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Apple is no longer a company, it’s an ecosystem
Technology investment

Apple is no longer a company, it’s an ecosystem

Portfolio managers from Janus Henderson and M&G comment on the U.S. tech giant’s most recent accomplishment, and look towards upcoming tech industry trends.
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20 AUG, 2020

By Constanza Ramos

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This week Apple has crossed another milestone, becoming the first publicly traded U.S. company to reach a $2 trillion market cap. The news confirms the continued dominance of tech stocks in global markets and how large tech companies like Apple have been largely shielded, while some have even thrived, from the pandemic and resulting economic shutdown. Apple shares are up about 60% year to date, pushing through a coronavirus pandemic that has battered many companies.

Below we highlight commentary from Alison Porter, portfolio manager at Janus Henderson, and Randeep Somel, associate fund manager at M&G, who describe how Apple, and the wider tech industry, are likely to continue to benefit from increased digitalization and product integration, even in the face of greater regulatory pressure.

Alison Porter, portfolio manager of Global Technology funds at Janus Henderson

Covid 19 has mandated a digital lifestyle for us all. Apple is a gateway to this, an integrated platform for the development of app usage which goes far beyond the original uses of voice calls and texts.

Unlike its fellow large cap FANG names ( Facebook, Amazon, Netflix, Google as well as Microsoft ) Apple has traditionally traded at a forward price-earnings ratio (P/E) below that of the broader equity market. The maturity of the smartphone market, elongating replacement cycles for iPhone, contracting gross margins on the iPhone and the “mother of balance sheets” (net cash reached over $150bn in 2015-16) that was not utilised for M&A, or for significant buybacks, all made it a poor relation to the other FANGs.

However, since the start of 2019 a curious thing happened; iPhone revenues in 2019 actually fell, but rather than resulting in  underperformance it marked the beginning of a new era for Apple. The growth of the high margin services division comprising: music, licensing, the app store and licensing (from Google), as well as Apple Care, and the more recently launched Apple TV and News combined with the rapid growth of the wearables category (Airpods and Apple watches) offset iPhone weakness. This helped to shift perception of Apple from a single product cycle company to an eco-system and platform that deserved to be more highly valued. This also coincided with the company committing to use its balance sheet more aggressively to buyback stock and enhance its dividend.

Further, while the company has developed other engines of growth in services and wearables, it now sits on the cusp of another major new iPhone product cycle, with the likely introduction in late 2021 of a 5g iPhone – now being anticipated by investors. The company has vertically integrated and committed to manufacturing its own processors, which should allow for another round of innovation; with other new product categories (more wearables) likely in the near future.

The company now trades on a higher P/E than either Facebook or Alphabet which have historically growth at a faster rate. Apple also now trades at a premium to the broader equity market, so going forward, upside to earnings we believe will have to be the key driver of the shares rather than the P/E. “

Randeep Somel, associate fund manager for M&G Global Select, M&G Pan European Select and M&G Positive Impact strategies at M&G

Apple’s new milestone today reflects the progress of the FAANG stocks in recent years, as well as consumers’ increased focus and reliance on technology more recently since the outbreak of the pandemic. However, while this has been very positive for technology large cap technology companies, the future outlook for the sector is less clear. Most notably, the increasing size and influence of these companies has brought with it greater scrutiny from regulators. The ability of technology companies, all of whom are sitting on vast cash reserves, to buy out new/challenger technology companies going forward will not be as easy as it has been in the past.

The large cap technology stocks are falling under greater scrutiny of regulators, as shown by the US congressional hearings on antitrust in July this year. The CEOs of Facebook, Alphabet (Google), Apple and Amazon were all remotely summoned to answer questions on the power of their companies ranging from use of data, pricing, and the treatment of smaller competitors. Technology platforms are very strong, but they have buttressed their positions by acquiring smaller competitors, such as Facebook’s acquisition of Instagram and Whatsapp. If there is greater scrutiny of large cap tech acquiring smaller companies going forward it will allow smaller companies to challenge and provide greater competition. As such, whilst the potential purchase of TikTok may also allow Microsoft to get footing in social media with an existing platform, an area that it has lacked relative to some of the other large cap tech companies, due to competition rules its main competitors would not want the public scrutiny of such an acquisition (Microsoft was not part of the congressional anti-trust hearings).

In terms of secular trends, the cloud/public computing businesses will continue to serve Microsoft (Azure) and Amazon (AWS) well.  They are two companies that invested early and are now already seeing the benefits of scale. The longer office workers continue to work remotely from home, the increased likelihood we have that this becomes a more permanent fixture.  This benefits cloud operators as companies scale down on-site presence (including own servers), and continue moving them to the cloud.  

Picture studios releasing films to on-demand (and not exclusively) to cinema first will embolden the appeal of platforms such as Netflix and Amazon Prime. Although original content providers are producing their own direct to customer platforms such as Disney+.

The upcoming rollout of 5G will be a good opportunity for handset makers to refresh their products with new technology and provide a strong update cycle. This should benefit Apple.

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