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AAPL of Investors’ i?
This orginally appeared on the Daily Capitalist and was
written by DoctoRx.
Despite continuing to unhappily take the
"under" both for the U. S. economic consensus (e.g.
Ben Benanke's positive growth forecast) and thus for the stock averages, I
can make a multi-year case for AAPL stock as having a favorable
risk-reward ratio. Here's why. Full disclosure: I am long
AAPL.
The major argument against AAPL has been that it has
only produced a stream of hit products similar to the output of Andrew
Lloyd Webber or Kid Rock, or a movie studio, etc., but that when you live from
hit to hit, you can flame out fast. So, how do you put a valuation on
that sort of company? In days of more fearful (i.e., conservative
= attractive to the investor) valuations of stocks, one way was for the
stock to sell around or even below the value of its tangible assets.
Of course, profitable companies with strong market positions were
not expected to keep as much in cash and cash equivalents as Apple
does; the expectation was that stocks had to provide income as bonds did,
plus the reasonable possibility of capital gains. Thus, the inherent
greater riskiness of stocks vs. bonds was to be made up by a margin of safety
for stockholders. If one looks back to the two major secular bull
markets that involved outperformance of stocks vs. bonds since
World War I, one can look at 1921-1929, and (pick your preferred starting
and ending points, and your preferred index) 1932-1979 (or, 1940-65). In
those cases, stocks started out as undervalued vs. bonds by multiple
metrics, such as: dividend yield, implied earnings yield (= reciprocal of
the P/E), and relative to tangible book value.
Don't look now, but those days of conservative stock
valuations have begun to return. For some months now, the DJIA has
outyielded the 10-year T-bond, and for some of that time, outyielded the
30-year as well. This is the first time outside of the panic in late
2008-early 2009 that this has been seen since about 1960.
I mention the above because AAPL is one of the few
large companies with the tangible assets, valuation and growth possibilities to
actually qualify as having highly positive present value even under
conservative valuations. Long-established names such as MCD and IBM have
been busily returning almost all their free cash flow back to shareholders
via dividends and stock buybacks, but however commendable such activities
are, all that cash has left the companies' coffers and cannot be double-counted
in the stock's valuations. So one is buying the future of those
companies, whereas soon enough Apple will have $120/share in cash
or near-cash (short-ish term assets) with no debt. Thus
one can adjust the current $422 stock price down to about $320
without much of a leap in earnings projections, and thus make AAPL
stock more comparable to MCD and IBM. On that basis, it is
cheap compared to them, and has the home-run upside possibility in the
next few years that could yield further big gains on top of the astounding
run it has already has.
Given the clear risks to AAPL's stock price, is the
above-hypothesized upside adequate for long-term investors?
Has Apple moved into the category of great companies
that are great because of their corporate capabilities and identity (e.g. MCD
and IBM), rather than because of the leadership of one or two people,
the loss of whom would likely lead to the corporate ship foundering on the
rocks one of these days?
With Siri potentially representing a meaningful step up
above the competition, the answer to the above questions increasingly may
be "Yes". Siri has even impressed someone at the
Harvard Business School, as discussed in Apple's Siri is as Revolutionary as the Mac:
Siri, the new iPhone's voice-control software, is going to
have as big an impact as that first iPhone did. It's going to fundamentally
change our relationship with computers. . .
Jobs described the original Mac as a bicycle for your mind.
Siri deserves some equivalent description — I think it's going to take devices
and turn them into assistants for our minds. It seems crazy right now, but I
don't think it will be long before we view this technology in the same light as
we view the iPhone: we won't quite be able imagine life without it.
Techie bloggers w/o portfolio are one thing, Harvard
Business School another. As a modern-day Edgar might have said (King
Lear), in marketing, the buzz is all.
Concomitant with high praise for iCloud from such people as
David Pogue, tech blogger for the NYT, it appears that Apple
continues to have the rare combination of real innovation and
execution. The iCloud is an important achievement for AAPL given the
problems it had with its prior iteration, MobileMe. Apple has already
apparently spent close to $1 B on its new center in N. Carolina. There
will be more such centers worldwide. Not many companies have the funds
and capabilities to have a great, large-scale cloud
capacity. With the cloud comes really, really knowing your customer,
with the many business benefits that entails.
Apple appears to have the chance to be a GM
in its heyday (say, post-WW II up till the first oil shock), and IBM in its
first computer heyday (say, 1950s and especially 1960s into the 1980s):
to be a, or even the leader in a transformation of the way we
live and do business. It could be the master of the
screen. What consumer screen remains for Apple to conquer?
The TV.
It is said that SJ hated TV. Perhaps Tim Cook
doesn't. Within the past year, Apple wasassigned a patent for goggle-free
3D TV viewing that allowed multiple TV watchers to all be individually
tracked. But it's better than that: the viewers could each move
around in their chairs or on the couch, and the system would be tracking them
and would adjust the images to maintain the 3D capabilities. With an
Apple TV that is a whole TV rather than simply a micro-mini computer
hooked up to a TV, a major chunk of the non-movie theater world of screens
could arguably then belong to Apple. Tying that possibility with an i-enabled
product line with an improving Siri and descendants/relatives/friends of Siri
set of functionalities, Apple could then be a great company qua company
rather than only a Jobsian vision brought to fruition.
There could be much more to the AAPL
stock story. Think further diversification.
Apple is already a very large retailer, both online and
in physical stores. Imagine the possibilities. Amazon grew rapidly
to sell much more than books. Apple has retailing possibilities that go
well beyond Apple products. Just as Amazon grew into selling much more
than books and the into developing products, so might Apple grow to be a
major retailer of . . . whatever. TBD.
Moving on, let's discuss the earnings in light of the above
optimistic discussion. Here is alink to an AAPL-oriented blogger
who reports that the AAPL blogosphere is looking for Tuesday's Q4
earnings to approximate $9/share (the Street is in the $7+ range).
Given my downbeat macro economic view, I would suggest that Siri-enabled
"i"-devices will roll out this and next year and that
calendar 2012 AAPL earnings could be roughly in the range of
$50/share and calendar 2012 earnings could be $70+. Cash on the
books, if there is no share buyback, large acquisition, or large dividend
payout could be $200/share, or two hundred billion dollars, in a few
years.
Let's turn to the intangibles at Apple
post-SJ. Again, while I have no idea of what the Apple mood is at
Cupertino and globally, the "vibes" from the stock action
suggest positivity. Perhaps the team is inspired by a dying Steve Jobs
working as long as he could. So perhaps they want to "win the
future" for him. Perhaps more relevant, the new management team has
a lot to prove. If I were part of the new leadership at Apple, already
with more personal wealth than I would need, my professional goal
would be to show that Apple was not a one-man show. So we may
have a double-barreled set of internal factors at the
company that favor shareholders. In contrast, by the time that GM and U.
S. Steel (picked randomly), were slowly dying, many years from their
dynamic growth phases, complacency was prevalent in upper management.
What about competition? Of course, it will be
intense. The important big picture point is that AAPL is in a leadership
position in one of the key growth industries for years to come. All the
company has to do is maintain its smart-phone lead and keep a large
market-share of tablets as the worldwide market grows (I know, easier said than
done). Apple did not bother with a conventional, slow-/no-growth
cellphone, so the market is coming quickly to it; soon enough, will anyone even
market a non-smart phone? Will a non-smart phone be like a Yugo?
Where's NOK stock price now?
Meanwhile, you can't beat something real- such as Siri- with
nothing but talk (pun intended). I recall Mr. Softee (MSFT)
boasting in the 1990s how much money it was spending on
- what was it . . . is my memory slipping? . . . oh that's it-- voice
recognition for computers! It was going to make the mouse
obsolete. Wha happened? So what's going on now at Mr.
Softee? Oh yes, it took some cellphone Viagra. But the
effect didn't last four hours. So what has happened to the critically
well-received Windows phone in the marketplace? Here's an August
2011 report:
Windows Phone 7, the operating system rolled out by
Microsoft late last year, was generally received warmly by critics. But the
Windows Phone OS has failed to find a firm foothold among consumers, according
to a new report from analytics firm ComScore. From March to June of 2011,
ComScore estimates that the market share owned by Windows Phone 7 dropped from
7.5 to 5.8 percent, a loss of 1.7 percent.
Whoops!
MSFT missed the search engine gold-mine and has (wow
!/sarcasm on) Bing. It keeps playing catch-up. Meanwhile, just how
much profit does GOOG get from the Android platform? Oh yes . . . once
again memory fails . . . now I remember: zero. Android is just so
great and wonderful, GOOG gets a premium price for licensing it
out. Nothing. (Yes, I know there's another
way to look at the Android freebie, but the business rationale therein has
plenty of warts, as well.) And then there's Amazon and its fiery
line. These may be good e-readers, but they also may ultimately flame out
(pun again intended). And AMZN is grossly overvalued. And the
Street can't help making excuses for its repeated failings to invest
in its planned needs (or worse, but I'll keep my E-mouth shut
now). For example, here's Value Line on AMZN:
Amazon.com's bottom line is apt to compare poorly in the
coming quarters. Every couple of years or so, the company has had to make
substantial investments in physical and technological infrastructure, much of
it running through the income statement and hurting profits. The time for
this has returned once again . . .
Bottom line on competition: the above snark aside, all
Apple's obvious competitors have their own issues. And given that it has
limited legacy businesses (iPod), perhaps it does not deserve the same low
P/E that MSFT deserves in view of MSFT's revenue stream still
coming very heavily from the 20th century stuff of an operating system (?
to become obsolete other than as a free, bundled service) and Office (? same
fate).
Why might AAPL be undervalued? Must not the
market price be highly efficient for such a highly valued company?
My answer: AAPL could be inefficiently (under)priced
for the opposite reason that CSCO traded at 150X earnings in 1999. Was
that an efficient price? LOL. CSCO did lots (and I mean lots)
of deals for stock back then (and it's been doing more lately). So the
Street "needed" a high stock price to allow it to do the deals so
that investment bankers could have great vacations and even villas in France
and Italy, or at least the equivalents in the Hamptons. So they
invented all sorts of fake valuation reasons to "justify" 150X
earnings. OTOH, AAPL does few deals, and I don't know if they need Wall
Street middlemen at all for the few they do. Plus, unlike MSFT,
which is again boasting of how great its future will be, AAPL is famously secretive.
It simply wants to win, and it defines winning as putting cash in the
bank. Maybe MSFT will indeed have a great future, but even if that
is so, it won't mean that it won't be Pepsi while AAPL could be Coke. Or,
Ford and GM back in the day. After all, we're taking long-term global
growth markets, where there will be multiple winners.
Not that there's any guarantee, but Value Line gives the
"value line" (fair value) for AAPL at 17.5X cash flow. In
Apple's case, cash flow is more or less equal to earnings. Discounting
that by 20% to 14X earnings, and assuming $50/share earnings sooner rather than
later, one gets a $700 share price. Even if it takes two years to get
there, that sounds pretty good to me.
If one day, Apple announced that it was going to
pay out $150/share with a recapitalization, including taking on some debt while
disbursing all its cash, consider what that would do to earnings estimates and
the stock price. There's your immediate stock upside in addition to
earnings surprises and major new product releases.
Putting it all together, AAPL stock strikes me as well
positioned to potentially be a big enough long-term winner to justify the
risks, even at its current stock price. It has a seasoned, motivated
management team; a potentially hot product feature to roll out throughout its
major product line in Siri, with years of improvements in that technology
ahead; unbeatable financial strength; loyal and even super-loyal
users; a focus on secular growth fields; and a low price-earnings ratio
based on reasonable earnings estimates. All this is being said by a
blogger who is bearish on the stock market as a whole and bearish on the U. S.
economy; but AAPL is about as far from the central control of the economy
exerted by Washington as can be; it is highly international; and periods
such as this recent period of high correlation between stocks have always given
way to periods of differentiation. Looking out to mid-decade or so,
I thus perceive a significant chance that AAPL can achieve the bifecta of much
higher earnings and a nicely higher P/E. This might yield the world's
first trillion dollar market cap company. If so, some might want to sing:
Yes, Siri, that's my baby; No, sirree, don't mean
maybe; Yes, Siri, that's my baby now. (Apologies to Donaldson/Kahn)
Next stop on the AAPL express: earnings Tuesday after
the close. Plus holiday season guidance, which will be way low, IMHO.
Staying tuned.
Of course, as always, nothing in this post represents
investment advice. Rather, it represents my current thinking, which
itself may change for any number of reasons, and no one can expect any changes,
large or small, in my viewpoint to necessarily make their way into the public
domain.
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AAPL is dependent on a highy competitive product cycle (especially at its current margins). Competition will erode its market share and profit margins. The stock is far from a sure thing and as big as it is not much of a growth play.
Every single time Steve Jobs has left Apple, this time permanently, the management team starts making some really dumb decisions.
Like an iPhone 4S, like the other times Jobs split (one to start Pixar, next to make NExT) the internal product developers started releasing one semi variant after another. Can't begin to to describe the 90's and Apple products, looks like that they are going down that same route again just to chase the tail of the competition (all the "new" features on the 4S are standard on Android). I expect another "new" release of an iPhone 4 SU then the iPhone 4SUX.
The problem with AAPL is that everyone is basically gunning for a piece of that industry. Apple's competitors, although they may not have as much cash, have the ability to inflict grave harm upon Apple by basically flooding the world with cheap smartphones (even an iPhone costs less than $200 to make), destroying Apple's margins. Apple has done a great job in saturating the markets in which they can sell product for $500-$800/unit, but the ability to grow further in those markets, especially given the financial situation out there, is limited.
I view it a lot like Win95 versus OS/2 back in the 1990s. OS/2 was quite clearly a superior product, but its giant problem was the hardware to run it cost a lot more than what you could run Win95 on (ie: OS/2 required 16mb of RAM, Win95 ran in 8!). Win95 won the day not because it was better (it certainly wasn't!), but rather, because it was cheaper.
If investing in stocks had anything to do with fundamentals, I'd say Apple is a big bubble. C'mon, a company that creates toys for rich kids managing to get a bigger market cap than exxon, the one who produces the lifeblood that Apple, and everyone else requires; that can't be sane.
My idea is that Apple sold a narrative and image. But that's all there is. Words and pictures, and those shiny gadgets. But all of that is like a castle built on sand. What will Apple do as the "big contraction" spreads? Who's gonna buy their shit, considering that they're one of the most expensive? Who's gonna buy stupid shit when you are more worried about eating everyday.
Apple is not a necessary part of the internet either, as Google or Amazon, so if they go, nobody would find out.
But considering Apple is only image and narrative, and that's what "the market" is all about, then it might be a good investment for a while (until reality sets in)
+1 Good post. If somebody asked me, "Is aapl a good buy?", I'd say it depends on the time frame. While the Fed is printing money, yes, when they stop, no. The risk is being caught out when the money stops flowing, but that could take awhile during an election year. But fundamentally, it is as you say - a product of no substance.
I know a lot of people very loyal to Apple, as if being loyal to a product logo somehow engenders cool instead vacuous consumerism, so I won't list the 1001 reasons why Apple is shit and any other hardware/software company is cheaper, better, faster, and more innovative.
Agree wholeheartedly. Also, I would reply with one of my favorite quotes; "The future? The future is cancelled due to lack of interest", (Interest on the debt, of course). Long term stock picks? Please; don't be silly.
Pigs can FLY. This Time IS Different.
AAPL's strengths come from marketing and making their products easily tie in with services that consumers want in a slick UI. Their products are not really revolutionary. The smartphone, tablet, laptop, music player all predated AAPL. It is a quality issue in a world where there is very little quality competition. I don't even like AAPL that much. But any quality is a breath of fresh air in this world where people sell plastic rice and rubber eggs as food. It is also nice to see a company that doesn't think selling to consumers instead of corporations as a waste of time.
AAPL a buy here--with no dividend? I think not.
What is it with US companies and not paying dividends? I can understand start-ups and small companies not paying a dividend but AAPL is the worlds largest company by market cap.
There is no point owning a company that generates so much cash if they aren't going to give you any of it.
No kidding, wouldn't it be funny if hyperinflation hit the United States/US dollar, and Apple's balance sheet (of "cash") evaporated before they had a chance to dividend any of it out. While their revenues/earnings collapsed because people were using their remaining resources to, heaven forbid, buy food and energy, not overpriced consumer discretionary items such as iPods and iPhones.
AAPL's playing with fire here, IMHO, having that much cash. A big bullseye, either for the tax-the-rich crowd, or for the inflationists.
I think the euro is gonna falter, the dollar rally and US equities take a hit, appl included. Thus expect the opposite. LOL
weird thing about AAPL is that ... if you look at weekly OBV ... OBV hasn't increased since $270 ...
POLL:
will the price of AAPL be above or below $420/share at the close of trading tomorrow?
Please indicate sentiment with arrows.
disclosure. i bought a put. literally one contract at 420. Nov exp.
Econophile vs. Reggie.....FIGHT!
no contest (sorry econ)
Reggie sold all his AAPL at $260, started advocating for GOOG at $600. He's had some great calls, but this ain't one of them. I'm going with Econ in the first round by TKO.
Part of something vs all of nothing?
I work in tech and I don't understand all the hubris surrounding AAPL. Sure, they are making money and have a popular product, but don't you think that stock price is just a little bit bubbly? And how is their product *so* much better than everyone else's?
Proprietary is usually first out of the gate in terms of growth/marketshare, but eventually gets crushed as things commoditize and more open platforms (with more competition) take over.
Andriod is eating the market for lunch, thus GOOG may end up being a good call ...
Regards,
Cooter
The problem with GOOG and Android is that Android is being given away for free. Therefore, Google doesn't earn money off of that. I don't think its a good idea to own *any* of these stocks, especially since there's so much out there that's far cheaper and has better growth prospects. Apple a trillion dollar market cap, that's preposterous.
Yeah, Google gives it away for free (Android), and that way it manages to spread their own OS far and wide captivating the market. And all the business opportunities for mobile devices will have to go through google then. It's a great trick, which in other times people would have called (almost) "dumping". They just capture the market. They keep with their own old revenue model, and with this market capture, they'll be adding more revenue through special services devoted to that. Meanwhile, Apple sells their closed OS for closed platforms and faces less and less potential buyers as the economy continues to stagnate... good call, Apple.
It's the same theme in their development programs. The world is crammed full of clever teens who want to tinker with apps for their devices, and that's probably where the next killer app is going to emerge. But instead of courting developers like all the other smart device manufacturers, Apple actually charges $99 for the privilege of developing a program for their devices. Contrast that with Android, an open source o/s free to download with development kit, what Nokia used to do with their o/s, or MSDN also free to download, and you get the point.
You don't need to have enrolled on a MBA program to know that technology company case studies clearly show that software applications, the so-called "killer app", is what generates interest and revenues for hardware devices.
Late to the thread.
YHC-FTSE has it exactly right.
It is just how technology works. I will learn from this "mis-speak" and be more clear next time. I tooks something obvious to me for granted and failed to communicate.
Regards,
Cooter
I don't know, I reckon you do perfectly fine communicating your views, for which I am grateful. :)