Still Long, But Growth Is Slowing

For the last few weeks, diehard fans have watched their Apple (AAPL) stock struggle to keep pace with the broad market. Once a leader and must own stock, AAPL has become a concern of late especially since disappointing investors with its last quarterly report. Look, I love the company and its products and still own half my position, but to deny that growth is slowing is living in denial if for no other reason the law of large numbers comes into play. To grow at just 10% its market cap will increase by $35 billion per year. That’s more than the entire market capitalization of Starbucks (SBUX) with over 17,000 stores worldwide.

The real cause of the slowdown is also its biggest source of strength. Apple has crossed over from a manufacturer of cutting edge products for high tech enthusiasts to must have tools for the mainstream. Just walk into any Apple store today and look around the floor. A few years ago the store was flooded with early adopters eager to get the latest technology and remain on the cutting edge. Those people are still there but represent a much smaller percentage of the overall base. Today the store is filled with grandmothers and grandfathers, all part of an older generation who are making the plunge for the first time. The iPad has made computing so easy they can now join the information age.

So what’s the problem, you say? At first I couldn’t see it either and then a light bulb went off. Like a junkie in need of a fix, I am one of those high tech first adopters drawn into the store like a zombie to get the latest upgrade or new model. However, your grandmother and grandfather won’t have the same urge. An increasingly larger audience will hold onto their new found toys for a considerably longer time. They will not feel the urge to upgrade as often.

This slowdown in the growth rate isn’t completely lost by analysts covering the stock. Take a look below and you can clearly see it in the estimates:

Analysts are projecting a slowdown in Apple's Top and Bottom Line.

click to enlarge

Apple’s revenue growth is expected to slow from 27% in 2012 to 16% the year after. Current estimates are predicting just 9% growth in earnings for 2014.

So what does all this mean for the company and its stock? The churning in the stock since its disappointing quarterly report a few weeks ago implies that the shareholder base is changing. Momentum investors looking for accelerating growth are clearly getting out as AAPL no longer meets those criteria. The handoff is being made to GARP (Growth At the Right Price) investors. For the faithful I would look at the top institutional shareholders page and wait for the names to change before adding to positions. Maybe today’s move to the upside means the handoff is almost complete. We’ll see.

Before you AAPL assassins put out a hit on me forcing us to beef up security here in Greenwich, consider this. Apple is a company that makes great products. It is not a religion although many of you may believe that. An investment in a stock permits you to participate in the earnings stream and dividends of a company and nothing more. This is still a great company and should continue to innovate for years, but it is NOT and WILL NOT be the hyper growth company of years gone by.

Disclosure: I am long AAPL.