"The Apple Conundrum": Why One Fund Is Not Buying The iKool-Aid

Tyler Durden's picture

Looking at the parabolic rise in AAPL shares in the past 3 months one would imagine that the company's product line up, so well telegraphed over the past several years, has changed, or at least has found a way to cure cancer, while expanding margins, and also providing loans to cash-strapped US consumers to buy its products exclusively. Truth is nothing substantial has changed - we have merely seen a ramp as every hedge fund and asset manager jumps on the Apple bandwagon (we fully expect at least 250 funds to hold Apple as of March 31: at least 216 were in the stock as of December 31 and then even Dan Loeb jumped in after) which is fun and games on the way up, but pain and tears when the bubble finally does pop. Many have attempted to warn the public about the latest manic phase of Apple expansion, but few have succeeded - such as the the reality of bubbles: they pop when you least expect them. Yet giving it the old college try, here is Obermeyer Asset Management's John Goltermann with an extended commonsensical approach to his perspective on the company with two main growth products, and why unlike everyone else, he is not buying the iKool-Aid.

Some excerpts from the letter:

Most members of the Obermeyer Asset Management team use Apple’s products and highly respect the company and its achievements. We recognize that it has built a cult-like following of both technophiles and ordinary users who aspire to own its latest and greatest gadgets. We recognize the elegance of its platform, the ease, convenience and life-enhancing attributes of its apps, the effortless delivery of media content and how it has even transformed entire industries. We recognize the style element of owning Apple devices, we recognize the status that people derive as Apple users and we understand the mystique the company possesses in the way it operates.


Given our shared appreciation for Apple as a company, why aren’t we making a place for it in client portfolios? We generally separate current and prospective investments into three broad categories: Yes, No and Too Difficult. In the case of Apple, we see this investment as Too Difficult. Let us explain:


With a market value of $550 billion, Apple now comprises 4.4% of the S&P 500 index and, all by itself, is larger than the entire utilities industry. With 932 million shares outstanding, every dollar move in Apple’s share price represents nearly $1 billion in net new capital flowing to its shares. For context, the median company size of those in the S&P 500 is $12 billion, so a 2% move in Apple’s stock is the equivalent of adding a whole new company at the median value to the index.


Since December 31st, Apple’s market value has increased by $172 billion, which is roughly the size of Johnson & Johnson, a large, well-established, innovative healthcare and consumer products company with a 125-year history. Johnson & Johnson has enjoyed many successes, has reinvested high levels of profit and is investing to expand its divisions, products and businesses. Apple attracted the same amount of investor capital in two and a half months that Johnson and Johnson attracted in its entire 125-year history.




Apple launched its first iPad in April 2010 and is now on its 3rd version, so the iPad has about a two-year shelf life for the company (it might milk a few more years out of each version, but the company’s business model is to continually launch new product iterations and slash prices on the older versions). Though it’s not disclosed in the financials, a guess would be that the new iPad will sell 26 million units its first year and 14 million in its second. If each version of the iPad earns $260 per unit, then Apple investors can expect somewhere in the range of $10 - $15 billion in total pre-tax profit for this newest version of the iPad. Unless investors thought Apple’s stock was way too cheap before the new iPad announcement, they seem to be expecting much more value to be delivered to shareholders from the iPad launch than can be reasonably be delivered by sales of the iPad device itself. The $172 billion increase in the company’s value far exceeds the approximately $15 billion that will come from the iPad, so it will have to come from something else. We don’t know yet what that “something else” is.


When we look at our cash flow models, assuming Apple can maintain its current operating margins (a heroic assumption in the face of increased competition in the tablet market), to justify the current stock price, it appears to us that Apple will have to sell about $2.6 trillion worth of total products and services over the next ten years. Last year’s revenues (for the fiscal year ending 9/24/11) totaled $108 billion. If Apple’s margins shrink, it will have to sell a lot more. This level of Apple product sales will make up almost 1.5% of U.S. GDP (of course it  also sells products outside of the U.S.). That means that with the average GDP per capita in the United States being around $50,000, each person must spend $750 on Apple products and services annually (since 30% of sales are domestic, this means that about $225 per U.S.  citizen would go to Apple every year). Since not all 310 million people in America use Apple, those who do need to spend a lot more and the vast majority of those sales will need to be on devices because iTunes sales do not bring much profitability.

Like we said: no stories here. Just common sense.

Full letter (pdf)


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Buckaroo Banzai's picture

This market is narrowing down to a point, and Apple is the point. When Apple breaks, LOOK OUT BELOW.

a growing concern's picture

Will its descent speed be approximately 9.8 m/s2?  Accounting for air resistance, of course.

NotApplicable's picture


I just went to RonPaul2012.com and saw Professor Fekete listed as a recent donor for the current money bomb.


markmotive's picture

A lot of euphoria around this company.

Some nuggets of info:

  1. Market cap is larger than XOM. Bigger than WMT and MSFT combined.
  2. Many investors are too optimistic about forward growth.
  3. Price is well-above 200-day moving average.


SAT 800's picture

Short it right now. This is what bubbles look like;and this is where they come from; public enthusiasm.

Carl Spackler's picture

"Applesauce" is the best term I have heard.

The numbers comprising the fundamentals are astounding.

The business model of Apple seems to have been infected by a worm...the fact that batteries can not facilitate more tablet technology without cooking the device into an apple pie.

RussellChester8's picture

my friend's sister makes $74/hr on the computer. She has been out of a job for seven months but last month her check was $17871 just working on the computer for a few hours. Read more on this site .... http://bit.ly/wYpMrv

gcjblack's picture

Will Apple be limited to falling due to gravity alone, at 9.8 m/sec^2 ?

Once it starts down, powered flight ( all engines with full after-burners spooled up to maximum thrust) will permit much higher velocities to be achieved as it flies towards a new Ground Zero.

poor fella's picture

Imagine the Apple logo on WTC Building 7 then?

patience...'s picture

Absolutely, it's the best of a bad situation.

In the meantime the  "Obermeyer Asset Management " has been missing out on some major returns.


jcaz's picture

not really, because most knuckleheads in this deal won't sell until it's back down to $150-  seen this movie before, always ends the same way.....

vast-dom's picture

Common sense Ty? If there were any Apple wouldn't be valued anywhere near this utter bs! 

this stock is literally double its true price. and the experts are still pushing it. i could give a shit about their expert opinions when the stock tanks.

a growing concern's picture

My iPhone cures cancer, doesn't yours?  

brewing's picture

they're going to have to do something about cost to wireless carriers.  the majors lost their ASS last year selling it.  i work in the industry, and have been hearing whispers that 1 or more may drop apple products...

patience...'s picture

Wispers my ass, shoot yourself in the foot by dropping your mayor player, laughable.

Spastica Rex's picture

English isn't like Latin. "Js" don't sound like "Ys."

iDealMeat's picture

+1,  the iPhone is a squid, sucking margin monthly.. Drop it or die..  Sprint is about to fold..

brewing's picture

this paints the picture pretty well.  in the end, the consumer is the loser everytime...



SAT 800's picture

Short it; do it right now; make the market pay you. I'm sincere; it's ripe.

geewhiz190's picture

how do wireless carriers lose money when the cost of running one of those ipads is an arm and a leg? i would think their revenues would be up based on data demand.

Stuck on Zero's picture

They used to say: "No one ever got fired for going with IBM." 

Kayman's picture

And Harold Geneen built a pulp mill where there were no trees.

Beware thine own press clippings.

GeezerGeek's picture

Many IBM mainframes in the early 80s needed water cooling. I hear that the new Apple product gets a bit warm, too. 

GMadScientist's picture

The homeless gadget collector considers this a feature; transferring energy from the socket at the Starbucks to the device for cozier latenight napping.

And my overclocked i7 is water-cooled too...so what? ;)

Ahmeexnal's picture

And you don't need a PhD in fuzzix to figure that one out.

Sokhmate's picture

Fuzzix: physics of the alternate universe. Just fyi for the not-knowing.

Mercury's picture

Stay away...but short a cult stock at your own risk.

In any case the easy money has been made and the rainmaker is gone.

The "life-enhancing attributes" of Iphone/pod apps is a bit of a stretch too...kiddie-crack for the most part.

SAT 800's picture

The risk is always limited with a stop loss order; the chart looks like its ripe to me. You can't win if you don't play.

Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

It's only pain and tears if you're still holding it on the way down. I think we'll know when the bubble's popped. Until then, please keep buying Apple stock and Apple toys.


Thank you.


As you were.



SheepDog-One's picture

Keep buying Apple stock please, retail sucker, er I mean Apple genius...because someone dumber is trying to sell Apple stock....heh heh.

Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

You must feel so smart being a contrarian. Now be a good mutt and roll over.

alexwest's picture

why would this guy think he is smarter than rest of ? can I see his trading record ? is he Soros/Buffet/Paulson/etc kind of guy? or just missed THE THING..

and yes Apple is bubble , and will end in tears, but nobody knows then


Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

You spelt it wrong. Not Soros, it's Gorog.





SheepDog-One's picture

I dont know if he trades based upon insider info like Soros and Buffet.

zuuma's picture

Apple 2012 = Tulip Bulbs 1636

monopoly's picture

"Common Sense". Please, this is the stock market. That phrase is banned here. Oh well.

dick cheneys ghost's picture

Is Apple a Chinese Company?

CClarity's picture

Better have a lot of pesticides . . . can't let a worm get into apple.

JustObserving's picture

With apple stock you can buy all the silver bullion in the world 17 times over.  Or about 1/6 th of the gold bullion in this world.

Overflow-admin's picture

The AAPL:SILVER ratio says it's time to sell your AAPL shares for physical, bitchez!