Why David Rolfe Sees Value in Apple
Guru David Rolfe (Trades, Portfolio) has been managing Wedgewood Partners for the last 18 years. He's a very good value and ownership-oriented manager, and I like to keep tabs on his portfolio and his views about certain companies. He just appeared on CNBC where he talked about Apple (AAPL), which is a stock that is very confusing to me, and which I have discussed just last week on GuruFocus.
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The intrinsic value of AAPL
To give you some context, Wedgewood's investment philosophy is built on the belief that long-term wealth will be created by investing as "owners" in companies. This is something Warren Buffett has preached throughout the years. Portfolio companies need to meet the following standards (see GuruFocus profile):
1. A dominant product or service that is practically irreplaceable or lacks substitutes.
2. A sustainable and consistent level of growing revenues, earnings and dividends.
3. A high level of profitability, measured by return on equity without the use of excessive debt.
4. A strong management team that is shareholder oriented.
Depending on how strict you are in your interpretation, Apple meets or doesn't meet the above rules. I could argue against Apple providing an irreplaceable product or lacking substitutes, but Rolfe clearly believes its products do meet this standard.
He also thinks the stock is really cheap at $97. For this to be a correct price, iPhone sales in the second quarter need to fall below 40 million. iPhone sales for the full year of 2016 need to fall back from an estimated 250 million to 200 million units, and earnings need to go back to $9 per share. Rolfe believes this is a very bearish interpretation, and for one thing, there is a new cheaper version of the iPhone coming out early 2016 that some customers may have been waiting for, and which may have put some pressure on the sales of the current models. If you are wondering why this is all about iPhones, that's because approximately two-thirds of Apple's revenue is coming from the iPhone. It is true, however, that the company is making a ton of money on other products that are in high demand.
As Rolfe describes it, the bear story right now is that we are at peak iPhone usage at 500 million users. If this story is true, you need to wonder if Apple is failing to take market share from Android. Is there going to be enough interest in the iPhone 7? Rolfe doesn't dispute we are seeing bad iPhone adoption rates, but does not see a reason to extrapolate that performance into the future.