AAPL - Apple Inc.

[Picasso]

Yeah I don't think either are Apple's fault, it just shows how difficult it is to break into a widely adopted payment system.  As it stands I have to carry around my wallet and cards anyway so using Apple Pay might be more convenient 90% of the time and annoying when I encounter the other 10%. 

[Liberty]

Yeah I don't think either are Apple's fault, it just shows how difficult it is to break into a widely adopted payment system.  As it stands I have to carry around my wallet and cards anyway so using Apple Pay might be more convenient 90% of the time and annoying when I encounter the other 10%.

 

That is the burden that early adopters face. By the time most regular people join a trend, all these problems have been ironed out. For example, most people who own an iPhone have never experience any of the earlier models (certainly not before the 4, probably not before the 5).

[innerscorecard]

It would appear the market is pricing a higher future effective tax rate for Apple.

[johnny]

I think it has a lot more to do with all of the smoke about the lack of growth in iPhone sales this quarter. The domestic activation share for iPhones is down a few percentage points, the supply chain mumbles, and the fact that Chinese launch sales got pulled forward to last quarter I think are all setting in.

 

I think dropping from 51% to 49% of activations on an S year is a pretty fantastic outcome.

[Liberty]

The company's already priced like it's going out of business, mid-single-digit FCF multiple ex-cash.

 

This is fantastic for a company that is doing tens and tens of billions in buybacks.

 

Apple grew EPS 44% last year. I think they'll probably land within their guidance, as they pretty much always do (well, they usually land just above it), but even if they were to be flat in 2016, who said results can't be lumpy?

 

Most people don't upgrade every year; tons of people who bought iPhone 5 and 5S models still haven't upgraded, they are gaining more switchers from Android and existing customers are more sticky, emerging markets are growing their middle classes, 4G is still being rolled out rapidly in China and many other places, and the competition still can't do much that is differentiated in the premium end of the market. And FX can't be a headwind forever. Over time Apple will keep growing FCF/share, especially as improved versions of the Watch, Apple TV, iPad, etc, come out and the share count keeps falling rapidly...  They won't grow EPS 40% every year, but they don't need to. They're priced for rapid negative growth so anything better than that is bonus.

 

The new meme since the CBS piece is that they are building a new HQ that might cost $4-5 bn, so clearly that's a waste and shows how bad the company is allocating capital, etc. I think this shows a lack of perspective. A company spending 2-3% of its cash, or maybe 3 weeks of FCF on a new HQ that might help it attract and retain scarce talent (which is the bottleneck for the company, and they face tough competition on that front from Google and Facebook and a zillion other techn companies with nice HQs), replacing dozens of random buildings spread across the city and helping reinforce the brand of a company that has one of the strongest brands in the world isn't bad. It's similar to their flagship stores in expensive locations with fancy architecture -- that would be a waste for an industrial company, but this stuff matters to a consumer business. Pretty sure a lot of other companies spend a lot more than 2-3% of their cash or 3 weeks of FCF on boring old HQs that add less value...

[Picasso]

Another 10% drop in AAPL and it will have a smaller market cap than Google.  On an EV basis there is already a large discount to Google, but that's kind of nutty when you think about what has changed between the two companies since 2012.  I'm kind of in agreement here that Apple is once again looking cheap but I'm finding better returns elsewhere.  I think if you can hold the stock for for at least several years you may be looking at greater than 10% returns at these prices, which isn't bad. 

 

I do think that Apple is going to slow down the pace of stock repurchases, at least the part funded by debt issuance.  It's probably not wise for a consumer products company to have over $100 billion of debt when they inevitably go through a cycle where their products don't fly off the shelves the same way they did in the past.  Icahn might want something more aggressive but this is a slow, big moving ship that needs to be careful to avoid icebergs.  The bulk of the equity returns will come from the great products they provide anyway, the buybacks are a small part of that consideration over time.

[Viking]

Apple trading at $105 got me asking if it is getting as cheap as it traded in 2013. I'll make a few posts with my thoughts and below is the first.

 

In early 2013 one big question regarding Apple involved capital allocation: what were they going to do with all the cash piling up on their balance sheet? Apple started paying a dividend in 2012 but they held no debt and historically were very averse to holding debt. Most companies used a large portion of their cash on expensive acquisitions (that often did not work out): Google and Motorola, Microsoft and Skype and then Nokia to name just a few. Would Apple waste its cash on expensive acquisitions or just let it accumulate on its balance sheet?

 

Answer: higher dividend (funded by US earnings) and aggressive share buybacks (funded by borrowing). I think Warren Buffett would approve of how Apple has answered the 'capital allocation' question.

 

Share reduction: Apple has reduced shares outstanding by better than 15% in the past 10 quarters.

April 12, 2013 = 6,573 million (peak)

Oct 18, 2013 = 6,293 = -280 = -4.3%

Oct 10, 2014 = 5,865 = -708 = -10.8%

Oct 9, 2015 = 5,575 = -998 = -15.2%

Repurchases have also sopped up all shares exercised as part of stock option payment plans (which for most companies causes the shares outstanding to increase by one or two percent every year, especially tech companies).

 

Given shares are trading at such a low multiple I would not be surprised if after earnings are released in January 2016 if Apple does not announce another accelerated share repurchase program.

 

Apple returned $56 billion to shareholders in f2014 ($11 div + $45 repurchases) and $48 billion in f2015 ($12 div and $36 repurchases). Despite returning $104 billion to shareholders in the past 8 quarters, at Sept 2015 net cash had still increase to $142 billion ($25/share), up from $130 billion ($21/share) at Sept 2013. Apple will earn in excess of $50 billion in f2016; we can expect more of the same moving forward. 

 

One watch out is the amount of debt the company is taking on to fund buybacks; obviously how much debt they can take on has its limits. However, it sounds as though some restructuring of the US tax code is building momentum and we may see something happen after the next Presidential election (in 2017).

[Palantir]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

[TheAiGuy]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

Roughly, they're funding the dividend from domestic cash flows only. Increasing the dividend much more than it is now would require using foriegn CF or using debt, neither of which is attractive.

[hardcorevalue]

cut the dividend, put it towards buybacks.

[innerscorecard]

The company's already priced like it's going out of business, mid-single-digit FCF multiple ex-cash.

 

This is fantastic for a company that is doing tens and tens of billions in buybacks.

 

Apple grew EPS 44% last year. I think they'll probably land within their guidance, as they pretty much always do (well, they usually land just above it), but even if they were to be flat in 2016, who said results can't be lumpy?

 

Most people don't upgrade every year; tons of people who bought iPhone 5 and 5S models still haven't upgraded, they are gaining more switchers from Android and existing customers are more sticky, emerging markets are growing their middle classes, 4G is still being rolled out rapidly in China and many other places, and the competition still can't do much that is differentiated in the premium end of the market. And FX can't be a headwind forever. Over time Apple will keep growing FCF/share, especially as improved versions of the Watch, Apple TV, iPad, etc, come out and the share count keeps falling rapidly...  They won't grow EPS 40% every year, but they don't need to. They're priced for rapid negative growth so anything better than that is bonus.

 

The new meme since the CBS piece is that they are building a new HQ that might cost $4-5 bn, so clearly that's a waste and shows how bad the company is allocating capital, etc. I think this shows a lack of perspective. A company spending 2-3% of its cash, or maybe 3 weeks of FCF on a new HQ that might help it attract and retain scarce talent (which is the bottleneck for the company, and they face tough competition on that front from Google and Facebook and a zillion other techn companies with nice HQs), replacing dozens of random buildings spread across the city and helping reinforce the brand of a company that has one of the strongest brands in the world isn't bad. It's similar to their flagship stores in expensive locations with fancy architecture -- that would be a waste for an industrial company, but this stuff matters to a consumer business. Pretty sure a lot of other companies spend a lot more than 2-3% of their cash or 3 weeks of FCF on boring old HQs that add less value...

 

I think the meme on FinTwit about the headquarters being a sign of impending doom is extremely misguided. I think it comes from a view that capital allocation is all that matters, and that there is no such real thing as creative or technical talent. It takes a truth, that capital allocation is decisively important, and pushes it to an extreme that is not true.

[Viking]

Given the recent weakness in Apple's share price, I thought it would be instructive to go back and re-read the comments section from this Apple thread from April 2013 (about page 145), the last time Apple shares were deeply out of favour. Why was Apple so out of favour in 2013? Why did the shares appreciate over 100% from their lows in 18 short months? What are the key learnings that can help us today?

 

Key learning #1: Apple's product updates are not always done in a predictable way each year. Some product updates are much mofre meaningful in certain years (i.e. iPhone 6 and larger screen launched in f2015) and sales growth in those years is much faster than normal. This is usually followed by a year or two of slower growth. Apple's business results (annual and by category) are very lumpy.

 

Key learning #2: Apple is a VERY secretive company. Other than providing financial guidance for the next quarter, Apple refuses to discuss its future plans. This leads to lots of wild speculation on the part of analysts and investors (i.e. supply chain leaks) most of which is far off the mark. All the speculation does, however, have a material impact on the share price.

 

When you put these two factors together you get an environment that leads to extreme sentiment shifts in the company and this leads to extreme swings in the share price. In years when the company experiences above average growth in sales and earnings investors perceive Apple in a very positive light and extrapolate high growth rates into the future and bid the shares to a higher multiple. In years where product updates/innovation are more incremental and growth slows investors perceive Apple in a very negative light and extrapolate slowing growth rates into the future and bid the shares to a very low multiple.

 

These swings in sentiment and the share price typically play out over 7 to 22 months. It is also impossible to buy in at the exact bottom (it may take months to form). Therefore, investors need to be very patient on the buy side and even more patient on the sell side.

 

Apple Share Volatility:

June 2011 under $50

Sept 2012 $100 (about 14 months trough to peak)

April 2013 under $60 (about 7 months peak to trough)

Feb 2015 over $130 (about 22 months trough to peak)

today (Jan 2, 2016) $105 (about 10 months - and counting - peak to trough)

 

If Apple issues weak guidance for FQ2 (when it reports results in January) I would expect the bears to once again loudly announce that this is proof of peak iPhone sales and that Apple is doomed. I would not be surprised to see Apple shares trade in the mid to low $90 range.

 

[innerscorecard]

Good points, but I think it's inaccurate to ignore the ways this time is different. There was obvious low-hanging fruit then - large-screen iPhones, Japan and China. The positive fundamental catalysts (as opposed to perceptual catalysts) from the present are not as easily foreseen nor are they as high-probability.

 

I would say that the current threat of China weakness and RMB weakness seems to be more worrisome than the Samsung and commoditization threat perceived back then. It appears more high-probability, though it is not as existential as the commoditization bear thesis. The saturation bear thesis is not existential either, for that matter.

[Viking]

innerscorecard, what I found fascinating about reading the old posts from 2013 is how pessimistic most investors were. They all had very valid reasons (in their mind) why Apple's business was going to deteriorate further. Below are a few 'consensus' views from back in 2013:

1.) commoditization/Apple needs to release a cheap iPhone: Apple actually raised prices (via new RAM options), introduced a more expensive phone (6 plus) AND sold many, many more total units; they did exactly the opposite of what consensus opinion was they should and were likely to do.

2.) Samsung/competition was not only catching but on the verge of passing Apple as a brand and in terms of phone performance: Samsung's premium smartphone sales are down big time; they are no longer perceived as hip and cool like they were in 2013. RIMM, Motorola, Nokia, Amazon were supposedly going to be taking Apple on and they have all failed miserably. The remaining players (LG, Sony etc) are all still losing money on smartphones.

3.) Margin compression would continue to fall to the mid 20's level: the opposite has happened and GM have returned to 38-39% level.

4.) No innovation post Steve Jobs: significant improvements were made to every hardware category (phone, tablet, pc) and both OS' (iOS and OS X). New hardware categories have been launched: Watch and TV. New software categories have been launched: carplay, homekit, healthkit, Apple music, Watch Apps, TV Apps and Maps has been improved dramatically. Look at how far ahead of the competition they are with 64 system on a chip and what they have done with the chip in the iPad Pro. The complaint now is that Apple is trying to do too much, spreading itself too thin and things it is launching (hardware and software) are 'incomplete'.

5.) Apple is only a consumer brand (and consumers are fickle): Apple has made significant inroads to growing sales in enterprise the past 2 years and have a long runway ahead of them in this segment

 

Now don't get me wrong... there are issues in Apple's business:

1.) company results will likely be soft in f2016 due to US$ strength (7-8% headwind) and slower growth in iPhone

2.) possible China slowdown (as you point out)

3.) Euro tax ruling raising company effective tax rate

4.) replacement rate on smartphones (and other hardware categories) getting longer (phones are good enough so why upgrade them as frequently?)

However, my read is Mr Market is in the process of shifting from loving Apple to once again hating Apple because... fill in the reasons this time. I think it is very cheap at $105 and a PE of 11.3 or 8.6 (net of cash). I am confident that Apple will find a way to continue to grow their revenue and total profit. Lumpy, but up over time.

 

Apple spent $4.5 billion on R&D in f2013; in f2014 they spent $6.0 (+33%); in f2015 they spent $8.1 (+35%); my guess is f2016 they will be spending more than $10 billion. Apple is notorious for only spending R&D $ on products they can bring to market. It is pretty clear to me that their best days in terms of innovation are in front of them (not behind). I can't wait to see what they have planned; all I know is it will nothing anyone has predicted.

[innerscorecard]

Oh, I definitely agree. That pessimism was what made me become an AAPL shareholder in the first place. Because it was easy to falsify those negative hypotheses with better analysis that existed when people believed in those things that were proven to be more accurate as time went on. It just seems to me that the current batch of worries is less likely to be easily proven false. "Good enough" and saturation will always be, in many peoples' minds, just around the corner. And some day it might be. I personally think we are very far away still, and that all smartphones are still laughable bad. But there is no way for that assertion to be proven true on a continuous basis.

[Viking]

I wonder when Apple will remove the home button on the iPhone. This would allow them to shrink the size of the phone and they would love to do this. Imagine the sales if they launch a phone that has a battery that lasts 50% longer than the current models. There are lots of things Apple can do to motivate more large upgrade cycles for iPhone. And as we learned with the larger screen size they do not have to be first.

[arcube]

I wonder when Apple will remove the home button on the iPhone. This would allow them to shrink the size of the phone and they would love to do this. Imagine the sales if they launch a phone that has a battery that lasts 50% longer than the current models. There are lots of things Apple can do to motivate more large upgrade cycles for iPhone. And as we learned with the larger screen size they do not have to be first.

+1

[johnny]

I wonder when Apple will remove the home button on the iPhone. This would allow them to shrink the size of the phone and they would love to do this.

 

If you want to track the plausibility of this, keep an eye on the Touch ID related patent filings, like this one: http://appleinsider.com/articles/15/02/05/apple-shows-continued-interest-in-embedding-touch-id-fingerprint-sensors-into-touchscreen-displays

 

I'm no engineer, but it seems like we're at least a few years out on that one.

 

[Palantir]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

Roughly, they're funding the dividend from domestic cash flows only. Increasing the dividend much more than it is now would require using foriegn CF or using debt, neither of which is attractive.

 

Why do you say so? If true, then looks like we're out of catalysts as we need to depend on organic growth for dividend growth.

[TheAiGuy]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

Roughly, they're funding the dividend from domestic cash flows only. Increasing the dividend much more than it is now would require using foriegn CF or using debt, neither of which is attractive.

 

Why do you say so? If true, then looks like we're out of catalysts as we need to depend on organic growth for dividend growth.

 

Well, mostly because I'm wrong about this. I said this from memory and looking at my notes, I'm off in the percentages.

 

In fiscal 2015, there was roughly ~20B in cash flow from domestic sources and ~11.5B in dividends. (Domestic Cash flow = (change in net cash) - (change in overseas cash) + (dividends) + (repurchases) - (net debt); these are disclosed in the 10k).

 

So, there's maybe room to raise the dividend by 75% without growth or reduction in share count.

[TheAiGuy]

Its also worth noting that Apple spent basically all of its domestic cash flow on share purchases and dividends. They may view that cash flow as a base rate for both, and use debt to fund more opportunistic share repurchases (I think there is evidence of both types of share repurchases).

[Mephistopheles]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

That's tax inefficient. Better to buy back shares if the stock is undervalued. Given that you're a shareholder, you must assume that it is undervalued. You can create a dividend for yourself by selling 5% of your shares every year. Or 10% or 2%. Nobody else suffers the tax hit and you get your dividend. Win win.

[bci23]

 

 

That's tax inefficient. Better to buy back shares if the stock is undervalued. Given that you're a shareholder, you must assume that it is undervalued. You can create a dividend for yourself by selling 5% of your shares every year. Or 10% or 2%. Nobody else suffers the tax hit and you get your dividend. Win win.

 

Agreed

[petec]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

That's tax inefficient. Better to buy back shares if the stock is undervalued. Given that you're a shareholder, you must assume that it is undervalued. You can create a dividend for yourself by selling 5% of your shares every year. Or 10% or 2%. Nobody else suffers the tax hit and you get your dividend. Win win.

 

Except that it forces me to sell my stock at an undervalued price if I want income which is a huge disadvantage for the income-requiring investor.

 

Personally I'm a big fan of dividends because I think they are harder to abuse.  At the least, I think the tax code ought to treat both the same and buybacks ought to be accounted for in the way described under the "share buyback" link here (https://www.fundsmith.co.uk/analysis) i.e. in the same way as purchases of another corporation's stock would be.

[Mephistopheles]

I wish they'd accelerate the dividend rather than these repurchases. I don't see why this can't have at least a 5% yield.

 

That's tax inefficient. Better to buy back shares if the stock is undervalued. Given that you're a shareholder, you must assume that it is undervalued. You can create a dividend for yourself by selling 5% of your shares every year. Or 10% or 2%. Nobody else suffers the tax hit and you get your dividend. Win win.

 

Except that it forces me to sell my stock at an undervalued price if I want income which is a huge disadvantage for the income-requiring investor.

 

Personally I'm a big fan of dividends because I think they are harder to abuse.  At the least, I think the tax code ought to treat both the same and buybacks ought to be accounted for in the way described under the "share buyback" link here (https://www.fundsmith.co.uk/analysis) i.e. in the same way as purchases of another corporation's stock would be.

 

When a stock pays a dividend, the price gets adjusted downwards, so the total dollar value of your investment is the same in either scenario.