Apple & Disney: Similar past, Similar Issues, Similar Future

Summary

Both stocks are taking a beating lately on the market and they share the same issue at different levels – technological evolution.

Both companies must please spoiled, greedy and very demanding investors.

Both stocks had hit their all-time high in 2015 and both are strong buysat the moment.

 

Between July 15th and August 6th, both companies lost nearly 10% on the stock market. Is it something that will continue this fall? Is it time to let these two companies go as they had hit their all-time stock price highs not so long ago? By looking at their similarities, we will better understand what happened recently and what will happen next.

AAPL and DIS

Source: Ycharts

Apple (AAPL) and Disney (DIS) share a lot more than their Californian roots. They obviously don’t operate in the same environment, but the sources of both their successes and recent issues are tied to the same reasons. Let’s explore what two of the greatest American successes share in common.

 

Back on the Rail through Bold Moves

Historically, both companies were going nowhere not so long ago. In 2001, AAPL was going nowhere with their Macbook products. But Steve Jobs came out of nowhere and introduced the first iPod in October 2001. This evolution in the company led to the “iSeries” with its most popular product; the iPhone. Since then, the stock gained over 10,000 percent… yes 10,000.

Back in 2005, DIS animation studios were going nowhere and the company was counting solely on ESPN to generate growth. New CEO at that time Robert Iger, decided to make one of the boldest moves in Disney history; spending $7.4 billion to buy Steve Jobs’ Pixar Animation Studios (what a coincidence!). Iger also bought Marvel and Lucas Film later on to generate even more growth. Since then, the stock has grown by over 400%.

This is obviously not as impressive as what AAPL did on the stock market, but for a company that is almost 100 years old and is not evolving in the fast growing techno sector, it is quite a feat.

 

The Client at the Center of All Strategies

It is not a surprise that the world’s most valuable brand is Apple, but did you know that Disney is 11th on this prestigious ranking right before AT&T, Amazon, Nike and Walmart? (Source Forbes) The reason why these two brands are so strong is definitely because they share the same level of attention towards their clients.

This is also why both companies are ranked #1 (APPL) and #5 (DIS) for best customer experience (source Huffington Post).

Both companies share an obsession about details to create the most amazing experience for their clients. This is why families going to a Disney Park will be planning their next trip the day they arrive home and why Apple customers are eager to buy more Apple products than any other customer for any other ecosystem.

Counting on an enormous fan base is crucial when you launch new products and this is a great part of both companies success.

 

Perfect Product Ecosystems

As an investor, one thing I like more than a strong brand with great customer service is a company offering 10 different products that all go together. Apple has designed the most “perfect” product ecosystem where each piece can interact with another. At home, we have iPhones, ipods and ipads… now we are considering buying a Mac to fully integrate our setup.

Disney works the same magic with their production. They don’t produce a movie like any other company. They produce the movie, create an animated series, sell you various toys and other derivative products on top of creating a whole amusement park based on what you saw, purchased and liked.

The product ecosystem is becoming more and more important these days as people don’t have much free time on their own. If a company can offer various products connecting to each other and solving several needs, the customer will run towards this dealssaving amazing cost & time.

 

High Dividend Potential

From an investor’s perspective, both companies are two cash money making machines that never sleep. I only purchase dividend stocks with a yield between 2.5% and 5% as I qualify myself as a dividend growth investor. I’ve made two exceptions in my portfolios with AAPL and DIS paying close to 1.5% each. Both companies show payout ratios around 20% and have lots of cash to share with investors:

AAPL and DIS dataSource: Ycharts

 

Techno-Evo Concerns

The reason both stocks went down recently was the same one: concerns around technological evolution. Apple is selling less iPhones recently due to China’s macro-economic problems. The company didn’t share much iPhone improvement features to come that would be boost sales on a short term basis. Its latest product, the iWatch, doesn’t show enough technology improvements to convince consumers to have a watch on top of an iPhone.

As for Disney, ESPN worries investors. The recent switch of customers moving away from classic cable TV to go on the web or pay for streaming services reduces ESPN viewers at the same time. Sports show productions is a cost prohibitive business and the company can’t count on a growing member base anymore.

In both cases, technology evolves so fast that it changes existing markets, creating new ones and smashing parts of it (anyone remember what happened to the famous Blackberry?).

However, as far as I’m concerned this is only noise around two of the most impressive companies ever managed. The real problem right now is that investors have become excessive with their expectations and probably think both companies will continue to skyrocket forever.

 

Sources of Growth for the Future

Both AAPL & DIS customer (fan) bases are not going to erode in the near future. The fact they have created strong brands with excellent customer service put both companies in a separate class for most people. They also have created two almost perfect product ecosystems where each product not only connects to another but encourages more purchases. The upsell stream is done at home while people are using APPL and DIS products.

Apple will definitely continue to generate enormous amounts of cash flow from its “iseries”. However, I don’t expect the company to skyrocket as it used too. We will probably see more dividend increases in the future and the company may eventually look more like “Microsoft” (MSFT) than a booming tech. Still, the company could become a dividend champion sharing the wealth with their shareholders for several years to come.

As for Disney, growth will come from the next Star Wars trilogy and a second Frozen movie. These two brands are big enough to support multiple derivative products for years to come. ESPN will continue to remain an important part of DIS but I think the growth will come from the “core business” – family entertainment.

 

Both Great Buying Opportunities

At the moment, investors benefit from a break in a long stock price increase trend. This is a great moment to buy both companies as they will bounce back shortly.

 

Disclaimer: I’m long AAPL & DIS