- Famous hedge fund manager Leon Cooperman recently said that Apple is likely to shrink over the next 3-4 years.
- The investor said he prefers Facebook and Google to Apple.
- But just how accurate is this view over the long-term?
Omega Advisors CEO and famous hedge fund manager Leon Cooperman recently featured on CNBC where he discussed the outlook for a number of companies. When asked what it would take for him to buy another big stake in Apple Inc. (NASDAQ:AAPL), Cooperman said that he just cannot see anything that is likely to become big enough to replace the iPhone and added that Apple is likely to shrink over the next 3-4 years. Mr. Cooperman though noted that Apple still retains the ability to generate high levels of cash, but said he prefers investing in companies with more visible growth such as Facebook Inc. (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG).
Cooperman dropped his stake in Apple last year after selling 384,000 shares amid fears that the company's growth was slowing. Interestingly, the iPhone continued selling well. Mr. Cooperman then flip flopped on the stock when his hedge fund bought 227,000 shares worth $24.7 million during the first quarter, though he got his timing wrong again since the iPhone has posted double-digit decline over the past two quarters. Apple shares hit a two-year low after the second quarter earnings report confirmed the trend of flagging sales and revenue.
Mr. Cooperman addressed a burning question for many long-term investors: whether to invest in a mature cash cow like Apple or a growth stock like Facebook.
Revived growth at Apple
Apple's growth woes are well documented. The hardware division, comprising of iPhones, iPads, and Macs, is the company's lifeblood. But all three segments have not been doing well, with the iPhone being particularly badly hit.
The newly released iPhone 7, however, has given a new lease of life for Apple stock, which climbed 12% in one week following the launch. That marks the strongest one-week gain by the stock since October 2011. Although Apple recently said that it will no longer disclose first weekend sales metric for the iPhone, current indications are that the latest iPhone is selling well. Nearly all major carriers have released encouraging order patterns for the new iPhone, with AT&T CFO Walt Piecyk tweeting that iPhone sales volumes were up on a year-over-year basis. Smaller carriers Sprint and T-Mobile have likewise reported strong opening demand for the device. Only Verizon, which had early access to the iPhone before the smaller carriers, has reported that 'it's business as usual.'
Although it's too early to say definitively whether iPhone 7 sales trend will continue to remain this strong, sales trackers such as Fiksu iOS Tracker have shown that first-week sales are a pretty reliable indicator for long-term sales. That's great news for Apple bulls. If the iPhone is able to help Apple return to growth, it will dispel the fear that we have seen peak iPhone.
Apple stock is now firmly in the green after that rally with a YTD gain of 5.8% (Sep 20 closing price).
Facebook is growing like a weed, but...
Facebook is still growing like a weed 12 years since its founding. Over the past 12 months, the company's top and bottom lines have expanded at a 51% and 85% clip, respectively.
It's the company's user growth, however, that has continued to impress. Despite its gargantuan size, FB's userbase is still growing. During the last quarter, Facebook posted 15% growth in MAUs to 1.77 billion. Facebook now boasts three platforms with more than a billion monthly users--core FB, WhatsApp, and Messenger. The company's global Average Revenue per User, or ARPU, expanded 33% to $3.73.
The biggest reason why Facebook has been able to maintain an impressive growth clip for long lies in its ability to continue growing its userbase and improving the ROI of its ads which have helped to command higher CPM rates from marketers.
But it's quite obvious that FB will have trouble maintaining that kind of growth for a long stretch. According to internetlivestats.com, there are 3.5 billion Internet users in the world, with the userbase expanding at just 7.5%. This implies that Facebook is currently growing at double the rate at which Internet users are growing, and has already covered half the addressable market. A reasonable assumption to make is that FB's user growth will soon begin to approximate Internet user growth, which itself has been consistently falling. That does not seem to be a stretch when you consider that Facebook's MAU growth four years ago was double today's rate.
Facebook will possibly be able to continue growing its ARPU at a healthy pace over the next five years or so, but not fast enough to completely offset the slowdown in user growth. Facebook certainly has good growth runways ahead if it's able to monetize Instagram and WhatsApp better. But it's hard to see those platforms becoming as popular and ubiquitous as Alphabet's YouTube. Given that Google already has six platforms with more than a billion users, and most marketers still rate Google ads as having the highest ROI for online ad platforms, it's quite likely that Facebook's growth will begin to approximate Google's about 5-7 years down the line.
Apple stock could be better than FB over the long-term
And there lies the biggest long-term risk for Facebook. Facebook might have trouble growing into its steep valuation. A JPMorgan study of the stock market over a 30-year period has shown that stocks with rich valuations, such as Facebook's PE of 61.7, more often than not fail to grow into their valuations leading to the stocks underperforming their peers over the long-term.
Apple has a relatively low PE ratio of 13.7, a dividend yield of more than 2% and good prospects to grow the dividend at a 9% annual clip over the next decade. That gives AAPL stock a possible annual return of 10.2% over the next decade as I explained here.
Facebook's impressive growth is likely to help the Facebook stock to outpace Apple stock over the next five years or so. But over a 10-year period, Apple stock presents better long-term visibility and lower risk than FB stock.