|Shares Out. (in M):||940,000||P/E||0.0x||0.0x|
|Market Cap (in $M):||440,000||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-137,000||EBIT||0||0|
Apple’s ecosystem is an important and durable competitive advantage; it creates a tangible switching cost (or, an inconvenience) after Apple has locked you into the i-ecosystem. It takes time to build an ecosystem that consists of speakers and accessories that will connect only via Apple systems: Apple TV, which easily recreates an iPhone or iPad screen on a TV set; the music collection on iTunes (competition from Spotify and Google Play lessens this advantage); a multitude of great apps (in all honesty, gaming apps have a half-life of only a few weeks, but productivity apps and my $60 TomTom GPS have a much longer half-life); and, last, the underrated Photo Stream, a feature in iOS 6 that allows you to share photos with your close friends and relatives with incredible ease. My family and friends share pictures from our daily lives (kids growing up, ski trips, get-togethers), but that, of course, only works when we’re all on Apple products.(This is why Facebook bought Instagram for $1 billion. Photo Stream is a real competitive threat to Facebook, especially if you want to share pictures with a limited group of close friends.)
The i-ecosystem makes switching from the iPhone to a competitor’s device an unpleasant undertaking, something you won’t do unless you are really significantly dissatisfied with your i-device (or you are simply very bored). How much extra are you willing to pay for your Apple goodies? Brand is more than just prestige; it is the amalgamation of intangible things like perceptions and tangible things like getting incredible phone and e-mail customer service (I’ve been blown away by how great it is!) or having your problems resolved by a genius at the Apple store.
Of course, as the phone and tablet categories mature, Apple’s hardware premium will deflate and its margins will decline. The only question is, by how much? Let me try to answer that.
From 2003 to 2012, Apple’s net margins rose from 1.1 percent to 25 percent. In 2003 they were too low; today they are too high. Let’s look at why the margins went up. Gross margins increased from 27.5 percent to 44 percent: Apple is making 16.5 cents more for every dollar of product sold today than it did in 2001. Looking back at Nokia Corp. in its heyday, in 2003 the Finnish cell phone maker was able to command a 41.5 percent margin, which has gradually drifted down to 28 percent. Today, Nokia is Microsoft’s bitch, completely dependent on the success of the Windows operating system, which is far from certain. Nokia is a sorry shell of what used to be a great company, while Apple, despite its universal hatred by growth managers, is still, well, Apple. Its gross margins will decline, but they won’t approach those of 2003 or Nokia’s current level.
For Apple to conquer emerging markets and keep what it has already won there, it will need to lower prices. The company is not doing horribly in China — its sales are running at $25 billion a year and were up 67 percent in the past quarter. However, a significant number of the iPhones sold in China (Apple doesn’t disclose the figure) are not $650 iPhone 5’s but the cheaper 4 and 4s models. (Also, on a recent conference call, Verizon Communications mentioned that half of the iPhones it has sold were the 4 and 4s models.) Apple’s price premium over its Android brethren is not as high as everyone thinks.
What is truly astonishing is that Apple’s spending on R&D and selling, general and administrative (SG&A) expenses has fallen from 7.6 percent and 19.5 percent, respectively, in 2003 to a meager 2.2 percent and 6.4 percent today.R&D and SG&A expenses actually increased almost eightfold, but they didn’t grow nearly as fast as sales. Apple spends $3.4 billion on R&D today, compared with $471 million in 2001. This is operational leverage at its best. As long as Apple can grow sales, and R&D and SG&A increase at the same rate as sales or slower, Apple should keep its 18.5 percentage points gain in net margins through operational leverage.
Growth of sales is an assumption in itself. Apple’s annual sales are approaching $180 billion, and it is only a question of when they will run into the wall of large numbers. At this point, 20 percent-a-year growth means Apple has to sell as many i-thingies as it sold last year plus an additional $36 billion worth. Of course, this argument could have been made $100 billion ago, and the company did report 18 percent revenue growth for the past quarter, but Apple is in the last few innings of this high-growth game; otherwise its sales will exceed the GDP of some large European countries.
If you treat Apple as a pure hardware company, you’ll miss a very important element of its business model: recurrence of revenues through planned obsolescence. Apple releases a new device and a new operating system version every year. Its operating system only supports the past three or four generations of devices and limits functionality on some older devices. If you own an iPhone 3G, iOS 6 will not run on it, and thus a lot of apps will not work on it, so you will most likely be buying a new iPhone soon. In addition — and not unlike in the PC world — newer software usually requires more powerful hardware; the new software just doesn’t run fast enough on old phones. My son got a hand-me-down iPhone 3G but gave it to his cousin a few days later — it could barely run the new software.
Apple’s success over the past decade is a black swan, an improbable but significant event, thanks in large part to the genius of Steve Jobs. Today investors are worried because Jobs is not there to create another revolutionary product, and they are right to be concerned. Jobs was more important to Apple’s success than Warren Buffett is to Berkshire Hathaway’s today. (Berkshire doesn’t need to innovate; it is a collection of dozens of autonomous companies run by competent managers.) Apple will be dead without continued innovation.
Jobs was the ultimate benevolent dictator, and he was the definition of a micro-manager. In his book Steve Jobs, Walter Isaacson describes how Jobs picked shades of white for Apple Store bathroom tiles and worked on the design of the iPhone box. He had to sign off on every product Apple made, down to and including the iPhone charger. His employees feared, loved and worshiped him, and they followed him into the fire. Jobs could change the direction of the company on a dime — that was what it took to deliver black i-swans. Jobs is gone, so the probability of another product achieving the success of the iPhone or iPad has declined exponentially.
What is really amazing about Apple is how underwhelming its valuation is today — it doesn’t require new black swans. In an analysis we tried very hard to kill the company. We tanked its gross margins to a Nokia-like 28 percent and still got $30 of earnings per share (the Street’s estimate for 2013 is $45), which puts its valuation, excluding $145 a share in cash, at 10 times earnings. We killed its sales growth to 2 percent a year for ten years, discounted its cash flows and still got a $500 stock.
There is a lot of value in Apple’s enormous ability to generate cash. The company is sitting on an ever-growing pile of it — $137 billion, about one third of its market cap. Over the past 12 months, despite spending $10 billion on capital expenditures, Apple still generated $46 billion of free cash flows. If it continues to generate free cash flows at a similar rate (I am assuming no growth), by the end of 2015 it will have stockpiled $300 of cash per share. At today’s price it will be commanding a price-earnings ratio (if you exclude cash) of 4.
Of course, the market is not giving Apple credit for its cash, but I think the market is wrong. Unlike Microsoft, which does something dumber than dumb with its cash every other year, Apple has a pristine capital allocation track record. It has not made any foolish acquisitions — or, indeed, any acquisitions of size. Other than buying an Eastern European country and renaming it i-Country, Apple will not be able to acquire a technologically related company of size, nor will it want or need to. The cash it accumulates will end up in shareholders’ hands, either through dividends or share buybacks.
What is Apple worth? After the financial acrobatics I’ve done trying to murder the valuation of Apple, it is easier to say that it is worth more than $450 than to pinpoint a price target. When I use a significantly decelerating sales growth rate and normalize margins (reducing them, but not as low as Nokia’s current margins), I get a price of about $600 to $800 a share.
Growth managers don’t want Apple to pay a large dividend, as though that would somehow transform this growing teenager into a mature adult. But I have news for them: Apple already is a mature adult. Second, when your return on capital is pushing infinity (as Apple’s is), you don’t need to retain much cash to grow. Two thirds of Apple’s cash is offshore, but that doesn’t make it worthless; it just makes it worth less — only $65 billion, maybe, not $97 billion, once the company pays its tax bill to Uncle Sam.
|Entry||02/07/2013 09:44 PM|
|Subject||RE: RE: wow!|
|Entry||02/07/2013 11:05 PM|
BJG. Thank you for your kind words. About Nokia. For a long time it tried to convert "dumb" phone operating system (Symbian) into a smart operating system. It failed. When Elop became CEO I am sure he looked at Symbian and their other efforts (Nokia also tried to develop their linux based OS, I think it was called Maemo) and realized that Nokia doesn't have smartphone OS that can compete with iOS and Android. Doing deal with MSFT was a desperate move but I don't think he had much choice. However, by doing so he turned Nokia into Dell or HP. This deal reminds me the deal IBM made with MSFT in late 80s. IBM saw value in hardware and MSFT hired MSFT to develop software for its PC. We know how that story played out. This is Nokia's last chance. Like conquistador Hernán Cortés, who in 1519 ordered his troops to burn all their ships when they invaded Mexico to ensure that they had to conquer the Aztecs to capture their boats and get back to Spain, Nokia has burned all its boats.
|Entry||02/08/2013 11:44 AM|
BJG, we're not supposed to share contact info on VIC, but you can find me in real life somewhat easily.
Here are my thoughts on AAPL:
1) The iOS ecosystem is real -- iMessage, FaceTime, Find Friends, Find iPhone, etc... are real network effect drivers. This is anecdotal, but my extended family has gone all iOS since these features were introduced in iOS 5. I've seen it happen with other families as well. Even if Android were to replicate all these features, you'd have to coordinate switching by everyone at once. Not going to happen.
The Android app ecosystem is doing well, mostly due to Samsung building the standard bearer Android phone. Developers are making $$$ selling Android apps and that's all that matters. But that's fine. I think the scenario where Android completely overwhelms iOS, like WinTel did in PCs, is not on the table. You don't have the same setup for a winner-take-all.
2) High volume economics is what matters in platform wars. The iOS vs. Android war is set up very differently than WinTel vs. Mac/Unix/whatever. In WinTel, MSFT and INTC drove R&D innovation for the entire industry. DELL and its ilk were just dumb assemblers, so that's why all the profits flowed to MSFT/INTC. Both parties then reinvested the profits to widen their moats and drive even higher volumes... you get a virtuous cycle.
GOOG is driving software R&D for Android, but no one is driving hardware R&D for the entire ecosystem. The highest volume player, Samsung, isn't making the technology in the Galaxy available to its hardware competitors. AAPL and Samsung are such a huge and growing part of unit shipments, that there just isn't enough left over to start the virtuous cycle. QCOM is supplying SoCs to the non-AAPL/Samsung sockets, but it isn't enough. QCOM is also fabless, which leads me to my next point.
Another key distinction is that one of the key advantages INTC built to reinforce the virtuous cycle was its fabs/process advantages. Samsung and INTC really are the only two companies with the resources to build next-gen fabs. AAPL is obviously trying to get TSMC in the game by moving volumes there and away from Samsung.
AAPL generates so much volume that it can nearly replicate the WinTel virtuous cycle inside one company. The two key risks I see are that Jobs is gone and that AAPL doesn't own chip fabs. AAPL obviously has lots of resources to reinvest in innovation, but will they pick the right projects to invest in without Jobs (think of all the $$$ MSFT has set on fire). I think the fab risk can be addressed via TSMC. AAPL has plently of money to bring TSMC up to the Samsung/INTC level if necessary.
3) So all in all, if you think of an ecosystem generating a pool of profit dollars, you can figure out where those dollars go given the industry structure. Given how the mobile/tablet ecosystem is structured, you can see that profits will flow to AAPL, GOOG, Samsung, ARMH. There might be small give and take, but I would put the probability of seismic shifts at close to zero. The virtuous cycle of high volume economics is nearly impossible to stop once it gets going, barring a "next big thing" type shift (i.e., PCs to phones/tablets).
|Subject||RE: RE: BJG|
|Entry||02/11/2013 10:27 AM|
I wouldn't be terribly worried about cross-platform apps. Before FaceTime, there was Skype for cross platform video chat. Before iMessage, there was Whatsapp, etc... for cross platform texting. Pre-existing apps didn't stop FT/iMessage from driving network effects for AAPL because there's value in being an integrated feature of iOS -- it just works, no app to download or learn.
But let's take the limiting case and think through it. Suppose Samsung/Android and AAPL/iOS are perfect substitutes for each other in terms of integreted OS functionality and the apps ecosystem. What is there is compete on? Price is one, but Apple has all its software & services revenue to potentially subsidize the upfront hardware cost. The software & services for Android are monetized by GOOG (Samsung knows this, which is why they are working on Tizen). But perhaps Samsung is a giant Korean company that doesn't care about profits and starts giving away phones for free or less than free. This is a risk to AAPL's long-term margins.
The other basis of competition is hardware features and design. Some of this will come to personal preference. Both Samsung and AAPL make nice phones much like BMW and Mercedes make nice cars. Will Samsung ever make a phone that just blows AAPL out of the water? Unlikely given AAPL already has the virtuous cycle of high volume economics going. If I was the benevolent dictator of Android, the only shot I see to win here (stop AAPL's virtuous cycle) is to go whole-hog with INTC. Android runs on x86 only. That way there may possibly be enough volumes to get INTC to dedicate its leading edge capacity to mobile chips (even then the ASP difference, the math may not work out). But again, so many mitigating factors -- Samsung isn't going to go with this (and Samsung is AAPL's only real competition) and AAPL has a bazillion dollars to do whatever with TSMC.
In any case, when I think through how the industry structure would have to change to do real damage to AAPL's long-term margins, I come up with very low probability events.
|Subject||RE: RE: RE: BJG|
|Entry||02/12/2013 09:33 AM|
Thanks for the thoughts and replies, YComb and Murman. Good stuff.
|Subject||Any thoughts here?|
|Entry||04/05/2013 12:14 PM|
AAPL seems to be a source of cash for everybody. What I find interesting is that almost every piece of news is interpreted by the markets witha negative spin. New cheaper Iphone out, shows that they can't compete with Samsung ant that they have lost the ability to innovate not that they have a lower cost device for emerging markets in general and China in particular. The sell side is pilling on to Goldman upgrades SIX (right before the Seaworld IPO) at a stupid valuation and downgrades AAPL at a single digit PE! CNBC seems to run all negative stories all the time on the stock. I guess that is a sign that it is still too owned and too loved. I disagreed that it was a buy in the $700s just because I thought it was overowned and going to have a hard time doubling given its market cap. Down here, it appears that it is being left for dead and that it is getting hit as selling begets selling. Are DELL and HPQ really worth a higher multiple than AAPL?
|Subject||RE: RE: RE: Any thoughts here?|
|Entry||04/05/2013 01:26 PM|
I think the posts by cuyler and salvo show the tension here. The bears think AAPL will play out in a similar vien as it did when wintel ate their lunch and the bulls think one of two things if not both 1) That there are huge moats and network effects around this business that didnt exist in the wintell days and 2) Even if the Company is vulnerable, the valuation takes that into account.
I am somewhere in between the two bullish camps but am surprised at the ferocity of the all things about the company are negative and i dont think a bigger phone is what truly ailes them, but hey why not have a bigger version too?
|Subject||RE: RE: RE: RE: Any thoughts here?|
|Entry||04/05/2013 02:48 PM|
I won't rehash the excellent network effect comments by YCOMBINATOR and others that make AAPL far more than a pure "gadget" company on this site but will talk about about why I think the stock can't catch a bid and why that could change.
The company has been trading into value investors hands from retail and growth investors for the past 2 years and the history of value tech (RIMM, PALM, MOT etc.) is not a happy one. The company is very cheap even if they "miss" which is widely expected and part of the reeason we are getting the premier tech comapny in the world for a single digit PE. Acutally lets just call it one of the premier companies in the world period. I suspect we will see a slew of products and earnings that will change the tone of the media coverage which has gone from fawning to hostile. This stock has gone very quickly from a stock that PMs must own to one that they are proud to say they sold avoided. If it starts moving up again it wont be a gradual move, it will be one of closet indexers and others falling over themselves to say and show they own it agin.
|Subject||RE: RE: RE: RE: RE: RE: Any thoughts here?|
|Entry||04/05/2013 05:07 PM|
I think there was always an expectation of competition for AAPL, i think most likely from MSFT and BBRY in earlier days that it comes from GOOG and Samsung does not mean that the market expected no competition. To call AAPL and commodity handset maker is like saying coach just makes bags. That said, the name is not underfollowed but neither was YHOO or AOL on their lows.
|Subject||RE: apple market size perspective|
|Entry||04/05/2013 06:05 PM|
found a typo in my last paragraph... Full disclosure I'm super biased as my Jan 2015 $350 calls pay out something crazy like 43% if the price does go to $500 per share or 7.0 times 2013 earnings. They pay out 140% if the prices goes to $600 per share or 9.2 times 2013 earnings. We'll see if I was patient enough...
|Subject||RE: RE: RE: RE: RE: RE: RE: RE: Any thoughts here?|
|Entry||04/05/2013 08:53 PM|
Respect your opinion, but disagree as to the validity of Samsung as a comp. Therein lies the crux of the larger disagreement-- is AAPL a hardware manufacturer or, at the heart of it, a software and content play that distributes the goods through recurring hardware upgrades?
I like Samsung as a comp if you cast aside the headlock AAPL maintains on its software; its brand power; iTunes; cultish brand loyalty; stickiness of owning more than one AAPL product; etc., etc., etc.
Undoubtedly the company has no chance of sustaining the ramp of recent years... but at the current valuation, it's priced not only to get off the ramp, but to drive into the muck and stay there.
All that said, I respect and empathize with the "too tough" position... a valid stance.
|Subject||A point on EV|
|Entry||04/06/2013 09:16 AM|
Forget not to subtract out cash taxes owed upon repatriation from their balance sheet when calculating EV.
|Subject||Wow, I thought it looked cheap at 420-430 range|
|Entry||04/18/2013 12:05 PM|
Any news or just selling begets selling. Where is Einhorn's buyback plan when we really need it?
|Subject||RE: RE: RE: Wow, I thought it looked cheap|
|Entry||04/18/2013 01:10 PM|
I think Tim Cook cares about what Apple looks like 5 years from now, in particular its market cap. I don't think he cares much about shareholders, just the general perception as to whether it has deteriorated under his watch. I think this is why they are hoarding cash, and that a big cash return will not happen anytime soon. I don't think they have Einhorn's depression mentality analogy. I just think Cook wants Apple to be one of the largest companies in the world 5 years from now.
|Entry||04/18/2013 05:52 PM|
Despite my comments in the other thread about there potentially being an argument that valuation doesn't matter in tech (not my words but the words of someone who has invested very profitably over the years, hence he has my respect), I am going to say 5x consensus earnings plus the y/e 13 net cash at a 20% discount = 350/share.
Calling capitulation in anything is so, so difficult, and one thing I have learned of the years is that "oversold" and "overbought" are the two most dangerous words in investing. With that being said, honestly it would not surprise me that much if we have a situation where they miss earnings and the stock finishes the day up 5%-10%.
|Subject||RE: RE: RE: RE: RE: RE: RE: RE: poll:|
|Entry||04/19/2013 10:52 AM|
"oof. . getting hard to hold tongue. . ."
All I would say is that, if anything, this proves the old rule of thumb I use that if an idea generates a rating of more than around 5.5 AND has more than about 20 comments, it is probably an avoid and one to stick in the "too difficult" basket.
HLF another example of the "return-free risk" dynamic that seems to sometimes manifest when the above two conditions are met.
Well aware I am gonna be on the receiving end of some ire from someone for this, but this is what I think!
|Subject||RE: RE: RE: RE: RE: RE: RE: RE: poll:|
|Entry||04/19/2013 11:11 AM|
Cuyler was spot on on a non consensus call and deserves a lot of credit imo.
|Entry||04/24/2013 09:50 AM|
Was just wondering - obviously you have been right in this one so far so was hoping to get your take - any particular thoughts on the interims? Past the point of maximum pain and next stop 450? Or cash returns don't matter, still operational pressures and onwards to 350?
|Subject||RE: RE: cuyler|
|Entry||04/24/2013 11:08 AM|
Thanks for coming back - those are all good points are really useful.
All the best
|Subject||AAPL has been tempting me, but ...|
|Entry||04/27/2013 11:47 AM|
... whenever I see something like this it really scares me:
This company, InfoSonics (IFON), has been written up on VIC before. It has a market cap of $7.5M, is a net/net, and used to be a distributor of other manufacturers' phones in emerging markets. When their distribution business went away they decided to start designing and manufacturing their own Android smart phones. Now they have a smart phone / tablet crossover. I think they have some kind of very small scale R&D center in China, and that's all they need to design and manufacter Android smart phones and tablets. Not saying IFON is a good investment, but the fact that it's this easy to build Android smart phones and tablets gives me some pause when I think about investing in AAPL...
|Subject||AAPL Senate Investigation|
|Entry||05/21/2013 08:22 AM|
What is AAPL worth if Congress cracks down on their tax avoidance schemes? Hits a) normalized EPS b) ability to use the pile of cash.
|Subject||RE: AAPL Senate Investigation|
|Entry||05/21/2013 09:59 AM|
Apple's lowest income statement tax rate over the last 10 fiscal years was 24.2% in FY2011.
It looks as if this is more of a cash tax issue than an income statement issue, so
perhaps EPS will be unaffected.
|Subject||RE: RE: AAPL has been tempting me, but ...|
|Entry||05/22/2013 10:55 AM|
If what you say is true, how do you explain what happened to Apple after they invented the Macintosh in the 1980's? Eventually Microsoft came up with a "cheap knockoff" that was perceived to be just as good, and in some ways even better, than Apple's product. As a result, Apple nearly went out of business. Why wasn't Apple's "brand" good enough to save them at that time? Doesn't the Android-vs-Apple battle of today look remarkably similar to the Microsoft-vs-Apple battle in the late 80's and 90's?
|Subject||RE: RE: RE: AAPL has been tempting me, but ...|
|Entry||05/22/2013 11:02 AM|
aagold, look at YCOMBINATOR's remarks in Message #10.
|Subject||RE: RE: RE: AAPL has been tempting me, but ...|
|Entry||05/22/2013 12:20 PM|
YCOMB has it right. Three other elements not raised are the importance of
(1) Carrier subsidies = compare $200 iPhone vs. $150 Galaxy S4; then compare $3000 Mac vs. $1500 PC
(2) Nature of the buyer = corporates who bought the first PC's were focused on price first and usability second. High volume economics then worked over the next decade to bring usability on the software to equal Apple and the hardware to greatly surpass Apple
(3) "Starting Point" of Apple's emergence = by 1984 when the Mac was released (late, I would add), DOS and DOS-compatible software had already taken off on IBM and clones. Apple's well-developed app ecosystem today and the HTML-based (i.e. "cloud") prevent parallel "network effects in reverse."
Besides YCOMB, I've found the two authors below to really "get it." Al of their blog entries are good, but the below passages address your question specifically.
|Subject||RE: RE: Variant View|
|Entry||06/26/2013 02:37 PM|
>$9 billion worth of stock is short. Do any other companies have such high short interest in terms of dollars?
|Subject||RE: RE: RE: RE: Variant View|
|Entry||06/26/2013 02:55 PM|
Okay, so some undetermined amount of Apple stock is short for pure market hedges. How high would the short interest have to be for you to consider the company-specific short view to be widely held?
|Subject||RE: Variant View|
|Entry||06/26/2013 03:24 PM|
That giant sucking sound you hear is a product release information vacuum, a gigantic Russell index shift, and window-dressing at mid-year by growth investors who can't bear to listen to their LP's talk about why AAPL is going to $ (insert arbitrary number here).
Value investing is about patience. I just use Jim Tisch's $5 Million Test while I'm buying at these levels -- go into any of the invariably busy Apple store and note the crowds / fanboys. Then realize you're buying an ownership interest in this business at a 25% cash yield. Dominance in tech hardware is never forever, but Steve Jobs's death did not mean that Apple's 20,000 engineers put their pencils down.
I do not care at all about FCF growth or broker estimates at this price ($400/sh). Even with sharply contracting margins on a lower-ASP iPhone and iPad, the expanded TAM will offset the lower product margins. BOM costs will come down and Apple will pass along some of those savings to their loyal customer base. That's what they do -- spy the 2013 Macbook Air at $100 less than last year's. Then look at the example of the iPad mini -- margins came down, but so what? FCF/sh grew >20% and suddenly a bunch of price-sensitive consumers just got exposed to the "smoothness" (for lack of a better word) of Apple products. The same thing will happen with the lower-ASP iPhone. Call Cook, Oppenheimer et. al. idiots about capital structure (I agree), but they do understand how to manage a business and will not dilute FCF/sh with new products.
Phew... Tell us how you really feel Mencken? :)
Anyway, I know there are a lot of declaratory statements above about a future which is inherently unknowable, but sometimes you get tired of hearing the same tripe passed off as contrarian insight for a company you believe is trading for 4x Normalized FCF. All that said, I'm a new AAPL shareholder so I can understand skepticism on perpetual 20% topline growth embedded in broker calls of $1,500/sh, etc.
Btw, it's worth reading those articles I linked to earlier -- both authors have made the (correct) point that Samsung is much more at-risk than Apple for commoditization. Samsung even realizes this, hence their pursuit of Tizen. As long as the ecosystem for iOS and OS X remains vibrant, low-ASP Chinese vendors are unlikely to impact Apple. Throw in a watch, a gaming device for the TV that gets them a toehold into TV, plus expanding share off a low-base into the PC market, and you've got new products that keep iOS and OS highly lucrative for developers and service providers.
|Subject||RE: RE: RE: RE: RE: RE: Variant View|
|Entry||06/26/2013 03:48 PM|
Got it. So when the short interest reaches THIRTY SEVEN BILLION DOLLARS, at that point you'll consider the bearish view to be part of the consensus. There are only something like 85 companies in the S&P 500 that even have a market cap greater than that, so your point makes total sense to me.
Einhorn notes that since last July consensus estimates for 2014 have fallen from >$60 to just over $40.
But you on the other hand don't believe Street estimates have even really come down yet. How far would they have to fall?
If I were running the Chinese government and I wanted to develop a home grown company to replace Apple, the first thing I would do is go out and mess with a company that employs a million people.
Is there any basis for believing a Chinese company could make products that are as good as Apple's?
|Subject||RE: RE: RE: cash balance|
|Entry||07/02/2013 06:38 PM|
I think it's more accurate to say they have high quality accounting earnings because they are burdened by higher book taxes than they are actually paying in cash. It's their FCF and balance sheet cash that are less attractive than they appear on an as reported basis.
|Subject||RE: RE: RE: RE: cash balance|
|Entry||07/02/2013 07:14 PM|
Snarfy, they are holding the cash for "indefinite reinvestment" oversees. They do not create a deferred tax liability and they have no tax expense on their income statement from this.
Here is a great explanation:
(just read the 3rd slide in, says page 1 at bottom).
You were right in theory... tax expense is supposed to be a provision for all the taxes worldwide that a company is responsible for over the period (regardless of what gets paid). If Apple were including the foreign taxes in this then the earnings quality would be high/higher. However, Apple holds the cash for indefinite reinvestment which makes tax expense lower than it should be if they didn't hold it this way.
That being said, I don't think there is enough here to make a decent investment thesis to go short Apple out of this.
|Subject||RE: RE: RE: RE: RE: cash balance|
|Entry||07/02/2013 08:29 PM|
It looks to me as if they are taking a deferred tax liability for unrepatriated foreign earnings.
When I go back over the last few years and trace the change in their deferred tax liability balance (which looks to be entirely driven by foreign earnings), it grows by almost the same amount as the line item they show for indefinitely invested foreign earnings in the table that reconciles statutory income taxes with the actual provision for income taxes.
The deferred tax liability was ~$15 billion at Dec-31, which seems like it would correspond to ~$100 billion of foreign cash.
Maybe I am missing something. The broader point is their book taxes are far higher than their cash taxes. It's not as if their accounting earnings are massively out of alignment with economic reality, which is more than you can say for many companies.
|Subject||RE: RE: RE: RE: RE: RE: cash balance|
|Entry||07/02/2013 09:01 PM|
Correction - the liability was at Sep-30 not Dec-31.
surf1680 - to your point I see they had an unrecognized deferred tax liability of $13.8bn,
up from $8.0bn the year before. If they had recognized it, it would have cost them ~$6 per share.
|Subject||Andreesen's partner bearish tablets|
|Entry||02/11/2014 09:48 AM|
Very interesting and bearish article ("Our Love Affair With The Tablet Is Over") regarding tablets from someone who should know (a partner at Andreesen Horowitz and former Netflix executive).
What I realize now is that it has been the phone all along. What we are witnessing today is a merger of phones and tablets, not just at Netflix but everywhere, which is why this decade’s attempt at tablets is nearing its death — just four years after Jobs launched the original iPad.
It comes down to size. The vast majority of the hundreds of millions of people who use tech every day are just fine with having two primary computing devices: One for your pocket and one for your desk. Tablets are trying (and failing) to be portable enough to go everywhere, yet large enough to be multipurpose. Despite all the keyboard origami and elaborate ways to make your tablet into a laptop, it isn’t one.
Stop trying. Consumers know it — the latest sales data has shown that worldwide tablet sales may have already peaked. PCs took a full three decades to reach market saturation, whereas tablets may have already topped off at the four-year mark.
If he is correct, this is obviously very bearish for Apple, which relies heavily on iPad unit volumes for profitability. I am not short AAPL again yet, but will likely buy puts soon. Nothing against Apple the company, which obviously makes products people love, but convergence of their 2 primary product lines is a big headwind for a company everyone expects to grow sales and profits ad infinitum.
If he is correct, profits could seemingly contract very quickly as both shipments and margins contract in response to demand changes and increasing competition.
Full article: http://recode.net/2014/02/06/our-love-affair-with-the-tablet-is-over/
|Subject||RE: Andreesen's partner bearish tablets|
|Entry||02/11/2014 10:25 AM|
maybe sales haven't peaked as much as there is not real incentive to buy anew - so the cycle of replacement isn't as high. I know my PCs gets harder use and I upgrade for speed every 3 years in a business setting (albeit remaining at a specific price point each time). There is no reason to do this is the personal-centric world of tablets. Just an anecdotal comment.
|Subject||RE: RE: Andreesen's partner bearish tablets|
|Entry||02/11/2014 11:00 AM|
Paul - agree, and the author makes a similar anecdotal comment:
Yes, tablets have sold in large numbers, but rather than being a constant companion, like we envisioned, most tablets today sit idle on coffee tables and nightstands. Simply put, our love for them is dying.
His comment and yours about a slow or slowing replacement cycle would seem to coincide.
|Subject||RE: Spec comparison|
|Entry||09/09/2014 05:17 PM|
As usual, you missed the important point. The real "killer app" news that Apple released today is that you're going to be able to swap out the wristband on the new Apple Watch.
No wonder Tim has been so bullish on the new product lineup.
|Subject||Re: Re: The short case|
|Entry||01/27/2016 11:56 AM|
How do you discount the possibility that Apple uses some of the $217B in cash ? I know 90% of it us overseas. But there is still an unprecedented amount of buying power. There is almost nothing that they could not buy. Do you believe there does not exist one single large business that Apple could acquire that would build value in the Apple ecosystem and increase the earnings and change how investors view the cash? Don't they need to start looking at doing some deals to offset the product cycle variability and take advantage of some deflation in asset prices?
|Subject||Re: Re: Re: The short case|
|Entry||01/27/2016 01:16 PM|
R&D expenditure? Apple spends less on R&D as % of sales then pretty much any major tech company out there.
Part of the bear thesis is that none of the new products will work. Apple car, VR, drones, Apple watch, whatever, none of them will work or rather none of them will become a blockbuster product like Iphone since a small hit is not enough to substantially affect a company of $600b mkt cap. So basically either they got lucky or Jobs was a genius, either way, I am saying they can't catch lightning in a bottle again.
So when I say multiple de-rating I am talking about multiple 3-4 years out. I expect FCFs to fall off a cliff in the outer years as the smartphone usage cycle lengthens. We've basically reached the point where the Iphone 6 is good enough. I recall saying that Iphone 6 is when Apple unit sales peak and I still stand by that statement. Now replacement cycles will lengthen as the product matures same as it does for all consumer technology products. Ipad replacement cycles lengthened earlier which has led to a collapse in Ipad sales. Same thing is coming for Iphones.
|Subject||Re: Re: Re: Re: The short case|
|Entry||01/27/2016 04:21 PM|
Biffins-I will ask my question again. Do you think Apple is going to sit idly by with $200b in cash and watch the business decline as you predict ? Maybe the answer is yes. But they have more financial capacity than any company in recent history. Don't they have to use it at some point, particularly because as you mention it will be difficult to a create business internally that will be big enough to matter. They could buy Tesla and Netflix and have money left over and both of those companies would probably benefit from Apple's scale.
|Subject||Re: Re: Re: Re: Re: The short case|
|Entry||01/27/2016 07:11 PM|
They'll buyback their stock with all that cash, egged on by Einhorn and Icahn. Since I believe their share price is expensive, it will only make matters worse.
|Subject||Re: Re: Re: Re: Re: The short case|
|Entry||01/28/2016 04:18 AM|
Should not say "strip out", rather, "add to that". Sorry.
|Subject||Re: Apple Cash|
|Entry||01/28/2016 08:35 AM|
I hope that you are wrong. For one, I have a difficult time believing that Apple will sit idly by while Amazon, Google, Comcast, Verizon, and AT&T all build OTT video businesses. There are ways for Apple to get in that business that do not include starting an OTT business from scratch. Television remain one of the businesses that can actually make a difference for a company of Apple's size. Itunes and the installed device base gives them a unique position in distribution. The subscription character of the cash flows would incrementally improve the multiple.
Apple is in a unique position as an acquiror because they have so much cash to buy, there business requires little cash to maintain, and they have a lot of cash to invest behind the acquired business. Any business that would benefit from more scale would benefit from Apple's $40B per year in free cash flow. You could put $2B more behind Coke and they probably would not sell more soda. But if you put $2B more behind Netflix, you would very likely sell a lot more subscriptions. Likewise, if you put $2B more behind Tesla, you could scale production and enter new categories. There must be opportunities to buy companies that can leverage Apple's global software ecoystem and installed device base.
I don't know about Einhorn and Ichan pushing for a buyback. But Apple has enough cash to do both. They could make large acquisitions and repurchase a lot of stock.
|Subject||Re: Re: Apple Cash|
|Entry||01/28/2016 10:27 AM|
i wonder how the market would react if apple bought
1) tesla 2) nflx 3) TWX
i think using the services idea is interesting, however one worry is that it is still tied to hardware sales to keep the device total. i think it works if one thinks the replacement cycle gets extended but users still remain with apple.
|Subject||Re: Re: Re: Apple Cash|
|Entry||01/28/2016 10:59 AM|
they could do acquisitions that could drive service revenue that would then drive device sales. Exclusive content is one area. They acquire content assets and then produce content available exclusively through their ecosystem. Amazon is doing this in a different way with Prime Instant Video. You could argue that they don't need to acquire content to do this-just license it. But if you believe that exclusivity is going to be increasingly valuable to a consumer technology business that is using the content to drive other businesses, like Amazon, then acquiring content assets could make sense.
Warner Bros. making a series of DC-Comics related short films available exclusively through iTunes would be an example. If they are able to build VR/AR experiences unique to their devices with exclusive content, they could create new reasons to buy the devices. This would have huge application if they ever made an actual television set. The incremental cost to distribute exclusive content would be low.
Apple is doing everything on their own. Apple News. Apple Music. Apple Pay. Some of these things make sense. But eventually, there may an acknowledgement that other companies have talent and advantages that Apple cannot easily recreate. Why not just buy Spotify and scale it to make it the dominant global music streaming service instead of fragmenting the market with your own subscription music service that is not going to be meaningful to Apple's business.
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: The short case|
|Entry||01/28/2016 12:56 PM|
perhaps because amazon's shareholders don't care about financials? :-)
|Subject||Re: Author Exit Recommendation|
|Entry||09/09/2017 08:25 PM|
Until recently, when Apple stock was still trading in the low $100s and at single-digit multiples, we were buying current product categories at a discount and were not paying for future product categories.
At today’s price that is not the case anymore. That is true with any company – the more expensive the stock gets, the more clairvoyance investors need to discern the company’s future growth.
At Apple’s size it is very hard for the company to increase its earnings significantly. Macs, iPads, and even iPhones are mature products.
The iPhone may have a few growth spurts left, but not many. It is facing an unavoidable headwind: the elongation of its replacement cycle. The iPhone improved substantially over the years, but as the i-marvels piled up, the incremental improvements that motivated people to buy a new phone every two years or so became less and less significant.
At some point the iPhone will face the fate of the iPad – its replacement cycle long in the tooth and sales stagnant and declining.
Will the iPhone’s sales stop growing in 2018, or 2020? I don’t know, but from a long-term perspective of the company’s valuation, a few years don’t make that much difference.
(A new iPhone is expected to be unveiled next week. The stock fell slightly Wednesday on concern supply disruptions could cause shipping delays with the new phone.)
Services is the only segment that can grow at a double-digit rate for a considerable period of time, but it only represents 13 percent of revenue. Even the Apple Watch doesn’t really move the needle.
They need another genius
But can Apple come up with new product categories? Let’s ponder on this question in the context of the following quote:
“Talent hits a target no one else can hit; Genius hits a target no one else can see.” – Arthur Schopenhauer
Apple has a lot of talented people designing and redesigning products in the categories that Apple already dominates. They are hitting a lot of targets no else can hit. Apple’s brand is as healthy as ever, and so is product satisfaction.
However, to create a new category of products Apple needs to “hit targets no one else can see,” and this requires a genius. But in an organization of this size with a lot of bright and talented people, it also requires a benevolent dictator – someone able to make bold, unconventional decisions (and own them), someone who in addition to everything else is able to inspire others to create what they may think is impossible. Yes, I am referring to the one and only Steve Jobs, he of the “reality distortion field.”
Here is an instance that comes to mind: Jobs asked his engineers to come up with a touchscreen computer – a tablet. They did. It looked like a bulky version of today’s iPad. Steve looked at and said “Let’s put the tablet on ice,” then refocused the company on miniaturizing that tablet and making a phone instead.
It is important to remember that at the time, though Apple was financially healthy, it was not swimming in cash the way it does today. Jobs made a benevolent dictator-like decision: He diverted engineers who were working on the MacOS to work on what would become the iPhone OS, causing the late release of some Mac products. And only years later, after the iPhone was a raging success, Apple brought the iPad back to life. That was Jobs’ Apple.
Now let’s visit Tim Cook’s Apple. The New York Times ran an in-depth article unearthing why Apple has (so far) failed to come up with an electric self-driving car. These few sentences jumped out at me:
“But the car project ran into trouble, said the five people familiar with it, dogged by its size and by the lack of a clearly defined vision of what Apple wanted in a vehicle. Team members complained of shifting priorities and arbitrary or unrealistic deadlines.”
Nokia spent a lot on R&D too
Even Jobs admitted that Cook is not a “product man.” Cook doesn’t have “the vision,” and thus he doesn’t have the authority to be a benevolent dictator. Nor does he have the charisma to project and maintain a reality distortion field.
Today Apple spends almost $12 billion on R&D – double what it spent just a few years ago. But as outside observers, we really don’t know where this money is going. Or more importantly, how productively it is being spent. I vividly remember how Nokia was increasing its R&D spend every year during the last years of its dumb-phone dominance, but all that R&D did not bring forth new products that would have saved the company from its eventual demise. Apple is not facing Nokia-like collapse, but the R&D argument still stands: R&D spend doesn’t always equal great new products.
The NY Times article said that Apple curtailed its ambition to make a car and is now focusing solely on self-driving technology. In other words, Apple is basically pulling out of the electric car space (at least for now).
If Apple develops and licenses its self-driving technology, it will recover some of its losses on investments made to date. But it will not be able to take advantage of the significant competitive advantage that comes with its incredible brand, its distribution network – hundreds of stores (potential car dealerships) sprinkled all over the world – its know-how in battery management, its design prowess, and its i-ecosystem.
We still own a little bit of Apple stock but have sold most of what we owned at current prices. Maybe Apple’s augmented reality products will become a huge success, or maybe the company is working on a brand new category of products that we have not even imagined. It is all possible.
In making investment decisions you never have perfect information. Apple is no exception. At today’s valuation we are paying for genius – Apple’s ability to successfully create and dominate a new, large product category. While the company is run by very talented people who will do a great job getting us excited about the categories of products they are already in, the company’s genius died with Steve Jobs.
Let me tell you where I could be wrong: India may prove to be a very fruitful market for Apple. iPhone penetration there is very low, Apple is building new stores, and India has a billion-plus people. I think 5G – which will allow much faster downloads – may end up creating another super upgrade cycle for iPhone. Also, Apple may come up with incremental innovations that keep people excited about iPhone, and the upgrade cycle will remain stable. Augmented reality – AR – may be another driver that I am underestimating. The iPhone may turn into a delivery device of earth-shattering innovations for Apple.