exxon is still a better bet than apple

Last February, I wrote a thought exercise of sorts for CNBC.com weighing the stocks of the number one and two companies by market cap at the time, Apple and Exxon.

Apple, as you may recall, had just turned in one of the greatest quarters in history, annihilating estimates with record smashing iPhone sales. Its stock had shot up to $128/share, and just about everyone expected it to climb higher. Pundits were breathlessly debating how soon Apple would become the world’s first trillion-dollar company. Exxon’s stock, by contrast, was $88/share and not many people were touting it as a buy. Oil prices had crashed to $50/barrel, from over $100 less than a year earlier, and a recovery was seen as unlikely.

Despite these factors, I wrote that if I could buy only one stock between the two and hold it for the long term, Exxon was a better choice than Apple. A quarter later, as both companies prepared to release earnings again, I reiterated my preference for the energy giant.

So where are we now?

A little more than fourteen months after my original piece was published, Exxon has dropped to the number four company in market cap but its stock is almost exactly where it was in February of last year, $88/share. Apple has fared far worse. It never did approach a trillion-dollar market cap and it closed on Friday below $93, just above its 52-week low. All told, it is down 27 percent since my first article, underperforming every market index—and most technology stocks—by a wide margin.

I’m not recounting these results to say “I told you so.” (Except, maybe, to the guy who called me a “doofus” in the comments section of the original article.) I made my recommendation based on which company was a superior buy-and-hold investment over multiple years, if not decades. It’s still too early to be sure I was correct. But I am more confident than ever that Exxon remains the better bet, and the events of the past fourteen months have shown why.

As I wrote last February, despite its well-earned reputation for tech innovation, Apple has become “essentially a consumer products company.” That alone made me nervous about its longterm prospects. One quarter’s must-have consumer product can easily become next quarter’s bust. Worse yet, Apple has become a consumer product company “with exactly one hot selling consumer product: a phone.” With 70 percent of its revenues coming from iPhones, I worried that Apple’s stock was susceptible to a major correction if sales didn’t continue to grow. Sure enough, two weeks ago, the company reported that iPhone unit sales had dropped both sequentially and year-over-year, resulting in a 13 percent year-over-year revenue decline for its March second quarter. Apple’s stock tanked on the news. As of last Friday, it was still falling.

Exxon reported its March quarter a few days after Apple. Revenues fell 28 percent vs. last year, and earnings fell to $1.8 billion from $4.9 billion. This profit drop was not surprising, as almost every energy company has reported a decline in March quarter revenues vs. one year ago. But Exxon’s balance sheet is strong, and Exxon sells products that keep America’s—and the world’s—economic engine humming. That was true decades ago and I am convinced that it will be true decades from now.

What intrigues me about the comparison between the two companies is how they are viewed by the investment community. Apple is revered as a trend-setting company of the future, while Exxon is generally regarded as a fossil fuel-dependent dinosaur of the past. Let’s face it. Tech stocks are cool. Megacap energy stocks? Not so much. But, as I pointed out last year, Exxon has demonstrated a surprising knack for diversification and risk-taking in its own right. It moved aggressively into natural gas a few years back. This past quarter, profits from its chemical business offset lower refining profits and losses from upstream exploration activity. Exxon is an extremely well-managed company, and I have no doubt that it will continue to expand and diversify in order to maintain its dominance. Exxon Solar might sound like an oxymoron, but if (or, rather, when) solar technology improves to the point that it threatens Exxon’s market share in a serious way, you’d better believe the company will do what’s needed to become a major player in that space, as well.

Meanwhile, Apple’s product line is starting to seem downright stagnant. Its watch has underwhelmed and sales of iPads and Macbooks have stalled. Of course, this trend could reverse, and the much-anticipated iPhone 7 could crush records again. Who knows, maybe we’ll all be riding around in self-driving Apple cars in a few years. But in the near-term competition from low-end Chinese phone makers is intensifying, as is the battle with Samsung in the lucrative high-end American phone market. I’m not sure American-based investors appreciate how formidable Samsung is as a competitor. Its 2015 worldwide revenues topped all revenues from Apple, Microsoft, Intel, and Amazon combined. And while Apple has over $200 billion cash, it has to pour much of that sum into research and development or it will suffer the fate of other forgotten tech darlings like Digital General, Wang Labs, and Motorola.

Consumers of technology products are fickle, and price sensitive. Companies must constantly improve their products, or they quickly lose market share. Right now, Apple is primarily a cell phone company. Twenty years ago, Motorola was the dominant worldwide cell phone company, followed by Nokia, Palm, and Blackberry. While Apple is unlikely to fade as rapidly as those companies did–or more recent consumer flash-in-the-pans like GoPro and Fitbit–its future is certainly less secure, by a great magnitude, than Exxon’s.


5 thoughts on “exxon is still a better bet than apple

  1. Pingback: Apple vs. Exxon Mobile | Base Hit Investing

  2. John Huber

    Scott, thanks for the post. I disagree with a few of the points, and made some comments on the company at my blog. But I always enjoy your commentary on both good companies and “dead companies walking”. It prompted me to think about the two businesses, and the broader concept of predictability with investments.

    Reply
  3. Dividend Growth Investor

    It is tough to compare apples to barrels of oil ( AAPL to XOM). The thing is that both could turn out to be cyclical companies if it turns out that we are at “peak earnings” for AAPL.

    I think that the main issue with AAPL might be the risk of obsolescence – will AAPL still deliver the cool technological gadgets that consumers are willing to pay top dollar for, despite the fact that there are other competing gadgets that provide a similar functionality but at a cheaper price. I have observed sales of Apple products that stop selling well, and it is not pretty .

    Of course, if they can keep people hooked on upgrading to a new apple iphone, iwatch etc, that is great and profits and revenues will keep doing well. But what if we are at the inflection point where it is selling iPhones but there are other devices that are cooler than that?

    They do have that ecosystem that everyone is talking about too. And people do like Apple products. But a lot of people have also liked their Sony Walkmans, Blackberrys, and Razr’s. Shifts in technology occur quickly – the leader in cellphones Nokia from a few years ago had its lunch taken from Apple. If Apple can maintain its position, they will do well for shareholders. Otherwise…

    For me, Apple is in the “too hard pile”. I just don’t know who will eat whose lunch.

    But I think it would be a great case study either way. I am looking forward to reading your articles on Apple and hope you make a lot of money for your clients.

    Reply
  4. Shaun

    Scott, you mention Samsung in the post. I hear you on their size and innovation. As I understand they have an incredible series of patents relating to graphene and potential applications. Including battery technology. Have you looked at the company? The common and in particular preferred shares seem very cheap. Curious if you have an opinion one way or the other.

    Reply
  5. tech game forums

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