Terry Smith has initiated a small position in Apple in his Fundsmith Equity fund, despite previously expressing concerns about the stock.
The manager also purchased a stake in elevator firm Otis, after selling out of its competitor Kone.
In 2020, Smith claimed that Apple owed its past performance to the work of founder Steve Jobs and said he was uncomfortable with the way its press releases focused on iPhone sales while overlooking metrics such as cashflow and turnover.
He expanded upon this theme in an interview with interactive investor, recorded in March last year.
“What scares me with Apple is that I lived through the rise and fall of Nokia, and I heard all the same reasons why we shouldn’t worry about a consumer electronics business reverting to mean returns because it was ‘an ecosystem’,” he said. “Maybe it is, and maybe I’m wrong, but it does worry me.”
The manager also had concerns about the sustainability of its business model, saying: “It seems it is driven at least in part by the need to continue to churn out the next nice flat device with rounded corners that you want to buy, even though it’s the same as the last one roughly speaking. It worries me.
“And it worries me you could get to the day where you don’t have a guiding single mind at the top of the organisation. But I might be wrong.”
Smith’s purchase of Apple may be regarded as an admission that he was indeed wrong. Apple has consistently beaten analysts’ expectations, and its quarterly results, released last Thursday, were no exception.
Revenue rose 8.1% to $90.1bn, compared with analyst expectations of just under $89bn. Product and services net sales increased, with iPhone sales jumping 9.7% to $42.6bn. There was growth in all regions apart from Japan.
This bucked the trend of a fall in global smartphone sales – for example, they fell 9% year-on-year in the second quarter, according to data analysis firm IDC.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said Apple’s ability to sell expensive hardware in the current environment “defied all the rules”.
“At a time when US savings rates are plummeting and borrowing is rising, it doesn’t add up that customers are still flocking to Apple’s products,” she commented.
“Yet this is the situation quarter after quarter, with the ceiling of Apple’s appeal still seemingly out of reach.”
However, she warned that the height of that ceiling may become clear when Apple releases its quarterly results in January.
“The key festive season is a crucial barometer for consumer sentiment, and there’s a possibility Apple is going to lose some steam year-on-year when it comes to Christmas sales,” the analyst added.
Apple’s shares have risen by about 7% since the results were released but are still down about 16% this year.
Performance of stock vs index in 2022 (share price only, in $)
Source: Google Finance
Lund-Yates said that beating analysts’ expectations would usually have provoked a better reaction in the company’s share price. However, she said that in the current environment, it takes something spectacular to get investors excited.
By that token, she said that avoiding a sharp sell-off following the results was “a genuine accolade”.
The analyst added that one unhelpful development has arisen from an EU ruling that will force Apple’s iPhones to switch over to USB-C chargers.
“Over a billion people already have a device that uses Apple’s Lightning chargers, so this is not a happy change for the tech giant,” she explained.
“Having unique charging systems is another way of backing Apple customers into a corner, which equates to more revenue, in much the same way the group’s digital ecosystem of apps and hardware does. This isn’t going to knock Apple off the rails, but it’s an unhelpful changing of the tracks.”