Big News (APPLE 4-1 SPLIT)

I had not planned to write anything on any particular company for quite a while until I covered the basics, but sometimes the news just mandates you move ahead faster than anticipated. So let’s dive right into this AAPL split news.

Yesterday, after the closing bell and on the heels of an earnings report that essentially crushed the analysts estimates for the quarter, and confirming that while delayed by a few weeks the 5g iPhone the public has been waiting for is coming, Apple did something that they have not done in six years. They are splitting the stock at a rate of 4 to 1, which sent the price roaring up a little over 6% in the after hours trading market. Apple in my own uninformed opinion stole the show for the week with this set of announcements.

What does the split mean for the investor? The split will occur on the 24th of August at which point every Apple owners shares will be multiplied by a factor of four, however this also means the price of these shares drops. It essentially resets the market for the individual purchaser of Apple who might have been holding off because of the price. With every company under the sun selling fractional shares this is not as big a deal as the last time Apple made a split of 7-1 in 2014, but I’m going to lay out the bullish case for this split here.

When Apple split last the price was around $675 and the share price after was a little under $100 a share, nothing had changed but the price for the number of shares owned and it moved above $100 a share within 3 months of the split in effect creating a $175 per pre-split gain which is a 25% return. So what do we learn about Apple from this? Apple becomes more attractive to investors at a lower price point and as discussed in my last post, investors are what drives the market. Today shares are fluctuating in the low $400s suggesting most investors are expecting a price around $100 a share after the split. Why do I believe this? Because humans like patterns and easy math, they much prefer getting a new price of $100 a share because it is easier for them to do beer math in their head about the direction and momentum of the company.

What I have asked myself is, has anything about the underlying value of Apple changed because of this announcement? Do they still have a strong durable competitive advantage or MOAT? Will people be willing to buy in for whole shares rather than continuing the process of buying fractional shares? Now I will warn here that I am merely giving my opinion and as such the analysis of these questions should not be taken as gospel. I am not a financial advisor or guru or someone who should even be given much of a second thought, but here goes. Apple itself is in the midst of a shift of revenue model from the hardware (iPhones) to services. The app store remains a strong and growing segment of the company and the services side has been steadily growing. While iPhone sales have fallen slightly they still remain strong enough to be considered when looking at the value of the company and likely the launch of the iPhone 12 with it’s 5g capability should see a rise in revenue for that segment. We all may think that 5g is still in the distant future and not ready, but I am telling you the focus of all the major providers now is how to build out the 5g network as robustly and quickly as possible. So, end analysis I don’t find any change in the underlying value of the company.

Let me address the durable competitive advantage. The MOAT Apple has is called a switching MOAT, essentially Apple has wormed its way so far into our lives and the technology that we use that changing from the iOS to another system is so painful that most are not willing to do it. Apple brilliantly created a way for all of your different technologies, phone, tv box, tablet and laptop to talk to each other and share information creating an ease of use that puts efforts of many other companies to shame. Inherently all of your platforms are linked without relying on the translation of programs and emailing documents back and forth or thumb driving them between your other devices. I switched to Android briefly after it came out and will admit it was a short lived change and have become more and more integrated into the Apple network. I like their OS, I like the ease of transition from one system to another and I’m not the only one. My wife and I were talking to a friend who recently made the switch away from Apple and there is already switchers remorse, she is just waiting for her phone to become eligible for trade in to move back. I hear this from many friends who have tried both systems. I don’t think there is anything inherently wrong with the Android, but I think Apple has spent the time to perfect their system and it shows. So no, there is no breaching of their MOAT now or in the forseeable future.

Last, will people buy whole shares at the new lower price? I think history for Apple has shown that they will and I think that the human minds love of round numbers and easy computations will actually drive a large number of people to buy in at what they will see as a price below the actual value of the company. Whether that is correct or not, I cannot say, but I think it has set Apple up with a long runway toward further Market Cap gains and with their history of doubling price every few years, I am all in. I worry about all tech companies, especially those that require creative destruction, but Apple has been pronounced dead walking for years and keeps innovating and growing, so you must pardon me if I think they may prove an exception to the rule and continue to grow against all odds.

I am long in AAPL and have increased my position within the last 72 hours, with plans for a possible further investment within the next 72 hours. This review is not paid for at all and represents my opinion only, it should not be taken as financial advice or a recommendation to buy or sell shares of the listed position. I am writing this for education and entertainment purposes only.

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