Alphabet And Apple: Latest Quarterly Results

The past week had seen some notable technology companies reporting their quarterly earnings. For this post, I will look at the two holdings which I had declared must-haves for an investor who is venturing into the United States (U.S.) market for the first time, and we will see if this trend continues to be so.

Apple MacBook showing Google website (Picture credit: Firmbee from pixabay.com)

Alphabet

On 29 Oct 2024, Alphabet had announced stellar third-quarter earnings, with earnings per share (EPS) and revenue beating estimates by 14.6% (US$2.12 vs US$1.85) and 2.3% (US$88.27 bn vs US$86.30 bn) respectively. Overall, revenue increased by around 15% year-on-year (YOY), with the Cloud segment revenue jumped nearly 35% YOY. Other major segments such as Search Advertising, YouTube and Google Play increased 12%, 12% and 28% YOY, respectively.

The share price jumped to above US$180 before settling at US$172.65 by the week ending 1 Nov 2024. This represented a year-to-date (YTD) performance of +22.51%.

Apple

Apple announced their fourth-quarter earnings on 31 Oct 2024, with EPS and revenue beating estimates by 2.5% (US$1.64 adjusted vs US$1.60 estimated) and 0.4% (US$94.93 bn vs US$94.58 bn estimated) respectively. Services and iPhone revenue streams improved 16% and 3% YOY respectively, but the overall revenue reduced by 1% YOY, which was dragged down by MacBook (-34% YOY), iPad (-10% YOY) and Wearables (-3% YOY).

Apple’s share price dropped from the US$233-ish to US$222-ish, but YTD is still profitable at +15.78% by the end of 1 Nov 2024.

The Bedokian’s Take

Both companies share common characteristics with each other (besides sharing the same first letter): Both are part of the Magnificent 7 that saw huge growth over the past couple of years; both are leveraging on the rising trend of AI (artificial intelligence or Apple Intelligence) in their products and/or services; and both are magnets of suits from regulatory authorities worldwide and targets of policies in the current geopolitical landscape. These in my opinion are the make or slight break for Alphabet and Apple.

Valuation wise, Alphabet seems to be “cheaper” than Apple in terms of the Price-to-Earnings (PE) ratio. As of 1 Nov 2024, Alphabet’s PE ratio was at 22.9, lower than Apple’s 36.6, and the current S&P500 PE, which is to be seen as the “average”, was standing at 29.2. 

Though financially, the two are fundamentally strong in their balance sheets and free cash flow, the main concern for Apple is that it is facing a decelerating revenue growth. This would impact its valuation and subsequently may cause a downward pressure on its share price. Still, based on the latest number of active Apple devices worldwide, it climbed from 1.5 billion in 2020 to 2.2 billion in 2023¹, demonstrating its wide moat effect. As for Alphabet, it still holds market leading services like YouTube and search advertising, so the moat is relatively safe.

With the companies’ resiliency shown in their moat status, I still opine that they are good to go, though circumstantially for my case I would view it as an average up. A thorough fundamental analysis is still required on your end should you want to enter them for the first time.

Disclosure

Bedokian’s average price for Alphabet (US$131.43) and Apple (US$93.07) based on US$/S$ exchange rate of 1.32.

Disclaimer

1 – Laricchia, Federica. Number of Apple’s active devices in selected years from 2016 to 2023. Statista. 19 May 2023. https://www.statista.com/statistics/1383887/number-of-apple-active-devices/ (accessed 2 Nov 2024)

Investing Your Supplementary Retirement Scheme Account?

Supplementary Retirement Scheme, or SRS for short, was introduced in 2001 and it is part of the Singapore Government’s multi-pronged strategy to address the financial needs of a greying population. It is a voluntary scheme that complements the Central Provident Fund (CPF). Thus, the SRS forms part of the basic make-up of our portfolio multiverse structure, along with the CPF and investment portfolio using disposable income. 

Besides saving for retirement, the monies that go into the SRS account are eligible for tax relief, so there may be some tax savings depending on the total relief amount and income bracket of the individual. The contribution limit for Singapore Citizens and Permanent Residents is SGD 15,300 and SGD 35,700 for foreigners per calendar year, and that means the deadline for the contribution is on or before 31 December.

 

Picture generated by Meta AI

Should I Open An SRS Account?

Before jumping into the how of investing in one’s SRS, we need to address the why first, and honestly there is no correct answer. In my view, if you have some spare cash lying around and want to reduce your tax bill, why not start it? 

Granted that the spare cash can be deployed into your disposable income portfolio, but that does not bring down your tax payable. Similarly, you may have maxed out your CPF contribution limit and still have some more headroom to the SGD 80,000 personal income tax relief cap. If you had hit both aforementioned conditions, then the case for opening an SRS account is stronger.

Even then, if you had not hit those conditions, you could still open an SRS account, like my case; I want to reduce my tax payable, so I just contribute to it. When I started my SRS, my CPF SA had already hit the prevailing full retirement sum for some time, so any further topping up via voluntary contribution does not invite tax relief. Also, I view SRS as a form of forced savings from which I have a stash of funds by age 62 (for me. Now is 63).

 

Investing Your SRS

If left uninvested, the funds in the SRS earn 0.05% per annum based on the latest information available, which is akin to a typical savings account. From an investment viewpoint, that yield hardly compensates for the inflation rate, hence investing it is a no-brainer option.

Unlike CPF where there are limited investable amounts and choices, you can plonk in the entire SRS into various financial instruments (shares, bonds, exchange traded funds, unit trusts, etc.), endowment annuity plans, bank fixed deposits and bank structured deposits. As with any investment decision, the choice of what to invest in depends on your product preferences and familiarity, risk appetite and tolerance. You can have more than one type of product within your SRS, for it is in itself, a portfolio universe.

 

Open Your SRS

If you have yet to open an SRS account, it is advisable to do so as soon as possible. The official retirement age in Singapore is set to go higher at 64 after 1 July 2026¹. Opening the SRS account would “lock” the withdrawable age at the prevailing retirement age, i.e. if you open now, you are able to start drawing down your SRS account from age 63, regardless of what is the prevailing retirement age when you reach 63. You can have only one SRS account, and you can open your SRS account with either DBS, OCBC or UOB.

 

Bonus Paragraph: What Is Inside The Bedokian’s SRS?

Now I am doing a regular contribution to a robo-advisory portfolio consisting of 60/40 fixed income/equities make-up, with an annualized internal rate of return of 9.48% so far. As I do not invest the whole works and have spare funds inside, I may deploy the balance in individual securities. 

Disclaimer

Reference

Supplementary Retirement Scheme. Ministry of Finance. 7 Dec 2017. https://www.mof.gov.sg/docs/default-source/default-document-library/schemes/individuals/supplementary-retirement-scheme/srs_booklet---7-dec-2017e42cafd2dab847f78b5cfb6919b476b2.pdf  (accessed 20 Oct 2024)

 

1 – Boo, Krist. S’pore retirement age to go up to 64 in 2026, re-employment age to rise to 69. The Straits Times. 6 Mar 2024. https://www.straitstimes.com/singapore/politics/s-pore-retirement-age-to-go-up-to-64-in-2026-re-employment-age-to-rise-to-69 (accessed 20 Oct 2024)

Know This, And You Are Halfway Knowing How The Market Works

I admit that the title of this post sounds like a click bait, but it is mostly true, at least based on my observations and conclusions.  In a way I had somehow stumbled upon a hypothesis that works most of the time.

Picture generated by Meta AI

So, what is this wondrous hypothesis that could half answer how the markets work?

It goes like this:

Capital, assumed it is limited at the point of time, would either flow to assets that provide the most deemed yield, or to perceived safe assets, or both.

In layman speak, it would be:

Capital would go to securities that provide “more bang for the buck” and/or to a perceived safe haven.

If you had been reading my blog for at least the past three years, you may find the second italicized quote familiar; I had mentioned something along that line in this post, where I also emphasized on the importance of diversification. However, we can apply more from this hypothesis besides just diversification, and the accompanying trait of rebalancing. One way is to go contrarian.

 

Going Contrarian

The good thing about this hypothesis is that you can counter its logic and still profit from it. This is known as “going contrarian”.

When capital starts to move fast and huge, like a flash flood, you will notice big movements in the prices of assets and securities. As a retail investor, when these things are happening, it may be a bit late as other people would have jumped on the bandwagon before you, although maybe you are lucky enough to be at the tail end of it. The contrarian part is, since most are going with the metaphorical wave, why not go against it?

The thing about going contrarian is not to do it wholesale and blindly; it is important to pick the right ones and capitalise on it. For instance, if you are an active investor who goes for individual equities and real estate investment trust (REIT) counters, picking those that were financially healthy but got unfortunately dragged down by the overall bear situation was a good case of going contrarian intelligently. 

Though the contrarian way sounds like an act of portfolio rebalancing, which is long term in nature, it could also be used in medium term or short trading terms, too. 

Going The Way Of The Dodo

As an investor, whether going for growth or dividends, we like to own companies that are near-monopolistic, or at least having a wide moat, as they are seen to be financially stable and strong given their steady or growing user base of their products and services. However, due to some poor management decisions and foresight, a great company may devolve into good, then bad, and then gone, either being bought over by someone (partially or fully) or doing business in some other fields. There are a few classic examples of these companies; the oft-reported stories would be Kodak and Nokia, where they had lost their dominance in their main products.

Picture generated by Meta AI

While it is easy to point out the causes of past declines due to hindsight, at present we do not know if a company and/or its product and/or service is facing obsolescence. While there are many potentials out there now, sometimes a change in management team, product or service range, or “white knight” investors, may save the situation.

The Bedokian’s View

As mentioned, it is not easy to identify such companies especially when things are still in a flux. The good thing is, except for companies that engage in financial fraud and/or suffering from a huge unmitigated public relations disaster, this decay generally would take several months to years to develop, so observant investors could see the writings on the wall and get the hint that it is time to say farewell.

The first thing an investor must know is not to fall in love with any counter, and not to harbour any hope given the known not-so-good circumstances surrounding the company. Love and hope, though good attributes in a personal sense, are not to be brought into investing, where staying objective and rationale is key.

Next up, we shall look at the numbers, in particular revenue and free cash flow. A profitable company would minimally have a slight growth in revenue and a not-so-volatile free cash flow. There are other metrics such as return on investment (ROI) and return on equity (ROE), but these are sector/industrial specific and cannot be applied in general. Though typically I tend to look at over two to three years, if the situation deteriorates faster than it should be, then I may set up an exit sooner.

As for how to tell whether the company is getting worse in a short time, I would look at what I call trends and fads (mentioned here). Though this method of mine is to look out for the next big (profitable) thing, it could be adapted for use in guesstimating negative outcomes.

The final word here is that, even after a thorough analysis conducted and yet you still feel queasy on a counter (that unexplainable “gut feel”), then prudently it is better to just let it go. Having a good sleep is good for your physical and mental health.

Macroeconomic Lessons To Learn From The Past Two Years

Due in part to the spike in demand and limited supply of products in the aftermath of COVID-19, and a host of other reasons such as geopolitical ones (e.g. Russian-Ukrainian conflict) and the long period of low interest rates which flushed the economy with cheap-loan capital, caused inflation to rear its ugly head. The subsequent accelerated rise of interest rates that was never seen before since the mid-2000s had brought an unprecedented economic environment in which most younger investors had not experienced before.

The past two years or so had provided useful insights and learning opportunities for us investors, and that is attributed to one macroeconomic policy: interest rates. What I would be sharing in the next few paragraphs are theoretical knowledge found in economics and finance textbooks, and most of the occurrences did happen, thus giving a sort of “classic textbook examples”.

Picture generated by Meta AI

Inflation And Interest Rates

When inflation is perceived to be happening, countries whose central banks can control interest rates (like the United States or U.S.) would raise them to bring inflation down. The rationale behind this is that when interest rates go up, the cost of borrowing would go up, and this slows down capital investments by companies as loans are getting expensive. Simultaneously, for consumers, higher rates meant higher returns from safe instruments such as short-term treasuries and bank deposits, which in turn encourages saving and less spending. All these cool down the economy and lower inflation.

For Singapore, instead of interest rates, our central bank (Monetary Authority of Singapore, MAS) used the exchange rate policy to manage the monetary policy. However, it is noted that our interest rates are very closely correlated with that of the U.S.’ in terms of direction and movement (see here and here for further explanations).

Effects On Asset Classes

Now that you got the gist from the previous paragraph, you could roughly tell what are the asset classes affected by high interest rates. Positively, as mentioned, are cash (in banks and money market funds) and short-term treasuries (less than two years). Negative ones include real estate investment trusts, or REITs (being leveraged investment vehicles, higher rates affect distributions to REIT unitholders), bonds (interest rates and bonds are inversely correlated) and lastly, commodities (which do not provide yield). For equities, though the cost of borrowing may affect the growth of companies, for some sectors such as finance (banks) and technology, as well as cash-rich companies, enjoyed some boom time.

True enough to a certain extent, we saw that REITs were hammered, a lot of people flocking to erstwhile boring treasury bills and fixed deposits, and gold was somehow muted throughout 2022 and 2023, to name a few.

Everything Is A Cycle

Good times do not last, and so are bad ones. All markets and economies go through a cycle, from bust to boom to bust to boom again. Now that the U.S. Federal Reserve had brought down rates, with more planned ahead, we could see treasury bill yields going down, REITs roaring back up, gold surging ahead, etc. The undulating nature of the market and economy, and the behaviours of the asset classes during these cycles, proved the importance of having a diversified portfolio with periodic rebalancing. With diversification and rebalancing, your investment portfolio can be protected from huge downswings and capital losses can be lessened. 

Ceteris Paribus

Last but not least, all economic scenarios and assumptions are accompanied by the term ceteris paribus, which translated from Latin is “all things being equal” (read here for more information). As we know, the economy is like a machine with many moving parts, working and affecting one another at the same time (read here for the economic machine analogy). Thus, even though we can observe “textbook examples” happening, sometimes it may not go according to theory, or even so, it might be other factors at play to give it a “textbook answer”.

Still, in my view, it is better to have some basic economic and financial knowledge to get a grasp of the complicated, yet simple, world of investing.

Frasers Centrepoint Trust: Good To Go?

Most real estate investment trusts (REITs) were having a field day with the not-so-unexpected cut of 50 basis points of interest rates. One REIT stood out as seen not benefiting from the rate cut, which is Frasers Centrepoint Trust (FCT).

 

Screenshot of FCT properties from presentation slides of FCT’s business updates for the Third Quarter ended 30 June 2024.

 

Looking at its price movement, it had seen a huge rise during the month of August, where the United States Federal Reserve (or Fed) had dropped a big hint on interest rate cuts. It reached a peak of SGD 2.41 just around a week before the Fed’s announcement, but after which, it went down to SGD 2.27 when the market week ended on 20 September.

There were people whom I know asking about what was happening, and I just shrugged (read here about why asking “what is happening” does not help much in the situation). From their third quarter financial highlights, the gearing level stood at 39.1% and their average cost of debt was 4.1%¹. This meant that the rate cut should benefit FCT given the not-so-high-but-high-enough gearing ratio and the cost of loan they were getting, so theoretically there are some justified push-up factors for its price instead of going opposite.

With the last known book value of SGD 2.26 as of 31 March 2024², at SGD 2.27 it represented a good bargain, since FCT was one of the stronger retail REITs known, and with 100% exposure in Singapore properties, thus could command a higher premium. This is a good example of a fundamentally sound counter that was somehow being dragged down for reasons, obvious or not, and for us this show of price weakness meant a good chance to average up our FCT holdings.

Disclosure

The Bedokian is vested in FCT.

Disclaimer

1 – Fraser Centrepoint Trust. Business updates for the Third Quarter ended 30 June 2024. 24 Jul 2024. https://fct.frasersproperty.com/newsroom/20240724_193109_J69U_7OBO7A3PF3O39XSV.1.pdf  (accessed 22 Sep 2024)

 

2 – Fraser Centrepoint Trust. Results Presentation for the First Half Financial Year 2024 ended 31 March 2024. 25 Apr 2024. https://fct.frasersproperty.com/newsroom/20240425_075534_J69U_VG71VYH4JFEHK0J8.3.pdf  (accessed 22 Sep 2024)

25 Or 50 Basis Points?

The investing and trading world will be waiting with bated breath this coming Wednesday and Thursday (17 and 18 September); the Federal Open Market Committee, better known as the Fed, is expecting to announce an interest rate cut for the first time in around three years. After the intent was made known by the Fed back in August, you could observe equities, real estate investment trusts (REITs) and even gold were rising in anticipation.

 

Picture generated by Meta AI

While the consensus among economists, analysts and retail investors were looking at a highly probable 25 basis points cut, there were some quarters that speculated a higher rate cut at 50 basis points. The reason for the latter is mainly on the viewpoint that the prolonged high interest rates are hurting the market more than it should, and this opinion is gaining traction. As of 13 September, the CME FedWatch had placed an equal probability (i.e., 50%) for a 25 and 50 basis point cuts; just the week before, the 50-basis point cut was given only a 30% chance¹.

 

Potential Reaction Of Markets 

Interest rates play a huge part in the performances of the various asset classes; equities, REITs, long term and corporate bonds, and gold are on the uptrend, while short term treasuries and cash are seeing a downside. From my observations and guesstimates, my conclusion is that the markets are currently pricing in a 25-basis points reduction. However, if 50 basis points is announced, the market volatility would be higher, whether is it upwards or downwards is depending on which asset class, sector / industry and companies that you are looking at. 

This means REITs may rise further, gold may yet reach another all-time high, banks may feel a slight downward pressure due to the deemed lower net interest income, the USD/SGD exchange rate may go down to the level not seen since late 2014, etc. Notice the word “may” used, because we do not really know how the markets will react, hence the word “potential” for this section heading.

For this round, I may adopt the following actions (not exhaustive):

• Change more USD and/or buy more USD denominated counters.
• Average up fundamentally sound equities and REITs that do not rise much vis-à-vis the general market rise. 
• Average up corporate bonds.
• Buy into banks if price weakness is shown

Whatever the interest rates, and macroeconomic conditions, good or bad, there is always an opportunity to invest in the markets.

 

Disclaimer

1 – FedWatch. CME Group. 13 Sep 2024. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html (accessed 15 Sep 2024).