Why I didn’t buy the iPhone X

There it was gleaming with its OLED display, crying to be picked up. It was surreal, holding it alone in that near-empty Swisscom store, tucked beneath Zurich’s central train station.

“Would you like to buy one”, a voice behind me asked.

I turned around, phone-still-in-hand and replied incredulously, “Is it on sale?”

“Well it’s for sale” she laughed. “But not on sale”.

I was caught off guard. A few awkward seconds passed.

“How much is it?” I asked. “I mean, how much is it in this colour?”

“The silver 64GB model is CHF 1,199 and the 256GB model costs CHF 1,389”, she said.

I felt like I was going to cry.

It was like being kneed in the groin.

The Swiss franc is pretty much 1:1 with the US dollar, so this base model in Switzerland cost well over a thousand bucks.

I whipped out my screen-cracked iPhone 6 that was dropped on cement a month before and flicked over to the US Apple website: $999 for the 64GB model and $1,149 for the 256GB model. It’s cheaper, but not by much.

Then I browsed over to my home country’s UK site: £999 for the 64GB model and £1,149 for the 256GB model. That’s more expensive than Switzerland.

After further research, I found out that the Brazilians got ripped off the most, (thanks to “custo Brazil“). But honestly, despite this regional outlier, the iPhone X is just all-round expensive wherever you look.

It’s sad because the iPhone is special to me. I remember how I took shelter on a rainy day in an Apple store in London’s Regent Street back in October 2008. Banks were failing, panic had spread across markets and I was about to lose my job. But half an hour later, I walked out the shop smiling with a black 8GB iPhone 3G. The rain had cleared and the sun was shining.

It blew me away. I had the World Wide Web in my pocket on an unlimited data plan. I could check my Hotmail on the bus and watch music videos. I had Google Maps so I always knew where I was. For the first time I could actually take decent photos on my phone. I no longer needed an iPod because my phone stored all my music.

I thought my life had change. Then I discovered Angry Birds.

Well, back to present day. The problem is that the price of the iPhone X is just too expensive for me.

I could have easily bundled it into a new contract, but I’ve always bought in cash because I hate debt. When you buy like that you don’t realise it, but you pay monthly interest and you’re locked in for a couple of years, paying off the phone.

The whole thing is made of glass, which means I’ll own it for another two years. I probably smash that lovely screen too that costs $279 to fix. Apart from its fragility, I don’t want to pay more than a thousand bucks, just so I can look like an animated animal. Nor do I want the phone fire a billion lasers at my face just so I can open it.

Why does it need to do that?

I just want to make a phone call.

I mean what’s the next innovation going to be for the iPhone?

It will probably do away with the buttons or even the screen. It won’t even need a battery because it will be powered by your love. To open it, you will just need to spit on the screen so it can read your DNA.

Furthermore, there is that ugly “notch” with it myriad of sensors (see below). It’s a logical bit of brand differentiation in the smartphone market. But it’s still ugly and I don’t want to pay for it.

Look, I appreciate that Apple have taken the artistic liberty of claiming that the iPhone X is “amazing”, “innovative” and “new”. In reality the iPhone X is just an iPhone that can now match the top-end android phones already out there. And, Samsung has slickly reminded us that in its recent ad.

I am being harsh, but I am a little annoyed with Apple. I have to admit the iPhone X is impressive in terms of its design, the materials used in it and the engineering involved to pull it off.

It represents genuine improvements to the existing iPhone, given that the last four were just iterative updates.

It’s just too expensive.

Despite my disappointment, I’m still a massive fan of Apple. It’s the first new form-factor iPhone to be released by Apple in three years. There’s so much pent-up demand that regardless of how I feel, it’s price no obstacle for most fans.

In fact Apple has already reported better iPhone sales during the third-quarter than forecasted. Its delivered an extremely bullish outlook too, which suggests it will deliver the most fourth-quarter profit ever recorded by a US company.

In Taiwan, Apple’s suppliers have benefitted too. They represent a third of the FTSE TWSE Taiwan 50 index, which in turn accounts for 70% of the Taiwan Stock Exchange. So the uptick in the index was strongly explained by the launch of the iPhone X.

Apple also sits on a huge pile of cash and I can’t stress how important that is.

If anything this could increase thanks to the strong free cash flows it enjoys across its business. For instance, it’s profit margin rich “service division” is expected to double revenue between the fiscal years 2016 to 2020, adding further to this cash horde.

Trump’s tax reform proposals are also music to Apple’s ears as the company holds 90% of its cash overseas. Once this cash is repatriated, it could create even more value for the company.

As an ex-Fidelity’s guy, I’ve been indoctrinated by former portfolio manager Peter Lynch on the importance of net cash. This is cash minus the long-term debt that a company holds, and it can completely alter the way you value it.

Imagine a company is trading at $40 a share. When you divide this price by the company’s earnings (say $2 a share) you get a multiple of 20x. If the stock market is trading collectively at a multiple of 16x, then this company is relatively expensive.

In layman’s terms, the market has priced in that you will double your money in 20 years, while the market will do it quicker in 16 years.

But if $10 of the share price is net cash, then this changes everything. It’s like getting $10 cash back when you buy the stock at $40. Your swapping $10 cash for $10 share when you buy this share. Therefore, the price should really be $30. 

This makes that multiple of 20x into a multiple of 15x ($30 divided by $2), which implies a better return than the market index can offer.

Perhaps Apple is likely to grow less than Amazon, Alphabet, Facebook and even Microsoft next year. There could also be a brutal correction, which could hit tech stocks hard since they have led the current rally. Having said this, Apple’s fundamentals still seem robust and enduring.

I particularly liked this table by D.M. Martins Research who have adjust Apple’s forward-looking PE multiple for net cash. It’s more eye-watering than the price of the iPhone X. 

The next day my package arrived. The Samsung Galaxy S8 Plus instantly blew me away. It was so beautiful, intuitive to use and half the price of the iPhone X. It’s just what I needed. It even opens up when I look at it without firing lasers at my face.

Using my Samsung, I browsed over to my online broker and bought an iPhone X load of Apple stock.

Look even if there is a correction, I think Apple’s stock price will depreciate far less quickly than the value of an iPhone X in two years. So, why not?