AAPL - Apple Inc.

[johnny]

Will Apple accelerate the functionality of iOS for iPad to give the device more functionality? The power of the chip in iPad is now desktop class; all they need to do is grow iOS for iPad.

 

 

I think we should be cautious about swallowing Apple's marketing so readily here. The A9X is a great chip, and the line is advancing impressively, but it is certainly not "desktop class". It is, in the best light, possibly competitive with Macbook Airs from about 4 or 5 years ago. That's still a very significant gap.

 

Also, as I think I've mentioned in this thread, from my n of 1, it sure seems like the power gains from this generation of the A chips came along with a super-linear increase in power consumption. That is always the major constraint for the ambitions of the operating system, and the size jump to the iPad Pro gave them a lot of room to squeeze out some performance without necessarily improving energy efficiency (by throwing another 10 watt Hours of battery into the larger frame).

 

Gruber's review of the iPad Pro I think nailed it, specifically when he puzzled over how mediocre the keyboard support is for the device, since if you knew nothing of iOS, but simply looked at the iPad Pro and had its computational abilities explained to you, you would assume keyboard input would be a massive part of the experience. This is not a decision that requires rethinking how aggressive iOS is about its power management: sleeping apps, controlling radios, policing background activity, etc. It is the closest thing to a no-brainer, zero trade-off, free money decision Apple could have made and it is really distressing to see that they seem to need bloggers to clue them into it.

 

So I agree with you that there's a lot of room for the iPad to grow, in terms of functionality. But there is still that computational/thermal ceiling that they sometimes gloss over in their marketing.

[innerscorecard]

I think Apple's iPad software is quite bad and has always been quite bad. It's no surprise that sales have declined.

[Picasso]

Eh, I always hear a lot of complaining about how cheap Apple is.  I could probably find several instances on this thread.  It's not the end of the world when they're busy repurchasing shares. 

 

Maybe it irks me that they went from nearly bankrupt to the largest company in the world within a decade and investors are still upset it isn't trading at a market multiple.  From my standpoint the business and stock has already priced in the bulk of whatever the future is.  Maybe it's worth a trillion dollars in 7 years... just seems like a tough ride to make the next $500 billion. 

 

Alright sorry guys I'm banning myself from this thread. 

[Liberty]

The idea that Apple must be priced right because it is large and popular is funny on a forum where a large number of participant make money by buying megacaps like BAC, AIG, GOOG, MSFT, AMZN, BRK, WFC, etc.

 

People have been predicting Apple's doom yearly for 15 years and kind of grudgingly admit that it didn't happen this time, but next year's the one. People think it's a hardware maker like Nokia and RIM were. People think it's all about revolutionary products and surprising people. *shrug*

[Viking]

Regarding China and a yuan devaluation there is a case to be made that it could be to Apple's benefit. The unit volume of sales lost in China (due to higher yuan prices) could be more than made up by the drop in COGS to all units sold worldwide. Just a guess on my part...???

 

The negative is the phones would rise in price in China; however, if we have learned anything the past year it is that Apple has a very strong brand and people will pay more for the phones. As an example, here in Canada, the phones have gone up more than 30%. It is similar in many parts of the world the past two years since the US$ has been appreciating in value. Apple's sales have also been very strong these past two years. I would not expect a modest yuan devaluation (less than 20%) to impact iPhone sales it in a meaningful way in China given the strength of the Apple brand.

 

The positive for Apple is cost of goods would come down. This would improve GM on all products sourced from China and sold in all countries (not just China). The bigger the move down in the yuan the higher the GM improvement for Apple. Apple very likely has currency swings built into its contracts with all Chinese manufacturers like Foxcon.

[JayGatsby]

Maybe it irks me that they went from nearly bankrupt to the largest company in the world within a decade and investors are still upset it isn't trading at a market multiple.  From my standpoint the business and stock has already priced in the bulk of whatever the future is.  Maybe it's worth a trillion dollars in 7 years... just seems like a tough ride to make the next $500 billion. 

 

Alright sorry guys I'm banning myself from this thread.

Seems like that explosive growth is what causes the lower multiple. Everyone remembers the handful of cell phone companies that were dominant one year and nothing the next (Nokia, Motorola, Blackberry). Before that it was the music device companies. Apple has to keep reinventing themselves faster than most companies to stay on top.

[blainehodder]

Maybe it irks me that they went from nearly bankrupt to the largest company in the world within a decade and investors are still upset it isn't trading at a market multiple.  From my standpoint the business and stock has already priced in the bulk of whatever the future is.  Maybe it's worth a trillion dollars in 7 years... just seems like a tough ride to make the next $500 billion. 

 

Alright sorry guys I'm banning myself from this thread.

Seems like that explosive growth is what causes the lower multiple. Everyone remembers the handful of cell phone companies that were dominant one year and nothing the next (Nokia, Motorola, Blackberry). Before that it was the music device companies. Apple has to keep reinventing themselves faster than most companies to stay on top.

 

iPhone saturation causes the low multiple. I am long as of today, and think it is cheap, but I have no illusions that it should trade at a huge PE. A company simply cannot sell new iPhones to 1% of the population of the entire earth every Quarter. 4% globe/yr is not possible over time. The world isn't wealthy enough to sustain that. Other business lines may not offset the shrinking iPhone sales since the iPhone sales are so monstrously large. That is the bear thesis.

 

...but the market and the bears are seemingly slow to realize that revenue doesn't need to grow big for the stock to grow big. Perpetually low EV/EBIT, high ROIC, addictive products, shrinking float, decent divs. It is a cigarette co style investment thesis of the modern age (cigarettes are also still the cigarette style investment of the modern age). And multiples can only contract so far before EPS growth = price growth.

[petec]

 

I wasn't talking about companies buying back above IV.  I was talking about the fact that the buyback doesn't necessarily offset my dilution because the price at which they buy back doesn't necessarily equal the one at which I sold.  If companies could be trusted to accelerate their buyback at lows this would work in my favour; they cannot, so it does not.

 

Perhaps I can put it another way: solvent dividend paying companies tend not to suspend their dividends at market bottoms, whereas companies that buy back stocks often do.  I'd rather get the dividend, because then I can choose when to do the buyback.  And yes, there is a tax cost to that.

 

I understand and accept the point re: tax, although as I said earlier I wish the tax code would change to eliminate that as I don't think it has positive consequences.  But that's a separate point.

 

Sorry, I misread. Yes you did say that.

 

Of course if we assume a company reduces the buyback at low prices and increases it at high prices, maybe I'd take the dividend then too. But I was talking about a management who is shrewd enough to take advantage of downturns. I understand that many are not, but I wasn't referring to them.

 

If you need that regular income, then obviously whether you sell 5% a year or get paid 5%, doesn't make much of a difference and yea I would take the reliability of the 5% dividend as well. Still this destroys value for the other shareholders and I think we can agree on that.

 

Yep, I think we are on the same page.  Where I differ is that I don't think I trust any management team to be shrewd in the way you describe unless that sort of capital allocation is deeply woven into their culture (Buffet etc.).  The vast majority of management teams don't behave that way, and while I am no expert on Apple, I wouldn't assume they will behave that way without a lot of proof!

 

As Liberty says: it is a judgement call, which means it is a bit more complex than just saying "they should do buybacks because they are more tax efficient".  Me, I prefer dividends *except* in very particular cases.

 

I will also reiterate that I think the incentives to do buybacks are hugely distorted and that they probably, in aggregate, do more damage than the tax value they "create" but that is a much more involved debate!

[Liberty]

Maybe it irks me that they went from nearly bankrupt to the largest company in the world within a decade and investors are still upset it isn't trading at a market multiple.  From my standpoint the business and stock has already priced in the bulk of whatever the future is.  Maybe it's worth a trillion dollars in 7 years... just seems like a tough ride to make the next $500 billion. 

 

Alright sorry guys I'm banning myself from this thread.

Seems like that explosive growth is what causes the lower multiple. Everyone remembers the handful of cell phone companies that were dominant one year and nothing the next (Nokia, Motorola, Blackberry). Before that it was the music device companies. Apple has to keep reinventing themselves faster than most companies to stay on top.

 

I think the important point that is often missed is that Nokia and Motorola and Blackberry and Sony are/were all companies making devices with specific functions. Sony made Walkmen to listen to music, Nokia made phones to make calls, and maybe take photos and do a few other things, RIM made phones that could do email, etc.

 

Apple makes general purpose computing devices. There's nothing on the tech tree above general computing devices, because these can do everything with the right software/hardware. They can be a clock, a web browser, a music player, a way to watch video, a calendar, a map, a camera, a GPS, a gaming device, a productivity tool, whatever. And since you can download software, these devices are infinitely expandable (where would smartphones be without app stores?).

 

Moore's Law means that eventually, general computing devices replace function-specific devices. But once you've got a computer in your pocket, there's not another level on top that replaces computers, just better computers...

 

There are very few general computing device companies that control enough of the stack to be able to make a differentiated product with a premium experience.

 

Samsung has expertise in hardware (more manufacturing than design, though), but is pretty pitiful in software and services. Google is great at services and has control of a good mobile OS, but it is a commodity used by everyone from the cheapest off-brand handset maker to the most expensive ones, and they couldn't make the hardware part work (Motorola, bought and sold). Microsoft might have the expertise to do software and services, but they never were very good at consumer user experience, mostly relying on enterprise lock-in in the past, and now they don't have a viable mobile OS and they are locked out by the network effect of iOS and Android (MSFT has basically zero percent developer mindshare on its mobile OS).

 

Computers are taking an increasingly important place in people's lives, and Apple is a computer maker in a unique position, with unique company DNA to do well in this new environment.

[rkbabang]

Maybe it irks me that they went from nearly bankrupt to the largest company in the world within a decade and investors are still upset it isn't trading at a market multiple.  From my standpoint the business and stock has already priced in the bulk of whatever the future is.  Maybe it's worth a trillion dollars in 7 years... just seems like a tough ride to make the next $500 billion. 

 

Alright sorry guys I'm banning myself from this thread.

Seems like that explosive growth is what causes the lower multiple. Everyone remembers the handful of cell phone companies that were dominant one year and nothing the next (Nokia, Motorola, Blackberry). Before that it was the music device companies. Apple has to keep reinventing themselves faster than most companies to stay on top.

 

I think the important point that is often missed is that Nokia and Motorola and Blackberry and Sony are/were all companies making devices with specific functions. Sony made Walkmen to listen to music, Nokia made phones to make calls, and maybe take photos and do a few other things, RIM made phones that could do email, etc.

 

Apple makes general purpose computing devices. There's nothing on the tech tree above general computing devices, because these can do everything with the right software/hardware. They can be a clock, a web browser, a music player, a way to watch video, a calendar, a map, a camera, a GPS, a gaming device, a productivity tool, whatever. And since you can download software, these devices are infinitely expandable (where would smartphones be without app stores?).

 

Moore's Law means that eventually, general computing devices replace function-specific devices. But once you've got a computer in your pocket, there's not another level on top that replaces computers, just better computers...

 

There are very few general computing device companies that control enough of the stack to be able to make a differentiated product with a premium experience.

 

Samsung has expertise in hardware (more manufacturing than design, though), but is pretty pitiful in software and services. Google is great at services and has control of a good mobile OS, but it is a commodity used by everyone from the cheapest off-brand handset maker to the most expensive ones, and they couldn't make the hardware part work (Motorola, bought and sold). Microsoft might have the expertise to do software and services, but they never were very good at consumer user experience, mostly relying on enterprise lock-in in the past, and now they don't have a viable mobile OS and they are locked out by the network effect of iOS and Android (MSFT has basically zero percent developer mindshare on its mobile OS).

 

Computers are taking an increasingly important place in people's lives, and Apple is a computer maker in a unique position, with unique company DNA to do well in this new environment.

 

Once again Liberty hits the nail on the head.  Let me add that the shrinkage of computing devices has gone through a number of generations.  An entire floor of a building -> a room -> a cabinet -> a desktop box -> a laptop box -> now a pocketable handheld device.    There are really only two more steps: wearable device -> then implants.  For the time being wearable devices will not be able to hold the computing power, nor the battery power to be useful, which is why the Apple Watch is just an accessory to the iPhone.  IMHO Apple is in a good position to make the transition from pocket to wearable quite smoothly, just as IBM was able to make the leap from mainframe (a room) to minicomputers (a cabinet).  The disruption will come from implantable devices one day (it isn't clear that Apple will be the one to do this), but not for at least a couple (or three) decades.  The iPhone business right now is like Microsoft 1989.  There is a long way to go from here.

[mals]

 

Once again Liberty hits the nail on the head.  Let me add that the shrinkage of computing devices has gone through a number of generations.  An entire floor of a building -> a room -> a cabinet -> a desktop box -> a laptop box -> now a pocketable handheld device.    There are really only two more steps: wearable device -> then implants.  For the time being wearable devices will not be able to hold the computing power, nor the battery power to be useful, which is why the Apple Watch is just an accessory to the iPhone.  IMHO Apple is in a good position to make the transition from pocket to wearable quite smoothly, just as IBM was able to make the leap from mainframe (a room) to minicomputers (a cabinet).  The disruption will come from implantable devices one day (it isn't clear that Apple will be the one to do this), but not for at least a couple (or three) decades.  The iPhone business right now is like Microsoft 1989.  There is a long way to go from here.

 

Your shrinkage of computing devices description is very good.

On those lines, I have wondered whether we may see a day of ubiquitous very high bandwidth connections to remote computing resources that mobile computers tap into - in a way that does not happen now. And if that is technically feasible, then might we have mobile computing devices which become infinitely powerful when connected to very fast network, and be at the current state of development otherwise.

 

Now, even if the above scenario unfolds, I wonder why Apple might still not lead in that scenario - considering that customers decide on the basis of user interface familiarity, perceived brand value, perceived and real customer service experience, wide variety of apps and fashionable looking products.

 

Not sure if anybody else has pondered over the distributed computing mobile devices scenario and whether it is possible at all with the current wifi technology and its growth path.

[johnny]

A jump in the trend away from on-device compute and toward cloud-compute is not really advantageous for Apple.

 

The first reason is that one of Apple's greatest strengths (still somewhat underappreciated outside of supernerd circles) is that they currently have the best on-device compute in the industry. Their silicon isn't just good in a general sense, but benefits from being precisely tailored to the phone's designed functionality. Any trend that reduces the relative importance of on-device compute is not great for Apple, absent other factors.

 

But other factors aren't absent. Apple's two strongest (financially) competitors are Google and Amazon, who both excel in cloud compute. The case for both Google and Amazon devices is essentially this: "we have all the stuff you want, working very well on the cloud, and we will sell you cheap devices to access that awesome stuff". To the extent that Google and Amazon both enjoy success in devices, this should indicate that it is not an uncompelling pitch.

 

Apple has yet to demonstrate that it can really rival them in these areas. Some would argue that it has failed to demonstrate that it even understands its mediocrity here. Remember that the entire Apple Maps operation is a defensive manuever that is designed to reduce the chances (and mitigate the negative impact) of Google denying iOS certain maps functionality. Apple has not created an industry-leading Maps application. It has created merely a "good enough" Maps application designed to prevent widespread user defections in the event of Nuclear Mapwar. Maps are the best present-day example of the future of computing you propose. The on-device computation is essentially limited to rendering the views and relaying coordinates; everything else is in the cloud.

 

That said, we're a very long way from on-device compute being rendered irrelevant. There are still a few good solid nanometers to shave off the A-series before we get quantum-pwned, and the "ubiquitous high bandwidth" thing is -definitely- a long way off. Remember, we have pretty good high bandwidth connections now, but they aren't there 100% of the time. In moments of network congestion or bad signal, a network-dependent device becomes a doorstop. And going from 80% to 99% network-reliability was probably easier than than going from 99 to 99.9%, which is probably easier than going from 99.9 to 99.99% and so on. I don't know how many 9s you need there before people become okay with the occasional crippling of their devices, but I think we're a few orders of magnitude out.

 

By the way, a great example of a completely network-dependent device would be the Amazon Alexa (Edit: Amazon Echo). And it should be no surprise to you that Amazon released the Echo, and not Apple. It should also be no surprise to you that the Echo is designed to stay safely within the confines of your home and within range of your robust wifi connection.

[DCG]

I assume you mean 'Echo', not Alexa (which is a site ranking tool).

[johnny]

You are certainly right that I meant Echo. Alexa is how they brand the actual cloud service that the device taps into; I think it is also the default personified trigger-word for the thing, but I don't have much experience it.

[Liberty]

For those of you who have seen the Nikkei supply-chain report-rumor today, this might help provide some context:

 

http://appleinsider.com/articles/16/01/05/analyst-nikkei-iphone-6s-supplier-story-says-nothing-of-iphone-demand-site-wrong-before-in-2013

[innerscorecard]

There are some decent points there, but the macro sentiment context is pretty different. China was untapped then, whereas it's now perceived as on the verge of total collapse.

[mals]

A jump in the trend away from on-device compute and toward cloud-compute is not really advantageous for Apple.

 

 

Thanks for sharing your thoughts on cloud-compute devices. Nice name.  :)

 

I was thinking of it as I create scenarios where Apple loses long term. And those long term scenarios are the one in which patient Apple shareholders stand to lose.

I can only hope that Apple will improve here - why should Siri not be able to do most of what Echo/Alexa do. May be it will not be as good as Alexa but it can keep catching up...

Maps is an area where they have tried to catch up, and I hope that Apple wants to do a good job of it. It is hard to beat Google, but I am not sure this means that Apple cannot win in its space while Google wins in its own. 

 

While there are many strengths for Apple's business, I wonder what other plausible scenarios are there in which Apple loses long term?

Especially such scenarios in which Apple is not able to catch-up to what the competition offers.

 

[innerscorecard]

It's interesting that AAPL seems to trade as a one-way inverse China derivative these days, given that you could plausibly argue Apple ex-China (so retaining the Hong Kong and Taiwan segment of their China reporting segment) is already worth more than the current trading price.

[giofranchi]

The iPhone business right now is like Microsoft 1989.  There is a long way to go from here.

 

Apple controls 92% of the smartphone industry earnings. To me it looks like a near monopoly. Usually, if you don’t pay too much for a monopoly, it is a very good thing to own.

I agree growth won’t be as fast as it has been in the past (how could it be?). But I think you don’t need much growth to achieve reasonably good results, if you buy a monopoly at a 10% FCF yield.

And I don’t see the smartphone industry starting to shrink anytime soon. There is no substitute for the smartphone in sight yet, and smartphones can still get much more powerful and useful than they are today.

Therefore, I basically agree with Viking: a 10% compounded return from here is plausible.

 

Cheers,

 

Gio

[alwaysinvert]

The iPhone business right now is like Microsoft 1989.  There is a long way to go from here.

 

Apple controls 92% of the smartphone industry earnings. To me it looks like a near monopoly. Usually, if you don’t pay too much for a monopoly, it is a very good thing to own.

 

I don't think that word means what you think it means.

[giofranchi]

I don't think that word means what you think it means.

 

This is what I mean:

When you control all the earnings of an industry, competitors struggle to catch up with you. You have the means to continuously improve your product, while no one else can because they lack those means (earnings). Therefore, the gap between you and your competitors tends to become wider and wider.

That is, of course, unless the whole industry is shrinking (which, as I have said, I don't think is the case with smartphones), or you start making foolish mistakes… In other words, your fate is in your own hands.

If you don’t pay too much for a business whose fate is in its own hands, and if that business is run by a smart management, usually it is a good thing to own.

 

Cheers,

 

Gio

 

[mttddd]

while id rather the stock to be thriving aapl dropping to these levels is almost as nice just so i can buy more

[mbharadwaj]

Apple registers car related domains:

 

http://fortune.com/2016/01/08/apple-registers-apple-car-domain/

[wknecht]

Apple is rumored to be redesigning its headphone jack in favor of something proprietary. Not mutually exclusive, but...a good technology advancement or a good way to irritate all of your customers? I'm biased due to my dislike of Apple products to begin with.

 

http://www.forbes.com/sites/jaymcgregor/2016/01/07/iphone-7-headphone-jack-anger-erupts/

[johnny]

Boring non-issue. Anybody that pays attention to Apple's product/design philosophies should not just be unsurprised by this, but should have expected this without any supporting rumors. They like dropping support for legacy standards, ports, drives, whatever as soon as they can practically get away with it. That means, by definition, some chunk of users (ideally a minority) will be irritated. They have a record of negotiating this balance act very well, so I don't see any reason to suspect they're going to faceplant on the timing of dumping the headphone jack. Same pattern as floppy drives (iMac), CD/DVD drives (Macbook, then iMac), or even display ports (Macbook Retina).

 

I'd say there's good reason to think that they're going to time this transition well. Not only do they have a decade of retail headphone sales to analyze (to figure out what the wired/wireless mix is, and how that is changing over time), but they also have some newly obtained data from Beats that probably helps them triangulate the entire market with a bit more confidence.

 

I think that an annual ceremony of user angst is pretty much a given. They're going to complain about the hardware transitions regardless of when they happen, and in the absence of a hardware transition, they're going to complain that the new operating system version is killing their battery life, or something else. So I doubt there is much to gain from delaying any transitions for PR purposes.