AAPL - Apple Inc.

[dabuff]

Michael Burry is holding AAPL (along with IBM) in his new hedge fund: https://www.sec.gov/Archives/edgar/data/1649339/000114036116052634/xslForm13F_X01/form13fInfoTable.xml

[fareastwarriors]

The Most Important Apple Executive You’ve Never Heard Of

 

http://www.bloomberg.com/features/2016-johny-srouji-apple-chief-chipmaker/

[giofranchi]

Smartphone units aren't growing anywhere near this level. Smartphone sales are effectively flat in developed countries and China.

 

●  The number of mobile-connected devices per capita will reach 1.5 by 2020.

 

●  The total number of smartphones (including phablets) will be nearly 50 percent of global devices and connections by 2020.

 

●  Because of increased usage on smartphones, smartphones will cross four-fifths of mobile data traffic by 2020.

 

http://www.cisco.com/c/en/us/solutions/collateral/service-provider/visual-networking-index-vni/mobile-white-paper-c11-520862.html

 

Cheers,

 

Gio

[giofranchi]

To argue this is to argue that competitors can't access the capital at a reasonable cost needed to compete with Apple's retained earnings. For one, this idea totally breaks down when you shrink the industry down where a large cap could squash the current industry champion (your best argument is really a scale argument rather than profit pool control - they can spread fixed costs of high-end component development over more units). Secondly, apple is mostly competing with Chinese/Korean state sponsored electronics firms with near unlimited access to state subsidized capital.

 

Of course I can only speak for what my own experience is: in its very small niche my business earns much more than any other competitor, and this has allowed me to keep reinvesting and widening the gap between our products and services and the competition’s. Without having to ask for other people’s capital and therefore without being at their mercy.

 

Instead, I don’t know much about “state sponsored electronic firm with near unlimited access to state subsidized capital”… But you seem to have great conviction in what you say about those Chinese/Korean electronics firms… I guess they will turn out to be formidable competitors. When they do, they will surely start to make a profit. And I will change my mind.

 

Cheers,

 

Gio

 

[Liberty]

Apple's resources are an advantage because they are set up in a way to make good products.

 

Microsoft had all the money in the world, tons of engineers, and started before everyone else and couldn't make anything happen in mobile.

[giofranchi]

Apple's resources are an advantage because they are set up in a way to make good products.

 

Microsoft had all the money in the world, tons of engineers, and started before everyone else and couldn't make anything happen in mobile.

 

True.

I am not saying that great resources are enough. I am saying that great resources in the hands of a capable management are a good thing to have. Especially when no competitor of yours enjoys them!

 

Cheers,

 

Gio

 

[dabuff]

Another question is whether Apple will make more disruptive innovations (iCar, i.e. going where the puck is going to be) or merely sustaining innovations (just more iterations of iPhone, iPad) without Jobs at the helm

Disney shows that companies can still thrive in the absence of their founder; Hewlett Packard demonstrates the opposite.

[jawn619]

Hope this to be a value add regarding Apple in China. Just got back from visiting and would like to give some insight for some forum members who have never been.

 

In the U.S., purchases of Iphones are usually through large retailers like Apple.com/Best Buy/Verizon.  In China, most retail sales/commerce is done locally, meaning Iphones are first bought by authorized resellers, most of them mom and pop shops, then distributed through those stores. How China is able to thrive under perfect competition is a mystery to me. What this means is that Iphones are sold basically to small enterprises in bulk, which is more favorable than selling to individuals, because Apple gets paid regardless of whether or not the end user actually buys it. In the long term of course it matters, but I think it is an important difference to mention. Secondly, while prices for Iphones in the U.S. are generally homogeneous, in China there is wider variation. I think this is because there are fakes, and people will pay extra to make sure their products are real.

 

Iphones surprisingly have not lost pricing power, but has actually seen its average price per phone go up. It's hard to imagine in the U.S. because Apple has such a large market share, but Iphones are a luxury product in China.

 

Competition/Market share

There is competition, and from smartphone makers most people in the U.S. have never heard of. Huawei is an example. By and large, Iphone is still seen as the best product, but has less market share than in the U.S. Macs have a tiny market share, and I don't think ever will get popular in China because gaming is really hard on a mac and a big part of Chinese culture.

 

On general Chinese economy

Most people in China are not wealthy, but a common cultural mindset is aspiring to be "rich". Actually most people in China are not just not wealthy, but actually extremely poor. Making the equivalent of $20,000 would make someone pretty well off. You have this weird dichotomy in China where food, labor, and services are extremely cheap compared to here, but certain items like cars/houses/luxury goods are as expensive if not more expensive than in the U.S. Capital allocation is pretty poor, and a lot of businesses are fueled with debt. The debt comes at a pretty high cost too, 3-5% for a bank CD. I have heard businesses that need to roll loans over.

 

P.S. Chinese people really like KFC, because they think it's clean. LOL

 

[DeepSouth]

To argue this is to argue that competitors can't access the capital at a reasonable cost needed to compete with Apple's retained earnings. For one, this idea totally breaks down when you shrink the industry down where a large cap could squash the current industry champion (your best argument is really a scale argument rather than profit pool control - they can spread fixed costs of high-end component development over more units). Secondly, apple is mostly competing with Chinese/Korean state sponsored electronics firms with near unlimited access to state subsidized capital.

 

Of course I can only speak for what my own experience is: in its very small niche my business earns much more than any other competitor, and this has allowed me to keep reinvesting and widening the gap between our products and services and the competition’s. Without having to ask for other people’s capital and therefore without being at their mercy.

 

Instead, I don’t know much about “state sponsored electronic firm with near unlimited access to state subsidized capital”… But you seem to have great conviction in what you say about those Chinese/Korean electronics firms… I guess they will turn out to be formidable competitors. When they do, they will surely start to make a profit. And I will change my mind.

 

Cheers,

 

Gio

 

You misunderstand. I never said that Samsung/Huawei will end up high ROIC producer of smartphones. My point is that lack of access to capital is not their problem and is not the limiting force from being a high profit firm. Samsung doesn't have to ask for anyone's money either but they have near unlimited access if they wanted it. In fact, they spend far more on CapEx and R&D than AAPL does. AAPL's moat and ROIC is not due to access to ample retained earnings. If all it took to be a dominant firm was access to retained equity capital there would never be disruption/changing of the guard in the corporate world. Further, if you're a public company without control (AAPL), management is already at the mercy of other people's capital (shareholders, creditors). You're seeing the effect of competitive advantage (high ROIC, high margins) and confusing it for cause of the moat.

[Jurgis]

You're seeing the effect of competitive advantage (high ROIC, high margins) and confusing it for cause of the moat.

 

A lot of people make this mistake for various companies.

[KCLarkin]

You're seeing the effect of competitive advantage (high ROIC, high margins) and confusing it for cause of the moat.

 

Apple earns high returns on "premium" phones, so it makes economic sense to invest capital in "premium" phones.

 

Android earns poor returns on "premium" phones, so it doesn't make sense to invest capital in "premium" phones.

 

Apple invests in widening the moat while Android makers fight for survival.

 

--

 

Android phones are a pure commodity since they all use the same OS. The only way to win in a commodity market is to be the lowest cost producer.

 

This results in a "race to the bottom".

 

[fareastwarriors]

Hope this to be a value add regarding Apple in China. Just got back from visiting and would like to give some insight for some forum members who have never been.

 

In the U.S., purchases of Iphones are usually through large retailers like Apple.com/Best Buy/Verizon.  In China, most retail sales/commerce is done locally, meaning Iphones are first bought by authorized resellers, most of them mom and pop shops, then distributed through those stores. How China is able to thrive under perfect competition is a mystery to me. What this means is that Iphones are sold basically to small enterprises in bulk, which is more favorable than selling to individuals, because Apple gets paid regardless of whether or not the end user actually buys it. In the long term of course it matters, but I think it is an important difference to mention. Secondly, while prices for Iphones in the U.S. are generally homogeneous, in China there is wider variation. I think this is because there are fakes, and people will pay extra to make sure their products are real.

 

Iphones surprisingly have not lost pricing power, but has actually seen its average price per phone go up. It's hard to imagine in the U.S. because Apple has such a large market share, but Iphones are a luxury product in China.

 

Competition/Market share

There is competition, and from smartphone makers most people in the U.S. have never heard of. Huawei is an example. By and large, Iphone is still seen as the best product, but has less market share than in the U.S. Macs have a tiny market share, and I don't think ever will get popular in China because gaming is really hard on a mac and a big part of Chinese culture.

 

On general Chinese economy

Most people in China are not wealthy, but a common cultural mindset is aspiring to be "rich". Actually most people in China are not just not wealthy, but actually extremely poor. Making the equivalent of $20,000 would make someone pretty well off. You have this weird dichotomy in China where food, labor, and services are extremely cheap compared to here, but certain items like cars/houses/luxury goods are as expensive if not more expensive than in the U.S. Capital allocation is pretty poor, and a lot of businesses are fueled with debt. The debt comes at a pretty high cost too, 3-5% for a bank CD. I have heard businesses that need to roll loans over.

 

P.S. Chinese people really like KFC, because they think it's clean. LOL

 

KFC and other American fast food places in China are so different than the ones in America... It's day and night.

[innerscorecard]

Hope this to be a value add regarding Apple in China. Just got back from visiting and would like to give some insight for some forum members who have never been.

 

In the U.S., purchases of Iphones are usually through large retailers like Apple.com/Best Buy/Verizon.  In China, most retail sales/commerce is done locally, meaning Iphones are first bought by authorized resellers, most of them mom and pop shops, then distributed through those stores. How China is able to thrive under perfect competition is a mystery to me. What this means is that Iphones are sold basically to small enterprises in bulk, which is more favorable than selling to individuals, because Apple gets paid regardless of whether or not the end user actually buys it. In the long term of course it matters, but I think it is an important difference to mention. Secondly, while prices for Iphones in the U.S. are generally homogeneous, in China there is wider variation. I think this is because there are fakes, and people will pay extra to make sure their products are real.

 

Iphones surprisingly have not lost pricing power, but has actually seen its average price per phone go up. It's hard to imagine in the U.S. because Apple has such a large market share, but Iphones are a luxury product in China.

 

Competition/Market share

There is competition, and from smartphone makers most people in the U.S. have never heard of. Huawei is an example. By and large, Iphone is still seen as the best product, but has less market share than in the U.S. Macs have a tiny market share, and I don't think ever will get popular in China because gaming is really hard on a mac and a big part of Chinese culture.

 

On general Chinese economy

Most people in China are not wealthy, but a common cultural mindset is aspiring to be "rich". Actually most people in China are not just not wealthy, but actually extremely poor. Making the equivalent of $20,000 would make someone pretty well off. You have this weird dichotomy in China where food, labor, and services are extremely cheap compared to here, but certain items like cars/houses/luxury goods are as expensive if not more expensive than in the U.S. Capital allocation is pretty poor, and a lot of businesses are fueled with debt. The debt comes at a pretty high cost too, 3-5% for a bank CD. I have heard businesses that need to roll loans over.

 

P.S. Chinese people really like KFC, because they think it's clean. LOL

 

I don't think these are eternal truths. Many still do buy at local resellers or at carrier stores, but Apple will soon have 40 Apple Stores in mainland China, and people can buy directly from Apple on Tmall and JD.com. I expect the proportion of sales from the latter venues to increase over time as less smartphones buyers are on their first smartphone.

[giofranchi]

You're seeing the effect of competitive advantage (high ROIC, high margins) and confusing it for cause of the moat.

 

I don’t think so:

 

1) Disruption: it happens when a very gifted individual (e.g. Steve Jobs) finds a way to bring to the masses a great and new product (e.g. touch screens). No advantage nor virtuous circle can protect you from that. Period.

 

2) Disruption is what put Apple in the position it is today, in which it enjoys 94% of its industry earnings. Scale has mattered much less: in fact Samsung sells 21.5% of worldwide smartphone sales, while Apple is only at 14%.

 

3) Once it got to the position it is right now, the fact that it leaves the crumbs to its competitors in terms of earnings at least puts Apple in a virtuous circle: Samsung might be spending more than Apple in Capex and R&D, but without earnings it is pressured to show results. Higher Capex, higher R&D, and much lower earnings? How long will it keep convincing its shareholders to leave their capital in Samsung? And what about the bond markets? Would you lend to a corporation which spends a lot and shows very little earnings as a result? In other words, Apple’s ample resources give it the freedom to invest for the long term benefit of its shareholders. Freedom that its competitors hardly enjoy. If management is good enough to wisely use this advantage, they should be able to increase over time the value proposition of Apple’s products and services compared to those of its competitors (which is basically the definition itself of good long term investing). Of course, if instead management falls short of this task, the virtuous circle I have tried to describe will be broken.

 

Cheers,

 

Gio

[giofranchi]

I find the article in attachment very useful to understand Apple's competitive advantage:

 

The problem with all this "quality" is that it gets expensive. It can easily double the

price. Customers impressed with Apple's quality wouldn't be willing to pay for it. Sure,

they'll pay 30% more, because it's a status symbol and "cool", but they won't pay

double. Therefore, Apple has to tackle the cost issue.

They do this with "NRE" or "up-front" payments. The reason quality components are

expensive is because they are produced in low volume, the same business model

duality described above. Apple has to push its business model down through the

supply chain. That means going to vendor, giving them a bunch of money (Non-

Recurring Engineering) to design a higher quality part, then capital so they can build a

factory to produce that part in volume. In exchange, Apple then gets to buy that part at

a low price.

Apple is so good at this that they can produce a high-quality iPhone at the same cost

as low-quality competitors. This produces huge profits per iPhone. Even though Apple

sells less than 20% of all mobile phones, it earns most of the industry's profits. Nobody

can compete with them. Another vendor wishing to enter the market doesn't have

enough capital to create the same deals Apple gets, so can't produce a quality phone

as cheaply, and thus must sell in lower volumes for lower profits. And even then, they

still can't compete because such a low volume product can't generate enough profits

for the engineering required. And, there is certainly no money left over to create the

luxury branding needed to support the marketing.

 

Cheers,

 

Gio

tesla-is-copying-apples-business-model.pdf

[giofranchi]

Global Smartwatch Shipments Overtake Swiss Watch Shipments in Q4 2015

 

https://www.strategyanalytics.com/strategy-analytics/news/strategy-analytics-press-releases/strategy-analytics-press-release/2016/02/18/global-smartwatch-shipments-overtake-swiss-watch-shipments-in-q4-2015#.VscnOPD2b4h

 

Cheers,

 

Gio

[LR1400]

In my observation Apple's competitive advantage is like that of most brands, except better due to what Gio described above. The brand itself has now become a competitive advantage, much like KO, MCD, etc. Like those companies, the brand should endure for quite sometime, however eventually it will begin to erode some, just like KO, MCD, etc.

[DCG]

They do have a strong brand, but technology brands can be tarnished pretty quickly (remember when Blackberry was a good brand?). Apple has already seemed to start paying less attention to fine details (resulting in some things like the Apple Music app, which is awful). Continuing to go down that route can hurt the brand pretty quickly.

[DeepSouth]

You're seeing the effect of competitive advantage (high ROIC, high margins) and confusing it for cause of the moat.

 

I don’t think so:

 

1) Disruption: it happens when a very gifted individual (e.g. Steve Jobs) finds a way to bring to the masses a great and new product (e.g. touch screens). No advantage nor virtuous circle can protect you from that. Period.

 

2) Disruption is what put Apple in the position it is today, in which it enjoys 94% of its industry earnings. Scale has mattered much less: in fact Samsung sells 21.5% of worldwide smartphone sales, while Apple is only at 14%.

 

3) Once it got to the position it is right now, the fact that it leaves the crumbs to its competitors in terms of earnings at least puts Apple in a virtuous circle: Samsung might be spending more than Apple in Capex and R&D, but without earnings it is pressured to show results. Higher Capex, higher R&D, and much lower earnings? How long will it keep convincing its shareholders to leave their capital in Samsung? And what about the bond markets? Would you lend to a corporation which spends a lot and shows very little earnings as a result? In other words, Apple’s ample resources give it the freedom to invest for the long term benefit of its shareholders. Freedom that its competitors hardly enjoy. If management is good enough to wisely use this advantage, they should be able to increase over time the value proposition of Apple’s products and services compared to those of its competitors (which is basically the definition itself of good long term investing). Of course, if instead management falls short of this task, the virtuous circle I have tried to describe will be broken.

 

Cheers,

 

Gio

 

1) Disruption is a low-end phenomenon. This doesn't apply to Apple or the history of iPhone.

 

https://stratechery.com/2013/obsoletive/

 

There are plenty of competitive advantages that can prevent a "gifted individual" from blowing up your business through disruption. It's hard to see a gifted entrepreneur disrupting Moody's business by offering a cheaper proposal (plenty of CRAs have tried).

 

2) I don't see Apple as a disruptive company, and I don't see how simply saying they "disrupted" generates any insight into their business or the industry.

 

Further, you misunderstand Apple's scale advantage. With ~zero operating margins on low end phones (commoditized/perfect competition), all industry margins are generated through differentiated high end phones. As the largest seller of >$400 phones and tablets, Apple has the scale to spread the fixed costs of high-end component R&D/CapEx across these units more efficiently than any competitor. Of course, there are other reasons why Apple commands ~the entire profit pool (branding, stickiness, software differentiation, design, strong workforce/mgmt, etc) but scale is a contributor.

 

3) I'll take this two ways. First, if the Asian competitors quit handset manufacturing it will be because they don't foresee profitable opportunities in the market (this is complicated by the fact that they aren't really rational agents), not because they don't have enough retained earnings to compete. You are seeing this issue backwards. If they had a clear runway to generate profits in the future, their BODs wouldn't care that AAPL has 100% of the profits today. The issue is that the competitive dynamics of the industry most likely preclude future profits at a reasonably high ROIC for other handset makers: the result of this is AAPL's ownership of the profit pool.

 

Secondly, if you think that AAPL has more patience in allocation of capital than Korean Chaebols (Samsung) or Chinese state controlled electronics manufacturers (Huawei) I believe you are hugely mistaken. AAPL's competitors are effectively government agencies that do not really have to answer to equity or credit markets, and do not have the same ROIC demands that American public companies have. IMO their patience for losses is far higher than any public American company.

 

To summarize, access to capital is not a competitive advantage due to the particular nature of AAPL's competitors, and the size of the profit pool simply entices continued efforts from these competitors to steal profit share from AAPL.

[LR1400]

They do have a strong brand, but technology brands can be tarnished pretty quickly (remember when Blackberry was a good brand?). Apple has already seemed to start paying less attention to fine details (resulting in some things like the Apple Music app, which is awful). Continuing to go down that route can hurt the brand pretty quickly.

 

Good point, the tech brands can erode faster than the classic consumer types.

[petec]

They do have a strong brand, but technology brands can be tarnished pretty quickly (remember when Blackberry was a good brand?). Apple has already seemed to start paying less attention to fine details (resulting in some things like the Apple Music app, which is awful). Continuing to go down that route can hurt the brand pretty quickly.

 

Good point, the tech brands can erode faster than the classic consumer types.

 

+1 completely different

[giofranchi]

There are plenty of competitive advantages that can prevent a "gifted individual" from blowing up your business through disruption. It's hard to see a gifted entrepreneur disrupting Moody's business by offering a cheaper proposal (plenty of CRAs have tried).

 

Of course, disruption happens when and where it can happen. Maybe MCO’s business is very well protected and doesn’t allow for disruption to happen. Technology is usually another matter.

 

2) I don't see Apple as a disruptive company, and I don't see how simply saying they "disrupted" generates any insight into their business or the industry.

 

Maybe not now, but you don’t think Steve Jobs has been a disruptor?

 

Secondly, if you think that AAPL has more patience in allocation of capital than Korean Chaebols (Samsung) or Chinese state controlled electronics manufacturers (Huawei) I believe you are hugely mistaken. AAPL's competitors are effectively government agencies that do not really have to answer to equity or credit markets, and do not have the same ROIC demands that American public companies have. IMO their patience for losses is far higher than any public American company.

 

To summarize, access to capital is not a competitive advantage due to the particular nature of AAPL's competitors, and the size of the profit pool simply entices continued efforts from these competitors to steal profit share from AAPL.

 

Again, this might be true if you believe you understand very well what goes on inside those Asian state controlled electronics manufacturers… I don’t think I know enough about those dynamics to judge. Instead, I know the position of strength I enjoy when I earn all the profits and my competitors none…

 

Have you ever personally experienced it does no good, and only attracts more competition, or have you just read it in some books?

 

Cheers,

 

Gio

[giofranchi]

They do have a strong brand, but technology brands can be tarnished pretty quickly (remember when Blackberry was a good brand?). Apple has already seemed to start paying less attention to fine details (resulting in some things like the Apple Music app, which is awful). Continuing to go down that route can hurt the brand pretty quickly.

 

Good point, the tech brands can erode faster than the classic consumer types.

 

+1 completely different

 

Except that Apple is no more only a "tech brand".

 

Cheers,

 

Gio

[giofranchi]

(resulting in some things like the Apple Music app, which is awful).

 

Why do you think Apple Music is awful? I pay 10 Euros every month and can listen to all the music I want... What's not to like about it?

 

Cheers,

 

Gio

[DeepSouth]

There are plenty of competitive advantages that can prevent a "gifted individual" from blowing up your business through disruption. It's hard to see a gifted entrepreneur disrupting Moody's business by offering a cheaper proposal (plenty of CRAs have tried).

 

Of course, disruption happens when and where it can happen. Maybe MCO’s business is very well protected and doesn’t allow for disruption to happen. Technology is usually another matter.

 

If control of profit pool isn't a huge barrier to disruption (it's tautologically not as the disruptor is always stealing the profit pool from the incumbent) then maybe that isn't the greatest competitive advantage in business as you say it is.

 

2) I don't see Apple as a disruptive company, and I don't see how simply saying they "disrupted" generates any insight into their business or the industry.

 

Maybe not now, but you don’t think Steve Jobs has been a disruptor?

 

Not really in the lens of his second stint at AAPL. In my understanding (http://www.claytonchristensen.com/key-concepts/) it means introducing a low margin good that eventually scales/improves and competes away market share of the high margin incumbent. While there are some elements (iTunes comes to mind), I don't really think he fits this mold well.

 

Secondly, if you think that AAPL has more patience in allocation of capital than Korean Chaebols (Samsung) or Chinese state controlled electronics manufacturers (Huawei) I believe you are hugely mistaken. AAPL's competitors are effectively government agencies that do not really have to answer to equity or credit markets, and do not have the same ROIC demands that American public companies have. IMO their patience for losses is far higher than any public American company.

 

To summarize, access to capital is not a competitive advantage due to the particular nature of AAPL's competitors, and the size of the profit pool simply entices continued efforts from these competitors to steal profit share from AAPL.

 

Again, this might be true if you believe you understand very well what goes on inside those Asian state controlled electronics manufacturers… I don’t think I know enough about those dynamics to judge. Instead, I know the position of strength I enjoy when I earn all the profits and my competitors none…

 

It doesn't take a PhD to know that Asian state-affiliated companies have near generous access to state subsidized capital. I'd suggest you develop a view on this if you are investing in firms that compete with these Asian companies. Investors in steel and dry bulk carrier companies have learned the hard way that these Asian businesses aren't rational capital allocators in the western sense.

 

Have you ever personally experienced it does no good, and only attracts more competition, or have you just read it in some books?

 

You think that companies seeking profit share from successful incumbents only happens in books? Since it seems like you appreciate disruption theory, the entire idea surrounding disruption is of small competitors fighting to capture profits from dominant incumbents.

 

Cheers,

 

Gio