Why Magellan is eyeing Apple for the long haul

Apple’s transformation from a tech firm to a subscription-driven services company has impressed Magellan.

Magellan chief executive and chief investment officer Hamish Douglass. Picture: Hollie Adams

Apple’s transformation from a technology company to a subscription-driven services company has made it a firm favourite of one of the country’s most successful fund managers, Magellan Financial Group.

Magellan chief executive and chief investment officer Hamish Douglass noted the stock was trading at a 30-40 per cent discount to the US market after a poorly received launch of wireless buds to go with its jack-free iPhone 7.

Speaking by video from the US, Mr Douglass said the company had developed “a whole ecosystem of immense scale — around its apps, payment services and wearable devices — that was not fully appreciated by the market.

“It is one of the most strategically advantaged monopolies in the world and it is going to grow into the future,’’ Mr Magellan told the Sohn Hearts & Minds conference at the Sydney Opera House.

Investors paid too much attention to the quarterly sales figures for new iPhones and other products, rather than looking at the “installed base” of iPhone users which, while not published by the company, is estimated by Magellan at 520 million people.

IPhone sales have gone from 72 million in 2011, with most of those customers new to Apple products, to 210 million in 2016. But 70 per cent of new phones were sold to existing customers who were upgrading to newer releases, with the rest going to new customers.

“There has been an inversion from new customers to exiting customers buying new phones,’’ he said.

As well the company had created “native” apps such as iTunes, iPhoto and cloud storage that made it hard for customers to switch, as well as generating monthly subscription revenue from a growing installed base.

Apple shares were down 8.85 per cent since October 25 amid fears of a consumer backlash against new wireless ear buds and phone and laptop computer launches that removed earphone and USB jacks, forcing customers to buy accessories to make them compatible with existing devices. It is trading at a forward price/earnings ratio of 11.9 versus 16.7 times for the S&P Index of leading US stocks.

Mr Douglass said that if just 12 per cent of the installed base bought ear buds it would add $10bn of revenue and contribute to a $100bn business in “wearable’’ technology. He noted the company had been successful in getting users of products with the rival Google Android operating system to switch over.

The payments system, Apple Pay, was another potential $200bn business that was in its early stages. And the company is sitting on $150bn of net cash.