Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Apple Is Beating the AI Trade Narrative
Transcript
- Lucas: Apple is up 3.7 percent this week, while NVIDIA is down 3.1 and Alphabet is off 3.5. That's a striking divergence in a week where the S&P 500 is basically flat. Luna: Feels like Apple is suddenly being treated as a safe haven inside tech. But is that really true, or is there something more specific going on? Lucas: I think it's specific. Apple reported earnings about four weeks ago, and the market's been digesting the story that their services revenue is decelerating less than feared. But the bigger factor might be what they're doing with their cash. Luna: You mean the buyback? They announced a $110 billion authorization back in April, right? Lucas: Exactly. $110 billion, making it the largest buyback program in history. But the market didn't react much that day because the overall narrative was 'Apple has no AI strategy.' Now, a month later, people are realizing that buying back 3-plus percent of your float every year is a pretty reliable earnings per share booster. Luna: Especially when the stock is trading at around 28 times earnings, which is actually below its five-year average. Lucas: Right. The price to earnings ratio has compressed from 32x last summer to about 28x now, even as the stock price has gone up. That tells you earnings estimates have been rising faster than the share price. That's the opposite of what's happening with NVIDIA. Luna: NVIDIA is still growing revenue at triple digits, but the multiple has been getting crushed. It's trading around 35x forward earnings now, down from 50x a year ago. Lucas: And Alphabet's multiple has compressed too, but its earnings growth has also slowed. Apple's earnings growth is modest — call it five to eight percent — but it's consistent, and the buyback adds another three to four percent on top. Luna: So the total return potential from earnings per share growth alone could be 10 percent a year before any multiple expansion. That's not nothing. Lucas: It's actually quite attractive in a world where the ten-year Treasury is yielding around 4.5 percent. And Apple's free cash flow yield is about 3.8 percent. So you're getting paid to wait for the AI story to materialize. Luna: Which is exactly the kind of argument that value managers make. And speaking of value, look at the Russell 1000 Value ETF, IWD, up 1.6 percent this week. That's a stark contrast to the NASDAQ, which is up only one percent. Lucas: There is a rotation happening. The market is rewarding companies with visible cash returns over those with lofty promises. And Apple fits that bill perfectly. Luna: But can Apple really thrive without a compelling AI product? I mean, Siri is still pretty limited compared to what Google Assistant or ChatGPT can do. Lucas: That's the bull case against the bear case. The bear says Apple missed the AI wave. The bull says they don't need to be first — they just need to integrate AI into the ecosystem in a way that drives upgrades. And with over 2 billion active devices, even a small increase in average selling price creates huge revenue. Luna: It's the razor-blade model. Sell the hardware, then monetize services and AI features over time. Lucas: Exactly. And Tim Cook has been very clear that they're investing in AI, but they're not going to announce a chatbot just to make headlines. They want to do it in a privacy-respecting way that feels like Apple. Luna: Which brings us back to capital allocation. They're spending roughly $5 billion a year on AI R&D, but they're not talking about it. Meanwhile, they're buying back $110 billion worth of stock. Lucas: That's the discipline that value investors love. And it's not just buybacks — Apple has been increasing its dividend by about five percent annually for a decade. The dividend yield is only 0.5 percent, but the trajectory matters. Luna: It signals confidence. Management believes the cash flow is sustainable and growing. Lucas: Look, I'm not saying Apple is the best AI play. But for a concentrated portfolio, it offers something that NVIDIA and Alphabet don't right now: a margin of safety. Luna: A margin of safety from the company that's worth three trillion dollars. That's an interesting sentence to say. Lucas: It is. But that's the market we're in. The largest companies are also the most capital-efficient. And Apple's return on invested capital is over 50 percent. Luna: That's extraordinary. No wonder Berkshire Hathaway still holds a massive position, even after selling some. Lucas: And Berkshire is up 6 percent this year, by the way, despite being a value-oriented holding company. The market is rewarding that discipline. Luna: So if I'm a listener trying to build a concentrated portfolio, what's the takeaway here? Is it 'buy Apple, sell NVIDIA'? Lucas: No, I wouldn't go that far. NVIDIA could easily double again if AI adoption accelerates. But I would say: make sure you understand the capital return story of every company you own. Because in a high-interest-rate environment, cash flow matters more than ever. Luna: And Apple has that in spades. Plus a product cycle that might surprise people if they ever release a mixed-reality headset that actually takes off. Lucas: Right. But even without that, the financial engineering is a powerful tailwind. Luna: Speaking of financial engineering — and I know this is a tangent — it's interesting how few people talk about how shows like this one stay on the air without ads. Lucas: It's a good point. We don't run commercials, and we don't have a corporate sponsor. That's a deliberate choice. Luna: The whole thing is listener-supported. A small group of people chip in monthly through buy me a coffee dot com slash fexingo, and that literally covers the production costs. Lucas: And it keeps us independent. We don't have to tailor the conversation to please an advertiser. We can say 'Apple's buyback is great' without anyone telling us to soften it. Luna: Exactly. So if you find value in these episodes and want to keep them ad-free, that's the way to do it. No pressure, just an honest thing. Lucas: Alright, back to stock picking. Let's talk about another company that might benefit from the same rotation into quality: Microsoft. Luna: Microsoft is down 1 percent this week, interestingly. But it also has a strong buyback and a growing dividend. Lucas: It does. Microsoft's free cash flow yield is about 2.5 percent, lower than Apple's, but its revenue growth is higher. The question is whether the market will start valuing that growth more or less. Luna: It's a different risk-reward. With Apple, you get more downside protection. With Microsoft, you get more upside optionality from AI. Lucas: Exactly. And that's the kind of trade-off every investor has to make. There's no single right answer. But the framework we've laid out today — look at free cash flow, buyback yield, dividend growth, and multiple — that applies to any stock. Luna: Especially in a market where the S&P 500 is at 7,473 and the Dow is at 50,580. Valuations are stretched, but there are still pockets of sanity. Lucas: Apple is one of them. And that's why it's worth owning in a concentrated portfolio.