Apple (NASDAQ: AAPL ) is a great company. That’s undeniable. But for a technology company’s stock to gain “never sell” status, there has to be something special beyond what’s happening in the present. Yes, there’s great current demand for the iPhone 6, 6 Plus, and other Apple products, but the big question is, what makes Apple a good investment for the next 30, 40, even 50 years? With Apple, I think there are five answers to that question.
1. Cash galore
Apple’s biggest product is its iPhone, which accounts for nearly 70% of gross profit. Now in their seventh year, iPhones saw their latest editions selling 10 million units on their opening weekend in September, a new record.
Of course, investors must bear in mind that one day, even if it’s decades from now, iPhones will be no more. Apple will have to keep innovating. The good news is that it has the money to comfortably do so. Apple has a cushion of $ 155.2 billion in cash and marketable securities that it can spend on innovation and future growth, and that should make long-term investors feel quite secure.
2. Giving it back
As if cash weren’t good enough, Apple gives investors downside protection for holding its stock. The company has bought back $ 45 billion worth of stock over the past year and still has more than $ 20 billion left on its initial $ 90 billion buyback authorization.
If you want to know how these buybacks help investors, look at the following chart of Apple’s market capitalization versus its stock price performance over the past year.
When a company buys back stock, its share price stays the same, but its total number of shares outstanding decreases. Theoretically, if Apple were to buy back $ 10 billion worth of stock tomorrow, then its stock price would have to rise to support its current $ 630 billion market capitalization.
Since there’s no way to accurately predict the future, investors must ensure that proper precautions are in place to increase their opportunity for success. One way is by not buying an overvalued stock. While Apple’s stock has soared 33.5% this year, it’s still cheap, in part because of those buybacks I just talked about.
Apple trades at just 16.5 times trailing-12-month earnings — much cheaper than the 19.3 times earnings on the S&P 500, according to multpl.com. This gives investor a good entry point and implies that Apple’s stock will outperform the broader market in the long term.
Aside from the popular metrics, Apple has quite a large business. iTunes has 800 million accounts, and about half of those accounts have stored credit card information. No matter what direction Apple goes in the future, it already has a lot of consumers invested in its ecosystem.
According to netmarketshare.com, Apple’s iOS has a 48% share of the tablet-plus-smartphone market worldwide. Given that over 1 billion smartphones were shipped last year, Apple is a leader in a massive market, and its large ecosystem gives it a good opportunity to be a leader in any industry it enters. For long-term investors, this is a good thing.
5. The Internet of Things
Apple’s market share in an industry with over a billion devices shipped annually is nice, but think of how well Apple can perform once connected devices reach an estimated 50 billion over the next decade. With the Internet of Things, people, cars, houses, and even whole cities will be connected through devices, and IDC estimates this market to be worth $ 9 trillion by 2020.
Considering Apple is one of the biggest hardware and software makers in the world, it would seem that iOS and the 800 million-plus people already connected to iTunes would give the company a good shot to be highly relevant, if not dominant, in the IOT.
Many analysts agree that the IOT is the next big thing in technology, a movement that will evolve many years into the future as ecosystems become larger with increased functionality. This bodes well for Apple and serves as security for investors with a long-term time horizon.
For investors who view Apple as a stock to buy and hold forever, it’s important to look past the iPhone and into other areas that make the company great, as technology itself is known to change rapidly. Thankfully, the IOT serves as a big change in the marketplace, and Apple’s ecosystem gives it a great chance to lead this movement.
This, combined with Apple’s cash, valuation, and willingness to buy back stock, is why I plan to own the company’s stock forever, and why I believe the next several decades could be much better than the last.
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