AAPL - Apple Inc.

[portfolio14]

 

I agree to factor in something like 15% reptriation tax as a conservative valuation. But I won't deduct the debt to get the ex-cash P/E. Think of the end-game. If Apple can bring the cash back and use it for, say, buybacks, what will they do to the debt? Is it not sustainable?

 

Sure, but that's the difference between being aggressive and conservative in your assumptions.

 

Also, Apple is unlikely to be aggressive financially as long as anyone from the 90s is still arround. You can build into you model Apple can disperse %125 of net cash, but they probably won't.

 

The balance sheet has a good hint how much cash they can disperse: all those long term investments are not needed for business operation.

 

Anyway, I think we are split hair here. I think we agree it's cheap.  ;)

[TheAiGuy]

 

I agree to factor in something like 15% reptriation tax as a conservative valuation. But I won't deduct the debt to get the ex-cash P/E. Think of the end-game. If Apple can bring the cash back and use it for, say, buybacks, what will they do to the debt? Is it not sustainable?

 

Sure, but that's the difference between being aggressive and conservative in your assumptions.

 

Also, Apple is unlikely to be aggressive financially as long as anyone from the 90s is still arround. You can build into you model Apple can disperse %125 of net cash, but they probably won't.

 

The balance sheet has a good hint how much cash they can disperse: all those long term investments are not needed for business operation.

 

Anyway, I think we are split hair here. I think we agree it's cheap.  ;)

 

Agreed.

[Viking]

Here is another very good reason to own Apple. It has nothing to do with having:

1.) the worlds most valuable brand

2.) the top product in each of the categories they compete

3.) a leading position in mobile where growth is just getting started

4.) a monopoly position in profits in each of the hardware categories they compete

5.) leading position in software and services

 

Another reason is capital allocation. In under 3 years Apple has reduced its shares outstanding by 15.2% (not including shares issued as part of employee compensation programs). Apple also pays a $0.52/share dividend = about a 2% yield. Between share buybacks and dividend Apple is returning about 7% per year to shareholders. Very impressive.

          Shares on hand at end of Sept; shares repurchased; % reduction

Sept 2012.  6,574. 

Sept 2013.  6,294.  280.  4.3%

Sept 2014.  5,866.  428.  6.8%

Sept 2015.  5,575.  291.  5.0%

 

Most companies spend this money on bad aquisitions; Microsoft and Google both have many examples of where they have spent many, many $ billions on terrible aquisitions.

[Viking]

One of the complaints I hear often from people as to why they do not want to invest in Apple is "the company is too big; it can't possible get any bigger".

 

Apple is reducing its share count by about 5% per year. Total earnings are growing each year. This is leading to double digit earnings per share growth.

[johnny]

AAPL has finally discounted Apple Watch...if you buy it along with an iPhone. I think it's necessary - you need network effects with something like Apple Watch, and so far the people you see it on in public are mostly geeks like Marco Arment and Jeb Bush. That has to change.

 

(I'm happy with mine, of course.)

 

I've already mentioned how concerned I am with the ~image~ of Watch early adopters being destructive to the brand's identity. But luckily, volumes on the Watch are low enough that most people aren't having their impressions molded that much by it. Dorks and software people cluster into their own segregated social groups, and so the young beautiful people who need to eventually like the watch have not yet developed a stigma or negative association with the product.

 

I don't think discounting the device slightly is going to significantly bump up the quality of the buyers, though. So I'm not too thrilled with the move. Hopefully it is just about lowering the inventory a bit for rev2. Will be interesting to see if they hold themselves to a yearly schedule on Watch.

 

That said, as somebody waiting for rev2 of the Watch, I like this as a signal that they may be starting to clear inventory.

[TheAiGuy]

AAPL has finally discounted Apple Watch...if you buy it along with an iPhone. I think it's necessary - you need network effects with something like Apple Watch, and so far the people you see it on in public are mostly geeks like Marco Arment and Jeb Bush. That has to change.

 

(I'm happy with mine, of course.)

 

I've already mentioned how concerned I am with the ~image~ of Watch early adopters being destructive to the brand's identity. But luckily, volumes on the Watch are low enough that most people aren't having their impressions molded that much by it. Dorks and software people cluster into their own segregated social groups, and so the young beautiful people who need to eventually like the watch have not yet developed a stigma or negative association with the product.

 

I don't think discounting the device slightly is going to significantly bump up the quality of the buyers, though. So I'm not too thrilled with the move. Hopefully it is just about lowering the inventory a bit for rev2. Will be interesting to see if they hold themselves to a yearly schedule on Watch.

 

That said, as somebody waiting for rev2 of the Watch, I like this as a signal that they may be starting to clear inventory.

 

I think you are worried about nothing.  Consumer satisfaction among owners is high, especially among non-techies and women. Source: https://techpinions.com/apple-watch-owners-remain-satisfied/42176. I think that suggests the appeal is broader than your intuition is suggesting.

[Palantir]

So on Halloween, AAPL's market cap is 666....

 

Taxing 70% of their cash and investments by 30% tax rate (there is no evidence that there will be a holidaty, we've been talking about it for years), and backing out the $65B debt out of the market capitalization, I get an EV of 568B. This year's FCF was $70.8B, but it's not clear yet whether this was repeatable, as a big bump was from people moving up to larger iPhones. The coming quarter will probably answer whether we can expect AAPL to grow that. So averaging last two years FCF gives us 60.8B/568B = 10.7% FCF yield, with maybe 8.9% as a bear case.

 

 

Btw, this is going to be a permanent overhang above the company, (can they grow next year?) and no matter how well it does, may be a factor in keeping it under(?)valued. That is where AAPL needs to be aggressive in their repurchases and hopefully dividends.

[Viking]

Apple's brand strength is as strong as ever.... I had a good laugh after reading the article. Poor Samsung.

 

http://appleinsider.com/articles/15/11/01/daniel-craig-resisted-android-phone-placement-in-spectre-because-james-bond-only-uses-the-best

[Liberty]

Anandtech's reviews are always in-depth (particularly when they look at the SoC chips):

 

http://www.anandtech.com/show/9686/the-apple-iphone-6s-and-iphone-6s-plus-review

 

For those who want to jump straight to the conclusions of the multi-page review:

 

http://www.anandtech.com/show/9686/the-apple-iphone-6s-and-iphone-6s-plus-review/15

[portfolio14]

Anandtech's reviews are always in-depth (particularly when they look at the SoC chips):

 

http://www.anandtech.com/show/9686/the-apple-iphone-6s-and-iphone-6s-plus-review

 

For those who want to jump straight to the conclusions of the multi-page review:

 

http://www.anandtech.com/show/9686/the-apple-iphone-6s-and-iphone-6s-plus-review/15

 

Liberty,

 

How far ahead do you think Apple is in its hardware advantage (CPU, SoC GPU, 3D touch)? 1-2 years?

 

(Other manufacturers will catch up, it's a matter of "when", not "if".)

[Liberty]

Liberty,

 

How far ahead do you think Apple is in its hardware advantage (CPU, SoC GPU, 3D touch)? 1-2 years?

 

(Other manufacturers will catch up, it's a matter of "when", not "if".)

 

That's a harder question to answer than it seems.

 

I think the most interesting angle is that Apple uses a lot of custom stuff while the rest of the industry uses a lot of commodity parts. That wouldn't be a successful strategy for Apple if it was a tiny niche player, but it has the scale (especially as a share of total profits) to make it work, and so it can use custom hardware to help differentiate its products while a lot of competitors are all using the same stuff. And because they aren't making much money, they have less to spend... It's a bit like when desktop PCs were all similar beige boxes using similar components and running the same software; who cares if you get a HP or a Compaq or a Dell? And these companies end up competing on specs and price because they are not differentiated otherwise, eating their margins away... But the Mac business has been doing quite well for over 15 years, keeping its high margins and outgrowing the industry. If you like what the Mac offers, you can't get it anywhere else.

 

Also, a lot of Apple's recent innovations are integrating hardware-software and sometimes services pretty tightly. 3D Touch works as well as it does because of that (they spent 5 years on it, apparently). But when developers are targetting a super fragmented base (everybody on different hardware, on different versions of the OS, some don't even support the feature, etc), it's a lot harder to get that integration right and provide a good user experience. Same with Apple Pay (hardware+software+service), same with the rest of the ecosystem integration (easier to make it a good user experience when you control all the hardware and software across devices).

 

So they can keep copying stuff, but catching up might be hard to do with a moving target. Maybe in a few years the other SoCs match the A9 for single-threaded speed and power-efficiency and so on, but by then Apple will be on something else that they're spending billions of dollars developing in secret right now.

 

And all those components only matter if the end product is actually something that people think is the best and worth paying up for. If someone else came up with a breakthrough SoC that was ahead of Apple but the rest of the user experience wasn't that great or was almost the same as on a cheaper alternative (ie. running exact same OS and apps, just a bit faster or with more battery time), it wouldn't be the end of the world for Apple.

[rkbabang]

There have been times in the past when Apple held no hardware advantage at all and was still the most profitable smartphone company.  I don't think the hardware advantage matters all that much.  It is the design and user experience more than the specs that matter.  I'm not worried that Samsung is going to comeout with a phone that has a faster processor and pressure sensitive touch and steal market share away from the iPhone. It will still be an Android device, not an iPhone.  The hardware advantage is more like icing on the cake.

 

As far as how long can a company keep a hardware advantage when it designs its own processors, ask intel.

 

[portfolio14]

The hardware advantage is more like icing on the cake.

 

This is very far from the truth. Hardware advantage is the ENABLING factor in everything Apple. Otherwise, we all should have been questioning Apple's poor capital allocation of wasting R&D money on things that make only marginal difference.  Actually I can't think of one important Apple product not because of important hardware innovation.

 

Look pass the raw performance figures. Think of the competition dynamics. e.g. One possible vicious cycle bootstrapped by hardware difference: superior GPU -> some visual effects only feasible on iOS -> (*) best game titles developed on iOS first -> gamers buy iPhone because of a particular game (the killer app) -> game developers make more games for iOS first because serious gamers are on iOS -> back to (*)

 

This is a moat. But this moat can be formed only if Apple's hardware adv has some meaningful lead over the pack.

[rkbabang]

The hardware advantage is more like icing on the cake.

 

This is very far from the truth. Hardware advantage is the ENABLING factor in everything Apple. Otherwise, we all should have been questioning Apple's poor capital allocation of wasting R&D money on things that make only marginal difference.  Actually I can't think of one important Apple product not because of important hardware innovation.

 

Look pass the raw performance figures. Think of the competition dynamics. e.g. One possible vicious cycle bootstrapped by hardware difference: superior GPU -> some visual effects only feasible on iOS -> (*) best game titles developed on iOS first -> gamers buy iPhone because of a particular game (the killer app) -> game developers make more games for iOS first because serious gamers are on iOS -> back to (*)

 

This is a moat. But this moat can be formed only if Apple's hardware adv has some meaningful lead over the pack.

 

I don't thing that is the reason the majority of people choose, or have chosen in the past, an iPhone over Android devices.  There are a lot of non-hardcore-gaming iPhone owners.  What you describe is important for some, but not most.  I'm not saying that Apple should let itself fall behind in CPU/GPU performance or camera performance, but if there is a phone or two out there with some better specs in those areas it will not matter to most IOS users, because that isn't what they are using the iPhone for.  Even back when Apple used off the shelf CPUs the iPhone was still a better product, the fact that they now have superior CPU performance only widens the moat, it isn't the reason the moat exists.

 

[rkbabang]

Interesting article and prediction.

 

Android and the Innovator’s Dilemma

 

"as a market matures, the early innovators get disrupted by competitors who come into their space with lower priced products, similar specs (the specs that matter), and eat into the market share of the early innovator in the category. Once the market embraces good enough products, the innovator can no longer push premium innovations as their value is diminished once a good enough mentality sets in. Android devices in the $200-$400 range are good enough for the masses leaving Samsung’s $600 devices and above stranded on an island.

 

One of the most interesting observations about all of this is the innovator’s Dilemma was supposed to impact Apple. This was a fundamental tenet of most bear cases. When the market for smartphones became filled with good enough devices at very low prices, why would anyone buy an iPhone? Yet this is impacting Samsung exactly according to the guidebook — but not Apple. The fundamental lesson to learn here is the innovator’s dilemma, in this case, only applies to Android land because all the hardware OEMs run the same operating system. As I’m fond of saying, when you ship the same operating system as your competition you are only as good as their lowest price. This is the curse of the modular business model. This is also why Samsung had hopes for Tizen. They actually knew this was coming. I know this because I discussed it with them in 2013 and was convinced they understood this was their fate if they continued to sell out to Android. Unfortunately, Android was their only option given its momentum. I’ll make a prediction. Samsung will be out of the smartphone business within five years."

[jawn619]

Redid a case study looking into why AAPL was the biggest no brainer in a while.

 

http://raritancapital.com/casestudy/aapl/

 

 

The core of it centers around ROIC/Cost of Capital

 

I define invested capital as

 

Total Assets - Non-Core Assets - Non-interest bearing liabilities.

 

This is the amount of “stuff” that is needed to generate Apple’s operating income less adjusted taxes. Property plant and equipment, inventory, receivables, intangibles are all included in this calculation. The result is mind blowing.

 

For every dollar invested into Apple’s PPE/AR/Inventory/Intangibles, Apple is able to generate somewhere between $1.11 and $1.61 of operating income after tax.

 

One controversy is that invested capital does not include cash and cash equivalents. Another is that Apple's reinvestment rates in the future will be a lot lower. This is evidenced by rapidly declining ROIC from 2012 to 2014.

 

*Basically Apple has too much cash and cannot reinvest it at out of this world returns.

 

But why is this ok?

 

As long as Apple can reinvest its capital at rates of returns higher than its cost of capital, it creates value.

 

Apple’s cost of capital is somewhere between 3-15%. 3% is the lowest interest rate when issuing debt and 15% is my guess of the highest required return equityholders would require.

 

Apple has a cost of capital of somewhere around 3-15% but is generating a return of 100% on its capital? What is Apple's future ROIC? definitely lower than 100% but higher than 3-15%.

 

[constructive]

All the financial assets piling up on the balance sheet are making ROE much more relevant than ROIC. Unfortunately shareholders can't just invest in the operating assets earning 100%, they also have to invest in the cash pile earning 1%.

[Guest neiljgsingh]

Came across a number of articles today claiming that AAPL has reduced its supply orders from Asian tronics cos by roughly 10% due to weaker iPhone 6S sales than expected. Might explain the 3% drop today. Anyone have a long-term view on how AAPL can continue to keep demand high for the 6S and future models (other than just current customer retention)?

[Liberty]

Came across a number of articles today claiming that AAPL has reduced its supply orders from Asian tronics cos by roughly 10% due to weaker iPhone 6S sales than expected. Might explain the 3% drop today.

 

Keep in mind the track record of analysts who try to read the supply chain tea leaves.

 

The company has much better visibility, and has a good track record with their guidance. Chances are, they will land somewhere close to the top end of their guidance, which would be pretty great considering the tough comp and FX headwinds. Per share results will be further improved by the reduce share count since last year.

[giofranchi]

Came across a number of articles today claiming that AAPL has reduced its supply orders from Asian tronics cos by roughly 10% due to weaker iPhone 6S sales than expected. Might explain the 3% drop today.

 

Keep in mind the track record of analysts who try to read the supply chain tea leaves.

 

The company has much better visibility, and has a good track record with their guidance. Chances are, they will land somewhere close to the top end of their guidance, which would be pretty great considering the tough comp and FX headwinds. Per share results will be further improved by the reduce share count since last year.

 

+1

 

Cheers,

 

Gio

[giofranchi]

http://www.marketwatch.com/story/apples-stock-sinks-on-concern-about-slowing-growth-2015-11-10?page=2

 

I don't understand what Mr. Kass means with this:

A maturing company of Apple’s size in terms of sales and market capitalization deserves a substantially lower market multiple.

Which multiple does Apple deserves? 5-7x EPS? ???

Even a company that won't grow anymore, and is selling for 9x EPS, isn't yielding more than 10%? Isn't 9x EPS a low enough multiple?

Or will EPS not only stop growing forever, but also start contracting?

 

Cheers,

 

Gio

[petec]

http://www.marketwatch.com/story/apples-stock-sinks-on-concern-about-slowing-growth-2015-11-10?page=2

 

I don't understand what Mr. Kass means with this:

A maturing company of Apple’s size in terms of sales and market capitalization deserves a substantially lower market multiple.

Which multiple does Apple deserves? 5-7x EPS? ???

Even a company that won't grow anymore, and is selling for 9x EPS, isn't yielding more than 10%? Isn't 9x EPS a low enough multiple?

Or will EPS not only stop growing forever, but also start contracting?

 

Cheers,

 

Gio

 

I think that's exactly it.  Rapid growth protects pricing.  As the smartphone market matures and slows, which is happening right now, that protection goes away.  The next phase is commoditisation and pricing pressure.  If Apple can a) withstand this in its phone business or b) replace iPhone profits with something new, you'll do fine.  If not, earnings will start falling and until they bottom no P/E will be low enough.  But you know this ;)

 

Personally, I find it too hard to call.

[giofranchi]

I think that's exactly it.  Rapid growth protects pricing.  As the smartphone market matures and slows, which is happening right now, that protection goes away.  The next phase is commoditisation and pricing pressure.  If Apple can a) withstand this in its phone business or b) replace iPhone profits with something new, you'll do fine.  If not, earnings will start falling and until they bottom no P/E will be low enough.  But you know this ;)

 

Personally, I find it too hard to call.

 

Personally I think quite puzzling how people might believe the smartphone market is saturated and will start to slow:

1) What we can do with our smartphone will only increase over time, and we will become ever more dependent on its use. That is at least until a new product replaces the smartphone… But I don’t see one on the horizon yet.

2) The smartphone will become the most necessary object we carry with ourselves not only for the young, but for the old too (think about healthcare and the constant monitoring of our biological signals).

3) I also don’t think it is growth that protects pricing. In fact what we have witnessed so far is volume growth in spite of pricing. What protects pricing is the fact the iPhone is not a commodity product.

We won’t go back to the PC, will we? If nothing new that could replace the smartphone is even on the horizon yet, and the iPhone is not a commodity product, and therefore will continue to dominate the smartphone market, is it plausible to think EPS will not only stop growing but actually start decreasing?

I don’t think so.

Of course, you might think the iPhone is a commodity product instead. That’s a business judgement. Mine is as good as yours (probably yours is better!). But until now the iPhone has not been perceived like a commodity product by its users (for all the reasons that have been repeated many times on this thread).

 

Cheers,

 

Gio

 

[Liberty]

I think that's exactly it.  Rapid growth protects pricing.  As the smartphone market matures and slows, which is happening right now, that protection goes away.  The next phase is commoditisation and pricing pressure.  If Apple can a) withstand this in its phone business or b) replace iPhone profits with something new, you'll do fine.  If not, earnings will start falling and until they bottom no P/E will be low enough.  But you know this ;)

 

Personally, I find it too hard to call.

 

Why do you think rapid volume growth and commoditization/differentiation are linked?

[petec]

Answering Gio and Liberty:

 

1. It seems to me in multiple industries that the early spurt of adoption-led growth protects pricing because there is demand enough to satisfy all the capacity that can be built and companies can get all the business they want without resorting to cutting prices to gain market share.  When growth flattens off this can change dramatically.  I don't have numbers but I'd bet that cars, radios, TV's, computers all passed through this lifecycle.  The thought was crystallised when I read a quote from Bin Lin, president of Xaiomi, a large smartphone vendor in China, who expects price wars and consolidation in the industry.

 

2. Apple may well be differentiated enough to withstand such pressure.  They have an exceptional brand and the best apps.  But, equally, there may be a competitors' price point where people get lured away by other phones that do much the same thing, more cheaply.

 

3. I don't think what we can do with our smartphones has anything to do with how saturated they are.  I agree that over time they will do more and more.  But most people won't need more than one - saturation and volume growth are related to penetration, not utility.  The data I have seen says that in q3 last year smartphone volumes grew 27% and this year it was 10%.

 

4. I also don't think what what we can do with our smartphones has anything to do with what we will pay for the hardware.  Smartphones will do more and more (mainly) because people think up more and more apps.  Apple will capture this value to the extent that it takes a fee for apps sold, a cut of Apple Pay volumes, etc.  That may well be enough.  But it might not. 

 

5. I struggle to see the difference with the PC, for which all of Gio's arguments could have been made 15-25 years ago.  Even now, my life is lived on Windows computers, which can do more and more every passing year.  But have the profits to be made from selling PC's (Windows + hardware) risen in recent years?  I don't think so.  The value of the app I'm locked into, however, rises every year.  The same goes for all the items above: cars, TV's etc.  Their utility has increased dramatically.  But it becomes remarkably hard to make profits from making them.

 

Bottom line: in the long term what protects pricing is not utility but uniqueness.  What's lastingly unique about the iPhone?  Can't everything that it does be copied?  Do brands provide lasting moats in tech?

 

I have a work iPhone.  Frankly, it seems a very ordinary product to me indeed.  I mean, it's amazing; but so is every other phone I try.  I wouldn't pay for one.  If your time horizon is 2-3 years then I can't help you, but I wouldn't bet on sales of the iPhone being a core profit driver for Apple in 10-15 years time.  The valuation, for me, hinges on what other profit streams they can find.  While I would not bet against them, I wouldn't put much of a multiple on unproven profit streams either.

 

Pete