AAPL - Apple Inc.

[Grenville]

Kindle presentation:

 

http://www.youtube.com/watch?v=VYi1jZXz9Kg

 

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txlaw,

 

Thank you for posting this. Awesome presentation. So much better watching it then trying to read the live blog. It doesn't do it justice at all.

 

 

[Guest valueInv]

Apple hasn't produced anything that seems to be better than its competitors and gives it an edge. Qualcomm, etc are revving faster with more clock speed, more cores, better consumption, etc. Differentiation only works if what you have is better. The top people leaving tells me that Apple is not doing anything interesting enough for them to stay. Apple has been through multiple generations of its Ax series without any advantage. Are they going to suddenly product chips far better than anything else out there?

 

On the flip side, they are dependent on their biggest competitor for their chip manufacturing. Samsung uses an identical chip in its phones. Not only are they adding to their competitors profits but also giving them economies of scale which it then uses to undercut Apple in price.

 

Those are good points, but it doesn't mean they aren't trying to differentiate (why buy all those chip designers?). Maybe they'll succeed, maybe they won't and will just go commodity. I think either way they should be fine since their chips aren't their secret sauce.

 

Ok, maybe I'm wrong on this:

 

http://appleinsider.com/articles/12/09/12/apples_new_a6_iphone_5_appears_to_be_first_arm_cortex_a15_phone

 

They also have some proprietary image processing stuff in their chips.

[Liberty]

Ok, maybe I'm wrong on this:

 

http://appleinsider.com/articles/12/09/12/apples_new_a6_iphone_5_appears_to_be_first_arm_cortex_a15_phone

 

They also have some proprietary image processing stuff in their chips.

 

I think it makes sense for them. Once they know there's something computationally expensive they want to do a lot of, building specialized hardware to do it will make it much faster and significantly more energy-efficient than a software-only solution, which over a few such tasks can add up to an advantage over the competition.

 

The question is: Can they find enough such tasks that deserve their own piece of silicon to add up to a big enough difference compared to a more vanilla chip? And will the competition start to customize their chips more too? Guess we'll have to wait and see.

[Guest valueInv]

Ok, maybe I'm wrong on this:

 

http://appleinsider.com/articles/12/09/12/apples_new_a6_iphone_5_appears_to_be_first_arm_cortex_a15_phone

 

They also have some proprietary image processing stuff in their chips.

 

I think it makes sense for them. Once they know there's something computationally expensive they want to do a lot of, building specialized hardware to do it will make it much faster and significantly more energy-efficient than a software-only solution, which over a few such tasks can add up to an advantage over the competition.

 

The question is: Can they find enough such tasks that deserve their own piece of silicon to add up to a big enough difference compared to a more vanilla chip? And will the competition start to customize their chips more too? Guess we'll have to wait and see.

Agreed. They are currently doing it with image processing. Security is another candidate.

[Liberty]

 

Agreed. They are currently doing it with image processing. Security is another candidate.

 

They're already doing some very solid hardware encryption:

 

http://support.apple.com/kb/HT4175

[Guest valueInv]

Another win for Aapl:

 

http://www.bloomberg.com/news/2012-09-14/apple-wins-ruling-in-case-brought-by-samsung-at-trade-agency.html

 

[Uccmal]

Apple is going to see heavy margin compression going forward.  The US carriers are sarting to take an anything but Apple approach.  The Verizon CEO is already touting the BB10 as an alternative.  At the first sign of weak sales of this dud, the carriers will be forcing Apple's pricing down real quick.  Another mistake I see them making is trying to go head to head with Google in mapping and services provision.

 

The new Ipods are overpriced for the Tween market they sell to. 

 

People, including many Apple owners, such as myself, hate the way Apple tries to force everything through Itunes. 

 

The phones are insanely overpriced.  I bet you see 5 pricing at or below similar Androids very quickly.  And the andriods will come down in price to meet every Apple drop.  We are quickly going to see a race to the bottom.

 

Valueinv, Did you read any if the comment posts about the presentation of the new Iphone.  People were bored.  They offered nothing new or groundbreaking.  They got all the mileage they could out of this but the fad is past. 

 

Apple TV is nowhere to be seen.  Why - Networks dont want to do business with Apple because Apple has a reputation of screwing everyone. 

 

They are building a smaller IPad.  Apple under Steve Jobs would never have copied the other manufacturers.  They WERE the leaders. 

 

I could type an essay on consumer behaviour that applies directly to Apple.  Sometimes people change just because they want  something different.  This applies especially to people who bought into a fad in the first place. 

 

[Liberty]

Ok, maybe I'm wrong on this:

 

http://appleinsider.com/articles/12/09/12/apples_new_a6_iphone_5_appears_to_be_first_arm_cortex_a15_phone

 

They also have some proprietary image processing stuff in their chips.

 

http://www.anandtech.com/show/6292/iphone-5-a6-not-a15-custom-core

[Guest valueInv]

Ok, maybe I'm wrong on this:

 

http://appleinsider.com/articles/12/09/12/apples_new_a6_iphone_5_appears_to_be_first_arm_cortex_a15_phone

 

They also have some proprietary image processing stuff in their chips.

 

http://www.anandtech.com/show/6292/iphone-5-a6-not-a15-custom-core

 

Yup, looks like you were right. I still find it hard to believe that Apple may be building better chips than Qualcomm or Nvidia but it looks like they might be. This also negates some of the Samsung's scales economies that I mentioned before.

[Guest valueInv]

Apple is going to see heavy margin compression going forward.  The US carriers are sarting to take an anything but Apple approach.  The Verizon CEO is already touting the BB10 as an alternative.  At the first sign of weak sales of this dud, the carriers will be forcing Apple's pricing down real quick.  Another mistake I see them making is trying to go head to head with Google in mapping and services provision.

 

The new Ipods are overpriced for the Tween market they sell to. 

 

People, including many Apple owners, such as myself, hate the way Apple tries to force everything through Itunes. 

 

The phones are insanely overpriced.  I bet you see 5 pricing at or below similar Androids very quickly.  And the andriods will come down in price to meet every Apple drop.  We are quickly going to see a race to the bottom.

 

Valueinv, Did you read any if the comment posts about the presentation of the new Iphone.  People were bored.  They offered nothing new or groundbreaking.  They got all the mileage they could out of this but the fad is past. 

 

Apple TV is nowhere to be seen.  Why - Networks dont want to do business with Apple because Apple has a reputation of screwing everyone. 

 

They are building a smaller IPad.  Apple under Steve Jobs would never have copied the other manufacturers.  They WERE the leaders. 

 

I could type an essay on consumer behaviour that applies directly to Apple.  Sometimes people change just because they want  something different.  This applies especially to people who bought into a fad in the first place.

 

I am not going to waste my breath deconstructing your post. My $5000 bet is still open and I'll up the market cap to $800 B within two years of this post. If you truly believe what you posted, then take the bet. Don't make an excuse that you don't short stocks. Unlike shorting, your downside here is limited to $5K.

[Uccmal]

Valueinv, How about this one....

 

Why did Buffett buy IBM, not Apple. 

 

Apple is overvlaued now, its earnings stream is unpredictable, and prone to extreme competition. 

 

The reason you dont want to deconstruct my post is because you cant.  So you hide behind your little bet. 

 

And lets see, by your argument, Apple is going to worth 800 B sometime in the next two years.  That is a whopping 20% over two years.  Stellar returns you'll be getting on this one. 

 

Every single company on the planet in the IT space now wants what Apple has, and you know what, many will get it. 

 

 

[ExpectedValue]

Al, can you quantify how Apple is overvalued? I think you're being a little overconfident by making such declarative statements about the company, without really quantifying anything.

 

There's a difference between having less of a moat -- or more precisely, being in a hits driven business versus being overvalued. I'd argue that Apple is in a hits driven business and is trying to make itself more recurring by getting users to accept its platform. At least in its current form, I wouldn't own Apple (I do however own a little Google).

 

You're right to say that Apple's earnings are less predictable, especially when compared to IBM. But if Apple can keep just maintaining share/retaining its customers, it's a cheap stock with optionality on any new markets they enter. I don't see how anyone can refute that.

 

I'd be willing to wager that over the next two years, Apple will probably outperform IBM. Also - I don't think IBM is screaming cheap. To me, the reason Buffett bought it was simply because its a good business that should keep growing with competitive moats, so with his access the float the return on that investment will be pretty good. For me though, I'd rather own other names besides IBM.

 

 

[Guest valueInv]

 

The reason you dont want to deconstruct my post is because you cant.  So you hide behind your little bet. 

 

 

I'm the one willing to put my money where my mouth is and you say I am hiding? I have deconstructed your arguments many times before and you keep repeating the same things over and over again.

 

Once in a while, it good to pay attention to reality:

http://www.usatoday.com/tech/personal/story/2012/09/16/apple-iphone-5-likely-to-spur-record-lines/57789680/1

[Guest valueInv]

Ok, maybe I'm wrong on this:

 

http://appleinsider.com/articles/12/09/12/apples_new_a6_iphone_5_appears_to_be_first_arm_cortex_a15_phone

 

They also have some proprietary image processing stuff in their chips.

 

http://www.anandtech.com/show/6292/iphone-5-a6-not-a15-custom-core

 

Benchmakr looks pretty good too:

 

http://news.cnet.com/8301-13579_3-57513867-37/iphone-5-benchmarks-surface-performance-doubles/

[Uccmal]

Hi Tariq,

 

I sort of thought it was fairly valued in the sub 500 B range. 

 

I have nothing against Apple.  I even own a couple of their products (mac 3 yrs old and an IPAD).

 

From my perspective Apple is now overvalued because:

1) they cant sustain the margins indefinitely... the competition is gaining strength and numbers.

2) Someone is going to step up and offer to give Apple ecosystem users discounts or complete tranferability to another ecosystem.  i.e. We know you already bought this app from Apple.  We will give it to you for free.

3) They have had an incredible run but its all going to slow down eventually. I enumerated all of the past consumer electronics companies elsewhere but will recap a few: sony, msft, rim, atari, kodak, commodore, netscape, polaroid.m When it slows there will be immense margin compression.

 

When the margins compress the stock will compress.  Forty percent margins are unsustainable in the environment they are operating in.  When it normalizes, shareholders are in for a rude awakening.

 

This is not to say that Apple will not continue to build great products but rather that their profitability will decrease.  It is also telling to see that there are no inside buyers, only sellers. 

 

Valueinv sees only half of the equation, and denies the existence of history.  No company has ever grown profits indefinetly without hiccups, or competitors swarming to them like bees to honey. 

[DCG]

Ufcmal, some of your arguments here are pretty ridiculous.

 

Buffet not buying Apple over IBM? Well, why didn't buy apple 5-10 yeas ago? Buffet buying IBM has no relation to Apple. I can point out 40 tech companies that I think will do better than IBM in the next 5-10 years, but that does mean Buffet understands them.

 

You keep stating the obvious that Apple can't sustain their growh forever. No company can sustain 70% growth indefinitely. Im interested in all the other companies you follow or own that you think will sustain huge growth for the rest of time.

[Uccmal]

DCf, you kind of missed the point. 

 

Apples stock price is based on 40% margins, today, and huge growth rates.  When these falter, the stock will get slaughtered.  Its that simple and in all of investing history it has never failed to happen. 

 

Part 2: Buying Apple now to get a 20% return over two years, with huge downside risk makes no sense.  Therefore holding Apple stock at these levels makes no sense either.

 

I generally dont buy growth companies inless they are dirt cheap: BAC, JPM, AIG, FFH. 

 

Now I will sit and wait and ignore the Apple thread.

[berkshiremystery]

Good point Uccmal,...

 

I own an iPhone 3GS & iPad2, because they were the only leading products on the market around the time of my purchase. I don't hold any Apple stock,... because every time someone asked me for some cheaper alternative, I could advise and lead them to some cheaper competitor product like Samsung or some rock bottom Huawei phone. Samsung Galaxy mobile products are awesome,... and me Scrooge McDuck would probably buy them, if I would have to start all over again, today. Only one thing keeps me back,... the nightmare burden to transfer all data to some other ecosystem (i.e., phone book, notes, files...etc).

 

Since Samsung et al, make so awesome great competing products,... what will be the likelihood that Apple can sell at current margins forever. Apple has an installment base of 400 million iOS devices, but can they continue to sell "at the same margins forever" to the rest of the world's remaining citizens (perhaps some 6.6 billion). The further they want to reach the remaining billions of users in less developed countries, they have to face the reality that those have some lower purchasing powers, thus they choose some cheaper alternative.

I have one simple question!

 

"Is this extreme high net income margin sustainable forever ?"

 

Can Apple sustain 25-30% net margins for the next 50 years, and beyond forever ?!?!?!

Buffett knows Coca Cola margins will be forever the same, actually 'til the last judgement day.

 

We have seen these patterns before...

>>> ATARI, Commodore, Digital Equipment, Compaq Computer, Tandy Computer.

where are they now ?

 

>>> Nokia, RIMM,... had these margin compressions.

 

So one simple question!

 

"Can Apple keep these margins forever" ?

 

If not,... current holders might be in for some rude awakening. That awakening might be in RIMM like proportions. It was once one of Canada's most valuable company, worth almost $150 billion something. MSFT holders have seen some decade long stalled valuation, after a steep rise in the 1990's. Of course Apple will continue to produce marvelous products the same way MSFT did.

 

"Reality is merely an illusion, albeit a very persistent one" Albert Einstein

 

 

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http://www.nasdaq.com/MorningstarprofileReports/AAPL_USA.pdf

 

 

 

 

 

 

 

 

 

 

 

 

 

[DCG]

DCf, you kind of missed the point. 

 

Apples stock price is based on 40% margins, today, and huge growth rates.  When these falter, the stock will get slaughtered.  Its that simple and in all of investing history it has never failed to happen. 

 

Part 2: Buying Apple now to get a 20% return over two years, with huge downside risk makes no sense.  Therefore holding Apple stock at these levels makes no sense either.

 

I generally dont buy growth companies inless they are dirt cheap: BAC, JPM, AIG, FFH. 

 

Now I will sit and wait and ignore the Apple thread.

 

I get that, but just because they can't sustain this 'forever', doesn't mean it can't be a good investment for at least the next couple years. And I personally think there is still more than 20% upside in the next 2 years. That said, I am not saying that their are not better bargains out there and that there won't be plenty of stocks that outperform Apple over the next several years, due to their size.

 

On that note, they sold 2 million iPhone 5's in the first 24 hours.

[Guest bengrahamofthenorth]

I'm not sure the Apple argument is as simple as 'margins will compress'. Of course they will, it happens in every product cycle. I think what alot of the Apple bulls are holding on to is the ecosystem. Its existing user base puts them in a great position to launch new products.

[berkshiremystery]

DCf, you kind of missed the point. 

 

Apples stock price is based on 40% margins, today, and huge growth rates.  When these falter, the stock will get slaughtered.  Its that simple and in all of investing history it has never failed to happen. 

 

Part 2: Buying Apple now to get a 20% return over two years, with huge downside risk makes no sense.  Therefore holding Apple stock at these levels makes no sense either.

 

I generally dont buy growth companies inless they are dirt cheap: BAC, JPM, AIG, FFH. 

 

Now I will sit and wait and ignore the Apple thread.

 

I get that, but just because they can't sustain this 'forever', doesn't mean it can't be a good investment for at least the next couple years. And I personally think there is still more than 20% upside in the next 2 years. That said, I am not saying that their are not better bargains out there and that there won't be plenty of stocks that outperform Apple over the next several years, due to their size.

 

On that note, they sold 2 million iPhone 5's in the first 24 hours.

 

If you are investing only for the next couple of years in AAPL,... then you pay some very high price for this cheery consensus of lofty margins, with no deep margin of saftey. Prem probably got some deeper value with his slow RIMM turtle,... at least it's breakup value, or selling outright the entire company would instantly yield more than the 20% of your fast moving AAPL hare, since it's almost below half book value. In the end, it's only price what you pay, and value what you get, nothing more. That might also include that RIMM might not have any bright future at all. If you would force me at gun point to invest 10% of my portfolio in some mobile phone equipment manufacture for the next couple of years (2-3yrs), only for the biggest total shareholders gain, my Darwinian gut feeling would let me choose RIMM,... but definitely not AAPL.

[CONeal]

I know that I will be lambasted for this since most of the board loves Apple and their products. 

 

I really want to short this stock.  Think they are real close to their peak in terms of consumer penetration.

[Guest valueInv]

I know that I will be lambasted for this since most of the board loves Apple and their products. 

 

I really want to short this stock.  Think they are real close to their peak in terms of consumer penetration.

Go ahead, what's stopping you? The interesting thing about Apple bears is its all talk, no action. I haven't seen a single person short the stock or even take my bet. Tells you a lot about their conviction, doesn't it?

[racemize]

I know that I will be lambasted for this since most of the board loves Apple and their products. 

 

I really want to short this stock.  Think they are real close to their peak in terms of consumer penetration.

 

Actually, I feel like most people on this board do not like Apple.

[CONeal]

I know that I will be lambasted for this since most of the board loves Apple and their products. 

 

I really want to short this stock.  Think they are real close to their peak in terms of consumer penetration.

Go ahead, what's stopping you? The interesting thing about Apple bears is its all talk, no action. I haven't seen a single person short the stock or even take my bet. Tells you a lot about their conviction, doesn't it?

 

I don't know what your bet is.  The only thing that is stopping me right now is I've never shorted a stock before so I have to get over the psychological barrier.