JOHANNESBURG  -  Huawei recently passed Apple, becoming the second largest smartphone maker in the world by sales. 

During the second quarter of this year, Huawei held 15.8% of the sales of smartphone market share while Apple had just over 12% of the market, driven in part by declining demand for iPhone upgrades. 

Given that Apple’s share price is near all-time highs, some investors are beginning to question whether we have reached peak Apple.

Global equity specialist at Bellwood Capital, David Nathanson, discussed Apple and the recent suggestions by some analysts that the company may have reached its peak. 

According to Nathanson, this highlights the issue of forecasting – which should be avoided for a number of reasons.  

“Many investors make decisions on the basis of predictions about the future – like this one – which may or may not come true. Further, even if their predictions are correct, the market might not react the way they expect, which compounds the difficulty of story-based investing.”

“Instead of making predictions or investing on the basis of stories, investors should focus on more readily identifiable preconditions that have a causal link to future return. In doing so investors should aim to identify companies that should do well through a range of future conditions.”

This is not the first time someone has called a peak. In November 2012, in an article penned for The Guardian, a former Apple employee gave several reasons why he believed Apple had peaked (the loss of Steve Jobs, the Maps debacle, etc.) and that the coming years would be a time of stagnation at the company. While the stock fell nearly 30% in the next 6 months, further reinforcing this sentiment, in the 6 years following the release of the article the stock has climbed 180% excluding dividends.

Talking points:
  • What are the preconditions of return that investors should be looking for?
In investing, there are things that are important and unimportant, and things that are knowable and unknowable. Investors should spend their time on things that are knowable and important. Predictions of the future, though often about important things, are seldom knowable.  

Instead of making predictions, investors should look to identify knowable preconditions that have a direct causal link to future return. These preconditions are business quality – profitability and financial strength – and valuation. Quality and valuation are the mathematically demonstrable causality of future return.  

A diversified portfolio of consistently profitable businesses with strong balance sheets is likely to deliver good sustainable return over time, through a wide range of future conditions. Acquiring these businesses at attractive prices is likely to further enhance this return over the long-term. With this approach, there is no need to predict the future.
  • Is Apple one of these companies “that should do well through a range of conditions”, and why?
Apple is a highly profitable business, in a good competitive position. Their balance sheet and cash flows are both very strong. While Apple is unlikely to deliver the growth of the last decade going forward, it is still likely to deliver strong sustainable return through a combination of lower growth and the return of profits to shareholders through dividends and buybacks. Apple is a high quality business.  

This doesn’t mean that there is no risk to Apple’s future, but a diversified portfolio of businesses with similar fundamental characteristics is likely to deliver better underlying business performance than the overall market.  

In terms of valuation, Apple is at the higher end of its historic price metrics, despite slower growth. Apple’s PE ratio has doubled from 10x in 2016 to 20x today, suggesting that valuation may be a drag on future total returns. While we see Apple as a high quality business, and we were happy to buy shares in 2016, we wouldn’t be buying more at the current valuations.