|Shares Out. (in M):||5,500||P/E||12.84||12.72|
|Market Cap (in $M):||594,000||P/FCF||9.66||8.64|
|Net Debt (in $M):||-146,000||EBIT||60,050||61,467|
Better than expected product launches this fall and next year, steady growth in services and other products, clarity on the stickiness of the ecosystem and all that implies, combined with "earnings yield" value accretion to shareholders from buybacks and dividends will eventually force a revaluation of the shares.
|Subject||Service Revenue Growth|
|Entry||08/16/2016 09:12 PM|
"most observers believe svices should grow 15-20% annually for the next several years"
Assuming that you believe this as well, what would you say is the bigggest driver behind this service revenue growth?
|Entry||08/17/2016 03:30 AM|
Agree with Condor. The current state of AAPL is analyzed through and through. For the record, I'm a huge AAPL fan and a believer in the company long term, but I reluctantly put this in the too hard pile recently.
The most interesting question for an investor of course concerns Apple's future: can AAPL continue to create blockbuster products and increase the monetization of its ecosystem so much that it compensates for the falling iPhone sales? I don't know (the only rational answer), but I don't think that these favorable scenarios are priced in today. As such, a rerating may occur after launch of said blockbuster products or evidence of said monetization - but before that, I doubt we'll see one. And I'm not quite seeing how AAPL can compensate for the falling iPhone sales over the next few years.
In the meantime, AAPL's stock could just as easily rerate down as up IMO. One can fairly easily think up depressing revenue growth scenarios for a few years at least. I don't understand people who seem hell bent on shorting AAPL when there are plenty of easier marks out there. But nor do I understand the need to be long AAPL at 108 USD. It's not that cheap either (my DCF value is 113 USD). You'll probably make some money over the long term, but it's not a sure thing and there should be easier things to do out there. --> Too hard pile.
Example of a scenario that would depress AAPL's stock price for longer. This is what I use as revenue input in my DCF (which as stated before returns 113 USD).
|Subject||Re: Re: Strawman|
|Entry||08/17/2016 03:48 AM|
(I should add that I'm pretty sure all these figures will prove horribly wrong.)
|Entry||08/17/2016 04:03 AM|
Put me in the "this is probably unsustainable" camp. But Apple is a tough short because there is some chance they do something pretty epic. They have the cash, the talent, the culture. Meanwhile the multiple is fairly low and their capital return is surprisingly excellent. All things considered, it doesn't seem that mispriced.
|Subject||Xiaomi - comparable phones 5 times cheaper|
|Entry||08/17/2016 06:43 AM|
IMHO bulls underestimate the threat from Xiaomi and the impact it will have on volume and ASP of iPhones.
It took the company only few years to become No.3 smarphone manufacturer globally and the largest in China. And the reason for that is simple - it sells high quality phones cheaply. I mean really high quality phones not some plastic phone immitations.
As an anecdotal example I bought myself Redmi 3 ($125) - great slim metal design, long battery life and has all the features the average user of the latest iPhones and Galaxy phones needs. And the phone also works smoothly. Good reviews indicate other users have the same oppinion.
Currently Xiaomi phones are still almost unknown neither in US nor Europe, but that is likely to change over the next few years.
There will always be some ultra loyal users who will continue paying any price just to be part of Apple ecosystem, but for majority the obvious question will be - why buy iPhone for $600 if I can get almost the same for $125?
|Subject||Question for Condor/Others on the Cash|
|Entry||08/17/2016 09:27 AM|
I am curious how the Apple bulls feel about the cash position and the potential for Apple to deploy it for a big acquisition.
I am a Netflix bull-so take this with a grain of salt. But Apple is in a position to buy Netflix-and then double the content budget to create a global television service that would be a viable competitor to the big bundle in the U.S over time. That can be a very large business-even for Apple. This would be a much more powerful way to enter the market than repurposing linear networks for a new streaming service.
I have heard the argument that Apple won't do this because 1) it is a product company; 2) Netlfix is available on all devices and Apple wants to sell Apple devices; 3) Apple does not need to buy Netflix because it can fund its entry into content/streaming without buying anything. I am not persuaded by any of these arguments.
1) Apple is becoming more of a service company-subscription video is probably the highest margin and biggest service revenue stream.Increasing the service revenue would be great for the multple.
2) having a service revenue stream that earns money outside of the Apple ecosystem is a hedge against Android/low-cost hardware competitors-----Comcast bought NBCU even though it was not exclusive to Comcast's cable system----John Malone has hedged content and distribution.
3) It would be more efficient for Apple to buy Netflix than try to enter the market from scratch because of the 80mm subscribers, existing content library, and brand awareness outside of the U.S.
I don't think that there is much integration risk. Netflix can operate independently. Apple can provide more capital.
Apple is in the great position of having enough cash and free cash flow that it could not only buy a great business-but also scale that business in a way that dramatically improves the economics. There are few businesses that benefit from incremental scale more than content.
|Entry||08/17/2016 01:13 PM|
I will provide a more detailed response to the specific pushback in another post, but wanted to start with some broader thoughts:
1. Condor, you accuse me of setting up a strawman argument. My understanding is that means I am arguing against an easy to rebut view that few people actually hold. In other words, my suggestion that there is a conventional view that Apple is just another phone OEM with a life cycle that will generally follow the path (albeit from a much larger scale) of its predecessors is not actually held by many investors. Yet it seems to me that Biffins, Barong and Leo implicitly do hold this view by modelling revenues having reached an all-time peak in fiscal 2015. I actually think it's more than a little ironic that the first thing Biffins and Barong do is state their agreement with you, and then proceed to promulgate the very argument that you brand as a strawman. I have seen similar views from other astute investors in many places on this site and others.
2. I don't think the fact that the company is well-covered (and of course we never argued that it wasn't) says much about what the prevailing view actually is or about the quality of the investment idea. Can anyone really know what investors generally believe without an exhaustive, well-executed survey? What we can say is that stock investing is similar to a pari mutuel system where price distills the prevailing beliefs of market participants and, in our view, a TEV/EBIT of less than 7.5 suggests they don't expect much going forward.
3. Barong, I appreciate your disclaimer that you're pretty sure your projections will be horribly wrong. If units and ASPs decline at anything close to what you have modelled, our thesis is incorrect and Apple will be a poor investment from the current price. Everyone is entitiled to project as they see fit and I don't want to get into the weeds too much here since we are very far apart in our views, but as an example, Other Product Revenues approached $10bb over the last 4 quarters and you are projecting that they will be under $3.5bb in 2017. Your model strikes us overall as very, very pessimistic. The fact that your DCF actually generates a value that is higher than today's market price off of these assumptions suggests to us that this one actually shouldn't be in the too hard pile.
4. Biffins, our point on the larger installed base and the longer refresh cycle is simply that a true full refresh cycle should generate higher unit sales. We are assuming that a longer refresh cycle will translate into a higher percentage of the the installed base participating in the refresh. Since mathematically unit sales will equal the participant percentage times the size of the installed base, we expect sales to be higher on the next full refresh since both of the factors in the equation are higher. You may disagree with that participant percentage assumption but I wanted to try to clarify our meaning since you said you read the sentence several times without understanding it.
5. I fully agree with Condor's final sentence that the most effective long statement on Apple is that it provides an excellent earnings yield with a decent capital return and it is a high quality compounder at a good price. Our intention was to support exactly that view throughout the writeup but maybe we weren't as direct as we should have been. A good part of the discussion was about the durability and opportunity set of the franchise, but that is what makes it a high quality compounder in our view.
|Subject||Re: Re: Xiaomi - comparable phones 5 times cheaper|
|Entry||08/17/2016 01:14 PM|
Huawei has caught up.
|Subject||More detailed response|
|Entry||08/17/2016 01:49 PM|
I think it is a paradox that the analyst community so strongly supports Apple, while my sense is that the stock is very underowned institutionally. I think the sentiment by those that control investment dollars is on balance negative toward Apple's stock. I've been monitoring the holdings of larger institutions and most large cap mutual funds and large hedge funds are meaningfully underweight the stock versus their benchmarks.
GCA - the drive of the services revenue is the growing installed base and ever broadening range of offerings. I don't that people appreciate the services revenue stream. Despite the $28 Billion in estimated FY 17 revenue from this business, it is rarely analyzed in detail in most research reports. The PE will start to rerate when the market understands that this is basically a 30% toll on all in-app software and content as well as many services purchased. (If the service itself is from the software, the charge applies. Thus, Uber doesn't pay it but Match.com does.) How can there not be continued growth in purchases of software, content, and services through apps with the installed base and product line continuing to expand? This will dampen the cycle impact of the phone and cause gross margins to improve over time. This services stream will likely grow to $50 billion in less than four years. Finally, I think it is important to note that Apple provides real value in exchange for this toll. The company provides development tools, infrastructure, billing as well as a distribution and marketing pipeline to a ready installed base of a billion units of higher-end consumers.
I also don't believe that it is appreciated that the installed base continues to grow meaningfully, by some 100 million phones per year, despite the declining number of unit sales reported by Apple because of refurbished phones being resold. I probably should have flushed this detail out more. My overarching point is that it is really hard to get the final sales number much below 200 million units for long. I don't believe that the average life of a phone will extend much past three years. But even if it extended to four years, it would still only be a few years before Apple's sales are well above 200 million units again. I also don't find it necessary to hazard a guess on future iPhone sales. I do however believe that expectations are quite low for the iPhone 7. This is based on the premise that Apple’s user loyalty remains high and the installed base continues to grow some 15% per year. Asian purchasers of 6+ and 6S+ phones clearly caused a spike in sales, as noted, but those users are now part of the growing installed base. Separately, I do not buy the view that Apple has stopped innovating. They understand that they need to make the overall experience more robust and convenient, which is more software and services driven. The necessary enhanced hardware features will be offered, but always slower than the critics demand. In my view, Apple Watch, CarPlay, Pay and Music are strong first generation products that support my thesis. No one responded to my observations about the Watch, but it is hard for me to imagine that the company doesn't sell 20-25 million units with the next version. Of course, if the Watch flops and services slow, my thesis is broken. The thesis is not broken if Apple only sells 70 million units versus 75 million units (about a $4 billion decline in revenue) in the upcoming December quarter; as long as the installed base keeps growing, this will only lead to a stronger cycle in the future. Services could grow 30% y/y ($1.8 Billion) and the Watch sells 5 million additional units y/y ($2.5 billion) in the December 2016 quarter to offset such an iPhone decline; margins would improve and EPS would still grow since share count will be 6% lower. My premise is that over the next twelve months, Apple's model will be deemed much less cyclical while EPS starts to return to growth, and investors will realize it is just a matter of time before iPhones grow again. As I pointed out in my original piece, the March and June compares start getting really easy. Anyone that thinks EPS is going to $8 sometime in the near future has not thought through the services, Watch, installed base, and share count reduction. Finally, I project that iPhone sales will return to over 250 million sometime in the next three years because of the much larger installed base. If that does not happen, it is likely because other Apple products are cannibalizing the iPhone.
I concede that it would be hard for the stock to rerate if the hardware cycle impacts earnings in the future as it did in FY 2014 and FY 2016, but the company does not need to beat and raise to effect a rerating. If the company hits published numbers and people appreciate that trough earnings are in and the quality of earnings has improved (more services and more diverse products), the rerating will occur. This will be helped along by the company's continued aggressive stock repurchase program. The next 15-20 % reduction in share count will be far more impactful to the stock price.
|Subject||Re: Strawman defined|
|Entry||08/18/2016 12:47 AM|
Thanks. Obviously too low on the other products line. Not entirely sure what I was thinking there, not entirely sure it will matter though. Anyway - you make some good points.
|Entry||08/18/2016 05:55 AM|
One Obvious reason to own AAPL today, as in right now, is the probablility of repatriation occuring within the next 18 months. This catalyst was clearly stated by Tim Cook last week. We believe this alone would lead to a significant multiple expansion from todays levels.
How long are you willing to keep unrepatriated income overseas?
Honestly, I believe the legislature and the administration will agree that it’s in the best interest of the country and the economy to have tax reform. So I don’t think I have to make that decision. I’m optimistic that it will take place next year.
|Subject||Re: Re: More detailed response|
|Entry||08/18/2016 01:18 PM|
Thank you, I did understand your criticism. I agree that this write-up contains nothing new about the company that hasn't been discussed elsewhere. However, just because an argument has been made and is known by people following the stock doesn't mean that it has been discounted in the share price. As is clear from the responses on this board, many know the view but simply don't agree with it. So, yes, you are right that we are just taking a side. Again, this doesn't mean that we have set up a straw man to knock down or that it isn't contrarian, as in fact it seems that a great many well-informed market participants hold the opposing view.
The next part of your criticism I think boils down to "why now?" for re-rating the stock. The catalyst section of the write-up lists better than expected product launches this fall and next year, steady growth in services and other products, clarity on the stickiness of the ecosystem and all that implies, combined with "earnings yield" value accretion to shareholders from buybacks and dividends.
Maybe it's due to a flaw in our approach, but we've been doing this a long time, and experience has taught us that the catalyst we expect to have the greatest impact on the share price rarely does, and frequently it's something out of left field or seemingly nothing at all that suddenly changes perception. Often, re-ratings seems to occur during inflection points when there is clear visibility that the second derivative of revenues and EPS is turning positive again, as we believe we are on the verge of for Apple now. In our view, right now we can see the bottom of the phone refresh cycle just as the higher growth, more predictable, low capex "Services" piece, along with the "Other Products" segment, are becoming truly meaningful parts of the business. The market will therefore soon be able to confidently project a smoother revenue stream going forward.
Once this is clear, we simply don't think a recognizable asset like Apple's stock, which is almost large enough to be an asset class in itself, can sit around at below 7.5 times EBIT in a world where the bonds of technically insolvent countries trade at negative yields, the entire US treasury yield curve is well below the inflation rate, and bubbles seem to the norm in most asset classes.
Maybe your point that Apple is sitting near the top end of its 5 year historical P/E range actually means that we're breaking out on this measure and the re-rating is in fact underway. Who knows?
|Subject||Re: Re: Re: Strawman|
|Entry||08/18/2016 01:21 PM|
"I think you are taking my comments a bit too literally and a bit out of context."
True - I was just making a very small point. This guy (you) already got it:
Finally, re: multiple/valuation, on P/E, AAPL has traded between 8x and 15x forward year EPS for the last 5 years, averaging 11x. Currently, they trade above 12x. I find it hard to argue that they should be re-rating higher - they are closer to the high-end of their valuation over the last few years, years that included some unbelievable earnings growth for a company that size. I certainly think AAPL in 2014 - when they traded at 13-15x is better than AAPL today. More importantly, without a catalyst other than hitting current consensus numbers, what makes them re-rate? Unless - again - you think the market thinks consensus is too high, which I highly doubt.
So you already made the case that it could re-rate (though in my defense I quoted your other paragraph directly!). The thing is, I think that if people were convinced this company's earnings were going to be stable, it could easily trade for 20x. Everything else does. Look at Tootsie Roll...and look at MSFT which traded for a lower multiple for years as investors were convinced they were done and you can come up with a long list of examples. We don't want to make the mistake of thinking 8x or 10x or whatever times means anything other than an abritrary marker (esp. in a world of 1.5% 10 yr UST). In the end, I was only make a wee small point - things happen, things we often can't see. That's it.
P.S. This stock ALREADY rerated - you know, when the EPS report came out. I'd call a 20% move in a few weeks a re-rate...
|Subject||Re: Re: Agreed with Condor|
|Entry||09/06/2016 08:49 PM|
I believe this is the data you were asking for. My contention is that "Over 3 years" tab will keep growing at the expense of the other categories. This leads to declining sales as product cycle extends. Also if they break from tradition and call this Iphone 6 SE or something instead of Iphone 7, implying the likely iterative changes and no design changes, I believe sales could be even more disappointing.