AAPL - Apple Inc.

[Viking]

I think much has changed regarding Apple during the past 12 months. I think their business is in much better shape and I expect their sales and profit per share to be better than analyst expectations. In this context, yes, the shares have has a nice run and look fairly valued based on earnings from the past 12 months. Over the next 12 months I think Apple will once again grow total earnings and earnings per share will grow even faster given all the share repurchases. Apple could easily earn $50 per share in fiscal 2015 (starts in October) and it you attach a 15 PE you get a share price of $750; not a crazy estimate; should investors get irrational (to the upside) then $750 is likely conservative.

 

Next week WWDC should profile some nice updates; however, the main course will be the hardware launches in the late summer/fall. We saw lots of pessimism at $400. I think the shares will pop over $700 in anticipation of the fall launches and if Apple delivers then we could see $800 as investors build their castles to the sky. It has been a very fun ride; hopefully we are not done yet.

 

1.) Margins have stabilized: Most importantly, gross margins looked to have bottomed out last summer at about 36-37% and stabilized in the 37-38% range; a year ago there was much talk that GM's were headed in short order to below 30%. What we have since learned is fiscal 2012 was an anomaly for Apple and GM's of well over 40% are not the norm; however, GM's in the 38-39% range are likely realistic estimates for the next few years.

 

2.) Competition is weaker (in premium segment of smartphone market): A year ago, Samsung was the smartphone darling and it was widely believed they were in the process of actually passing Apple in terms of innovation and quality; Samsung has underperformed expectations and Galaxy Gear demonstrated that they are way behind Apple in terms of being a market leader in terms of innovation. Every other non-Chinese competitor to Apple is in worse shape then they were a year ago, including Microsoft/Nokia, Blackberry, HTC and Morotola.

 

3.) iPhone has retaken the leadership position in the premium smartphone segment: 15 months ago Apple was clearly on the defensive. With the 5s they increased their lead over the competition. And based on what Samsung has shown us so far, it looks likely that with the iPhone 6 Apple will move further ahead. If the 6 also has a larger screen and sells for $100 more Apple will have a blockbuster on its hands; they will sell a record number of phones at a record profit per phone and this will lead to record profits, as the iPhone is apple's most important product by far.

 

4.) Capital Return question has been answered: 15 months ago Apple was sitting on a mountain of cash and other than establishing a dividend a few months before there was a lot of uncertainty as to what they were going to do with it. Since then we have seen two dividend increases and $90 billion committed to stock repurchases, of which $45 billion has already been completed. Last march the share count was about 946 million; end on March is was about 865 million; by the end of calendar 2015 the share count may be at 800 million, which is about a 15% reduction.

 

5.) Breakthrough Innovation question will likely be answered later this year: a year ago there was much discussion about how Apple will not be able to innovate post Steve Jobs and that the iPad was likely their last great new product launch. Although we have not seen any breakthrough products from Apple it does sound like something is coming in the fall. Eddie Cue's comments this week at ReCode that the pipeline of products coming later this year is the best in his 25 years at Apple certainly sounds encouraging. Payments, iWatch, iTV; lots of potential.

 

6.) carriers added: DoCoMo and China Mobile, both of which are proving to be absolute home runs for Apple. A year ago both were distant dreams.

[KCLarkin]

Over the next 12 months I think Apple will once again grow total earnings and earnings per share will grow even faster given all the share repurchases. Apple could easily earn $50 per share in fiscal 2015 (starts in October) and it you attach a 15 PE you get a share price of $750; not a crazy estimate; should investors get irrational (to the upside) then $750 is likely conservative.

 

This is my problem. $750 is realistic but it is only 18% upside from here and there is some downside risk. Last year, you could buy it with 80% upside ($385 to $700) and very little downside risk due to the big cash balance.

[Viking]

KCLarkin, I agree that the stock was much cheaper a year ago at $400. My point is the company is also in a much better position today than it was a year ago. And it looks like it will also be in much better shape in another 12 months.

 

In the past I have sold many stock positions after they ran up 20 or 30%, happy to book a large gain. At the same time these same companies were increasing earnings and growing their moats and Mr Market also decided they deserved a higher PE multiple ; many of the stock prices went up 75 to more than 100% within a year or two of their bottom. What I learned was I needed to get better with my sell discipline; I was selling looking primarily at price appreciation (happy to book a large gain) and not paying enough attention to what was going on with the underlying business. If the underlying business is improving (as it is with Apple) then patience should be rewarded with a much higher stock price. I would not call Apple stock cheap at current levels but I would not call it expensive either. When I weave it all together this tells me to not sell my shares (yet), even though the stock is up about 60% from its lows last year.

 

What would motivate me to sell some of my Apple (as I am overweight - it has been about 90% of my portfolio over the past year) is if there was something else out there that I really liked that was crazy cheap. I have been spending more time on US banks (BAC and JPM). I just haven't found anything that I like a lot better.

[Liberty]

What would motivate me to sell some of my Apple (as I am overweight - it has been about 90% of my portfolio over the past year)

 

So you're pulling an Eric, eh? Well, almost. Add some leverage and clever options and you'll be driving a top of the line Tesla in no time ;)

[peter1234]

What would motivate me to sell some of my Apple (as I am overweight - it has been about 90% of my portfolio over the past year)

 

So you're pulling an Eric, eh? Well, almost. Add some leverage and clever options and you'll be driving a top of the line Tesla in no time ;)

 

A whole new meaning to 'overweight'... Thanks for the excellent summary of your thesis.

;)

[ni-co]

For all of you who are still interested in this, Horace Dediu has a very clever thesis on why Apple acquired Beats:

 

http://5by5.tv/criticalpath/117 (starting around the 38 min mark)

 

Basically, he thinks it's about rebranding and repositioning iTunes and iPod into a new service and wearables category. I think he nailed it. One thing that spontaneously came to my mind is: "Beats" as in "heartbeats"… – this fits perfectly to all the health monitoring wearable rumors. It's also about time to reposition the stale iTunes and iPod brands.

[KCLarkin]

KCLarkin, I agree that the stock was much cheaper a year ago at $400. My point is the company is also in a much better position today than it was a year ago. And it looks like it will also be in much better shape in another 12 months.

 

I think it is reasonable to hold at this level. It is reasonably priced with a good capital return plan. The big problem is just the sheer size and the high profit margins of the iPhone business. Any new product is unlikely to have such attractive economics. There are also limits to how fast it can grow earnings. To double from these levels, it would have to become a $1T company.

 

I think you could reasonably expect 10+% annual returns from this level but I am 110% long and trying to get below 100% so I need to trim somewhere. Knowing that value investors sell too early, I am tempted to hold on but occasionally regret it when I do.

[Viking]

Liberty, over the past 20 years I have held 90% of my portfolio in one company only a couple of times: about 10 years ago when FFH fell to $70 and last year when Apple fell below $400 (I kept adding to my position both times all the way to the bottom). FFH worked out very well and it looks like Apple will also be great.

 

I think to get rich with investing you need to have a very concentrated portfolio at times. I think Druckenmiller talked about this. I think Buffett also talked about how 6 or 7 decisions in his life are what separate him from more average investors.

 

I have never used leverage; however, I have been thinking about using options since Ericopoly first made his killing with FFH years ago. Perhaps I will start this year to learn more.

[loganc]

Not sure if this has been posted in the thread.  I found it pretty interesting:

 

http://www.businessweek.com/articles/2014-05-28/apples-beats-deal-sealed-by-ex-banker-adrian-perica#r=rss

[txlaw]

Developers, developers, developers!

[Liberty]

I watched about 95% of the keynote (missed a little part at the end). Lots of great stuff that makes the ecosystem better and stickier and allows developers to make better stuff. Lots of things that are platforms that will be built on so it's hard to predict what killer apps will be possible because of them.

 

I was hoping for a "one more thing" hardware announcement, but I can also understand how they want to keep this a software event and keep focus on that for a bit rather than overshadow themselves with a new product. They can always have special events before the fall iPhone event if they want to enter a new category. Overall, I'm happy. They've just made all of their products better, and that's what matters in the long term. Not flashy events, but keeping customers happy and coming back.

[txlaw]

I watched about 95% of the keynote (missed a little part at the end). Lots of great stuff that makes the ecosystem better and stickier and allows developers to make better stuff. Lots of things that are platforms that will be built on so it's hard to predict what killer apps will be possible because of them.

 

I was hoping for a "one more thing" hardware announcement, but I can also understand how they want to keep this a software event and keep focus on that for a bit rather than overshadow themselves with a new product. They can always have special events before the fall iPhone event if they want to enter a new category. Overall, I'm happy. They've just made all of their products better, and that's what matters in the long term. Not flashy events, but keeping customers happy and coming back.

 

On the user-focused stuff, the things that stuck out to me:

 

-Better Spotlight, so ostensibly less need for browser-based searching (e.g., Google); but still not particularly great

-iCloud Drive makes Dropbox much less useful if all you have is Apple and Windows devices

-Airdrop working across Apple OS's is very nice

-Continuity/Handoff seems great, especially if the third party app support is robust

-Being able to initiate and take calls placed to your iPhone on your Mac or iPad is very nice

-Family sharing features are brilliant

 

Sucks that they didn't announce any new devices.  I've been waiting for a new Apple TV for a while now. 

[GregS]

I watched about 95% of the keynote (missed a little part at the end). Lots of great stuff that makes the ecosystem better and stickier and allows developers to make better stuff. Lots of things that are platforms that will be built on so it's hard to predict what killer apps will be possible because of them.

 

I was hoping for a "one more thing" hardware announcement, but I can also understand how they want to keep this a software event and keep focus on that for a bit rather than overshadow themselves with a new product. They can always have special events before the fall iPhone event if they want to enter a new category. Overall, I'm happy. They've just made all of their products better, and that's what matters in the long term. Not flashy events, but keeping customers happy and coming back.

 

I agree with this take.  They will be criticized for making incremental improvements, but they have added things that make the ecosystem much stickier.  My family has 2 iPhones and 3 iPads and I'm thinking I need to add a Mac.  I'm very happy that Microsoft made that decision easier by putting Office on Apple products.

 

The big new things might be Home Kit and Health Kit but I think it will be some time before we know how that will play out. 

 

I think the integration of Mac and iOS suggest what might be next for Apple TV.  We could just be looking at another screen to work with your iPhone.  And the game development presentation shows that maybe the gaming console is on thin ice.

 

Also interesting how they took some of the big apps like Dropbox and Snapchat and just added their functionality into iOS.  Thanks for proving the concept, guys, we're just going to steal that and give it away as a feature.  If I'm owner of a big time app company, I'm picking up the phone today looking for offers.

[Liberty]

And the game development presentation shows that maybe the gaming console is on thin ice.

 

Indeed. If they can get those kinds of real-time graphics out of a severely power-limited mobile device, imagine what they could do with a plugged-in Apple TV with a beefed up A7 or A8 with much more RAM. Could easily eat into consoles' market.

[KCLarkin]

Developers, developers, developers!

 

A pretty textbook case on how to expand your moat. Everyone focuses on the hardware but the smartphone wars will be won on the ecosystem. By providing the best development tools, Apple can keep its hold on on the best developers which attract the best users.

[Liberty]

Well, the part that I had missed is about Swift. Wow, that's a huge deal. Objective-C has been going on for like 20 years. This is epochal. Might not seem like much to a non-developer, but a new modern language should be great for the platform.

 

Update: Had a chance to look a bit closer at Swift. Am extremely excited. People only think of Hardware when they think of Apple, and hardware is important, but software it where the magic really happens and this has just strengthened Apple's position by a lot. It was already easier/faster/less expensive to develop for iOS than other platforms, and that only improves that advantage. Developing a new programming language/framework like this is a HUGE thing, these projects take years and often fail. Good luck to the competition.

 

It's funny. Most of the financial people on Twitter are like "meh" and all the programmers I follow are really excited.

[KCLarkin]

Well, the part that I had missed is about Swift. Wow, that's a huge deal. Objective-C has been going on for like 20 years. This is epochal. Might not seem like much to a non-developer, but a new modern language should be great for the platform.

 

Especially when you are competing against Java.

[ASTA]

Thanks every one for answers and discussions.

Just on a personal level I just felt it was enough and now have 17% cash as apple was a 7% starter position for me at 400. sold all today at 634. I hope apple becomes a trillion dollar company for everyone else how has skin in the game.  I do not have a replacement stock yet but as Daniel Loeb says this year might be choppy year I hope he is right :D

[plato1976]

When did Loeb say so?

 

Thanks every one for answers and discussions.

Just on a personal level I just felt it was enough and now have 17% cash as apple was a 7% starter position for me at 400. sold all today at 634. I hope apple becomes a trillion dollar company for everyone else how has skin in the game.  I do not have a replacement stock yet but as Daniel Loeb says this year might be choppy year I hope he is right :D

[ASTA]

Here is a blog post abut it. I do not even remember where I read he is expecting ups and downs. Maybe I am right or wrong my psychological beliefs is he did, cant change that quickly :D

 

http://blogs.marketwatch.com/thetell/2014/05/01/dan-loeb-advice-for-investors-be-patient-and-pick-good-stocks/

[Liberty]

http://stratechery.com/2014/growing-apple-wwdc/

[KCLarkin]

The big problem is just the sheer size and the high profit margins of the iPhone business. Any new product is unlikely to have such attractive economics. There are also limits to how fast it can grow earnings. To double from these levels, it would have to become a $1T company.

 

Wow, I can't believe I wasn't called out on my sloppy thinking --the other way to double from these levels would be to buyback half the stock.

 

I think Wall Street will always misunderstand the depth and width of AAPL's moat so it will be chronically undervalued. Which means the stock should outperform for a long time.

[tombgrt]

The big problem is just the sheer size and the high profit margins of the iPhone business. Any new product is unlikely to have such attractive economics. There are also limits to how fast it can grow earnings. To double from these levels, it would have to become a $1T company.

 

Wow, I can't believe I wasn't called out on my sloppy thinking --the other way to double from these levels would be to buyback half the stock.

 

I think Wall Street will always misunderstand the depth and width of AAPL's moat so it will be chronically undervalued. Which means the stock should outperform for a long time.

 

Good point. The same could be said about IBM and that is why I bought leaps on it again earlier this week.

[ni-co]

The big problem is just the sheer size and the high profit margins of the iPhone business. Any new product is unlikely to have such attractive economics. There are also limits to how fast it can grow earnings. To double from these levels, it would have to become a $1T company.

 

Wow, I can't believe I wasn't called out on my sloppy thinking --the other way to double from these levels would be to buyback half the stock.

 

I think Wall Street will always misunderstand the depth and width of AAPL's moat so it will be chronically undervalued. Which means the stock should outperform for a long time.

 

This might very well be true. There are some highly independent thinkers at work at AAPL and Wall Street has always never been great in giving independent thinkers credit.

[Liberty]

Wow, I can't believe I wasn't called out on my sloppy thinking --the other way to double from these levels would be to buyback half the stock.

 

I think Wall Street will always misunderstand the depth and width of AAPL's moat so it will be chronically undervalued. Which means the stock should outperform for a long time.

 

Indeed, the size of the market cap has nothing to do with it. All that matters is the per share value. They could be a smaller market cap company with a much smaller number of shares in 10 years and that could be very good for shareholders.

 

Apple is in the interesting position of being known by everybody but understood by relatively few. Wall Street just tries to compare them to other easier-to-understand companies instead of truly looking at what's going on, but these other companies aren't doing the same thing. I guess that to get the whole rather than just bits & pieces it takes someone who has a foot in many disciplines (arts/design/tech(software+hardware)/consumer products/fashion/finance) and that's rare.