Cramer's Investing Club Stock Profile: Why we own Apple and don't trade it

Published Tue, Jan 18 202212:48 AM EST

Members should be familiar with our view of Apple by now: Own it, don't trade it. Our reason for this is predicated on several key factors. Services The services business has grown into a highly profitable and resilient revenue stream (70% gross margin versus products at 32% gross margin) that has resulted in a robust ecosystem with high "switching costs" for users. Wall Street rewards recurring revenues and moats; the greater the share of services and the deeper the ecosystem, the greater the valuation support. Balance sheet Apple maintains one of the strongest financial profiles on the planet, a AAA credit rating from Moody's. Moreover, in the fiscal year 2021, Apple generated $94.68 billion in net income and $104.04 billion in operating cash flow. Back out capital expenditures and free cash flow comes in at $92.95 billion. So, not only is Apple reporting GAAP earnings (none of that adjusted stuff) but it is nearly entirely backed by cold hard cash. Capital returns Apple's strong cash flow profile brings us to our third reason to own it long-term, management maintains a "net cash neutral" stance over time. That means if cash doesn't go toward growth investments, it ultimately makes its way back to shareholders via dividends or buybacks. In the case of buybacks, earnings per share grows even faster than net income because Apple is constantly pulling shares out of the market. This rewards long-term investors with an increasing share of profits over time. Innovation Some claim Apple lacks innovation, but we disagree. Apple is one of the most creative mega-cap companies on the planet in terms of user privacy (supportive of Apple's goodwill). And while Apple is rarely first to release a new product type, when it does it's usually the most refined and polished on the market, thus allowing it to maintain the premium brand appeal and pricing power. Potential catalysts We don't include this as part of our core underlying investment thesis, but we're anticipating new product launches in the next few years, including an entry into the AR/VR headset market and the electric vehicle space. Apple's monster cash flows and a solid balance sheet means it can spend billions investing in new end markets and growth opportunities. Risk factors While we disagree that Apple has thus far failed to keep up with the pace of innovation of other tech, a failure to develop more breakthrough products in the future is a risk for any technology company. Competition is always a risk, especially a consumer products company; remember when Nokia handsets were all the rage? Execution on new product launches is another risk. Apple typically forgoes the first mover advantage in order to make the best product, but that may not always work. Lastly, we must call out the risk of inflation. While Apple has been able to maintain pricing power thanks to its premium brand appeal, we monitor for any indication that's slipping in a prolonged higher-rate environment. Bottom line We believe the competitive and rapidly growing services moat, rock solid financial profile and pro-shareholder return and customer privacy policies are all reasons to own Apple for the long-term. As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED. (Jim Cramer's Charitable Trust is long AAPL.)

Tim Cook introduces iPhone 13

Source: Apple Inc.

Members should be familiar with our view of Apple by now: Own it, don't trade it.