It's a question that cuts straight to the heart of investors' indecision. Is this the time to seek safety in numbers, or does one take a shot on what's arguably the market's highest-quality stock?
Either choice would be fine, for the record. But Apple (NASDAQ: AAPL) is a better pick than a broad-based fund for most investors right now, even when that find includes all 30 blue-chips found within the Dow Jones Industrial Average. Although the iPhone is losing steam as the company's breadwinner, more than a few blue-chip stalwarts are bumping into a headwind at the same time Apple's poised to catch at least one tailwind.
Apple's impending tailwind is 5G connectivity. While most wireless carriers deployed some 5G coverage last year, this is the year these long-awaited wireless broadband speeds have finally become widely available to consumers. AT&T has launched hundreds of new 5G markets since March. T-Mobile added 5G service in 121 cities in October alone. Verizon is in the fight as well, announcing last month that its 5G service is now available to more than 200 million people in 1800 U.S. cities.
Largely missing from this explosion, however, are the smartphones capable of 5G connections.
That's not to say they're not out there. The Galaxy S20 Plus from Samsung has been well received, and Google's Pixel 5 has garnered some respect even if reviewers balk at its price.
If there's any one single 5G phone consumers have been holding out for, however, it's the iPhone 12 series unveiled last month. As Counterpoint's research director Jeff Fieldhack commented in October: "There is significant pent-up demand from iOS subscribers putting off upgrades until these 5G devices launch."
The iPhone 12 was available for pre-order earlier this month, and deliveries began just a few days ago.
Of course, these next-gen iPhones are a means to an increasingly important end for Apple. That's sales of apps and digital services. While services only accounted for 22% of Apple's revenue last quarter (versus the iPhone's 40%), service sales grew 16% year over year. Product margins are also significantly higher on digital goods than they are on hardware. Firm demand for the iPhone 12 should lead to equally firm growth in service revenue and overall earnings, though, since the former fuels the latter. That is to say, faster wireless broadband speeds make a smartphone much more functional.
This bullish dynamic could persist for long, long time.
Too many drags
Of course, this isn't to suggest diversification is no longer important. It is important. Being a collection of 30 hand-picked stocks, however, the Dow Jones Industrial Average isn't nearly as diversified as, say, the S&P 500. And more than a few of its old-school constituents are running into challenges that may be size- and age-related.
Take Cisco (NASDAQ: CSCO), for instance. Once the king of networking hardware, it's struggled to maintain its edge now that smaller rivals such as Juniper and Arista Networks have figured out how to compete with the behemoth. Cisco shares have been sliding lower since mid-2019 to nearly reach March's low late last month, reflecting this challenge. They're still down 33% from that 2019 high, and still trending lower.
International Business Machines (NYSE: IBM) is another Dow name that's proven problematic. It finally snapped a multi-year streak of declining quarterly revenue in 2018, but only temporarily. The tech giant remains unable to meaningfully plug into the industry's most important area opportunities right now -- like cloud computing and cybersecurity -- despite investments on those fronts, while it continues to languish with its legacy businesses like mainframe computers. It's planning a breakup to better focus on its individual product lines, but with no guidance offered in last quarter's report (and none on the horizon), shares continue their march into multi-year low territory.
Walgreens Boots Alliance (NASDAQ: WBA), Intel (NASDAQ: INTC), and Boeing (NYSE: BA) are three other Dow names struggling for reasons beyond mere market volatility. All three face company-specific hurdles like COVID-19-crimped consumerism, failure to make competitive technological advancements, and the fallout from a flawed aircraft design, respectively. None of those hurdles will be cleared quickly, or easily.
These weak constituents won't be enough to hold the Dow Jones Industrial Average down from posting solid gains over time. They are enough of a drag on the index right now, however, to favor the risk/reward proposition offered by a name like Apple.
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James Brumley owns shares of AT&T and Boeing. The Motley Fool owns shares of and recommends Apple and Arista Networks. The Motley Fool recommends Intel, T-Mobile US, and Verizon Communications. The Motley Fool has a disclosure policy.
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