The coronavirus continues to ravage the U.S. economy. Cases are still largely rising in parts of the south and some states have even paused their reopening plans. Needless to say, the economy may take a bit longer to recover. Even so, there are certainly bright spots in the market. Some big tech firms are defying the trend and even growing their revenue during these unprecedented times. One such company is Apple Incorporated. Apple (AAPL) managed to grow revenue by 1% YOY and earnings by 4% in Q2. This shows incredible resilience in the face of the worst economic environment in a century. Apple is turning this crisis into somewhat of an opportunity as consumers transition to a stay-at-home/work-from-home lifestyle.
Apple is now my #3 holding due to the massive growth since 2018. P&G and Fastenal are my top two holdings. If this growth trajectory holds, Apple might be my number one stock by years end. This is largely due to Apple transitioning from hardware to software and services. For instance, iPhone revenue fell 7% for the recent quarter, but the company still managed to grow revenue. Services includes iCloud Storage, Apple Music, and a variety of subscription offerings. Growth is expected to continue as Apple TV+ and their streaming service continue to be rolled out. Even better, the company hiked its dividend payout by 6%. And while the dividend is small, there is plenty of room for growth.
Financially, the company is basically printing money! Apple has an absolutely monstrous $192.8 billion in cash; slightly down from its $207 billion in fiscal 2020. Despite the dividend rising 6%, the company is only paying out 25%. Apple carries a debt-to-equity ratio of 1.14 and has approximately $109.5 billion in debt. This indicates Apple is in an extraordinary position. Even if earnings weren’t growing in 2020, the company can pay off its debt on a nearly 2 to 1 basis. The price for such a solid company is certainly not cheap. Most analysts conceded Apple to be fairly valued or slightly overvalued. This is likely to be because Apple, and other tech giants, have become a safety play. As public and private organizations transfer to digital work environments, companies like Apple become even more important.
It’s weird to witness this paradigm shift in the market. Millennials are driving prices almost as much as large hedge funds. In addition, new trends continue to develop, reorganizing the economy. Information technology appears to have taken the place of consumer staples and utilities as being the #1 safe haven. Many of these companies, like Apple, have strong balance sheets, innovative product lines, and are positioned perfectly for the work-from-home lifestyle. For the most part, tech is the only sector driving the market! Such companies are experiencing growth as the rest of the economy struggles. This is why diversification is so important! I personally didn’t have much IT exposure until I started building positions in 2018. After all, they paid smaller dividends. But now, those positions are finally paying off.
I am long on PG, FAST, and AAPL. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.