 billion iOS devices in use globally. That’s more than 1.4 billion devices in regular use (some estimates indicate that the average iPhone users checks their phone up to 100 times per day) on Apple’s ecosystem buying products, buying apps, and buying services. These services are comprised of revenue generated from the App Store, Apple Music, iTunes, iCloud, Apple Pay, Apple Care, Licensing, and other service related offerings. The company’s services business has been growing at strong double digit rates and is currently nearly $11 billion in revenue per quarter. We believe that on average, these services’ revenues generate gross margins that are nearly double the gross margins of the hardware business (which are nearly double the gross margins of other hardware vendors because of the premium people pay for Apple’s software). These services, and the services Apple will introduce in the future, are what drive a greater than 92% loyalty rate among Apple iOS users.
We believe that Apple’s services business can grow from 14% of revenue and 24% of gross profits currently, to 27% of revenue and 44% of gross profits over the next five years. Even with limited to no growth in total hardware sales and profits over this time (which may prove conservative as we believe that Apple is still amongst the most innovative technology vendors in the world), we believe that the growth of services revenue and profits will be able to drive double digit annual growth in Apple’s earnings. In addition, the company currently has $130 billion of excess cash on its balance sheet that management has stated will be spent in the coming years on dividends, share buybacks, and potentially acquisitions. When combined with the nearly $60 billion of free cash flow we expect the company to generate over the next 12 months (and growing with earnings in the future), Apple has the liquidity to buyback nearly a third of its outstanding shares this year alone. We believe a continued aggressive buyback program will further support double digit annual earnings growth for the foreseeable future.
We added to our position on weakness during the fourth quarter of 2018 keeping Apple among the top 5 holdings in the Fund at the time. We assumed that if Apple continued to trade at its then current valuation of about 11-12x forward earnings (a discount to the market and in-line with low to no growth IT hardware companies) we believed that Apple’s share price would still compound at the double digit annualized pace we expect for the growth of its earnings and free cash flow in the years to come. Should the market begin to shift away from a focus on the ups and downs of the iPhone cycles and towards a services view of the company (which is what we believe management is trying to emphasize in its change in reporting), Apple could trade at potentially materially higher valuations – more in-line with other secular growth technology services and software firms. As 2019 has unfolded, Apple shares have surged over 25% in the first six months of the year, recouping much of its late 2018 losses as the company has reported strong service growth and a more stable iPhone demand environment than most have feared.”
Earlier this month, we published an article revealing that Apple’s market cap is over 3X that of entire precious metals mining sector.
In Q2 2020, the number of bullish hedge fund positions on Apple Inc. (NASDAQ:AAPL) stock increased by about 4% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with Apple’s growth potential. Our calculations showed that Apple Inc. (NASDAQ:AAPL) is ranked #11 among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.