AAPL - Apple Inc.

[Liberty]

I find it amazing that nobody seems to have a good explanation for this totally unexpected glass ceiling in the iPad sales growth curve.

 

Nothing goes up in a straight line. A short term slowdown is hardly a glass ceiling. The article explains that everybody else is basically giving away their tablets (sometimes literally for free); you don't think that should have an impact?

 

The competitive dynamic has changed and the iPad will be on a different path than it was when the competition was scrambling to come out with crappy tablets that were more expensive than the iPad (first couple years). But I'd be extremely surprised if Apple wasn't selling a lot more iPads in a few years and wasn't still taking most of the profits of the entire industry (while reinforcing the rest of it's integrated ecosystem and selling more other products and services to people who bought an iPad)...

[ni-co]

I find it amazing that nobody seems to have a good explanation for this totally unexpected glass ceiling in the iPad sales growth curve.

 

Nothing goes up in a straight line. A short term slowdown is hardly a glass ceiling. The article explains that everybody else is basically giving away their tablets (sometimes literally for free); you don't think that should have an impact?

 

The competitive dynamic has changed and the iPad will be on a different path than it was when the competition was scrambling to come out with crappy tablets that were more expensive than the iPad (first couple years). But I'd be extremely surprised if Apple wasn't selling a lot more iPads in a few years and wasn't still taking most of the profits of the entire industry (while reinforcing the rest of it's integrated ecosystem and selling more other products and services to people who bought an iPad)...

 

Not in a straight line, but in a s-curve.

I'm not convinced that competition alone can explain the sudden flattening of this curve. We'll see how this unfolds. I fear though that this is not one bump but a deeper problem.

 

I'm long AAPL for years now – so I certainly hope you're right. I'm not the only one who was completely surprised by this by the way. Horace Dediu:

 

It’s improbable that penetration goes to 42% as it just did, and then stops suddenly. These decelerations of adoption have been observed historically but they are usually explained by cataclysms such as wars and economic contractions, neither of which are affecting the US right now. If a product solves an important “job to be done” then it gets adopted in a predictable way by a given population.

 

http://www.asymco.com/2014/04/30/the-ipad-discontinuity/

[Liberty]

Models are useful, but limited. Volatility isn't just for stocks.

 

I still think the iPad got ahead of itself when Apple mania was at its peak and they basically had the whole tablet market to themselves. The only reason why things look relatively disappointing now is because of the insane comps from the most successful product launch of all time in the previous couple years (going from zero to bigger than the Mac in no time).

 

Time will tell. Do you think iPad sales will be flat or lower 3 years from now?

[jwfm1985]

Not in a straight line, but in a s-curve.

I'm not convinced that competition alone can explain the sudden flattening of this curve. We'll see how this unfolds. I fear though that this is not one bump but a deeper problem.

 

Competition IS the biggest impact of the flattening of the curve for Apple, and I think most agree the significantly lower average sales price of competitors' products are the key driver of consumers moving away from the I-pad.

http://www.idc.com/getdoc.jsp?containerId=prUS24833314

 

[Liberty]

Short piece about Apple University. Doesn't really say much, but gives an idea:

 

http://www.nytimes.com/2014/08/11/technology/-inside-apples-internal-training-program-.html

[Viking]

Apple took out its 52 week high today and is closing in on its all time high of $100.72 reached in Sept 2012. From a market cap perspective, Apple would need to hit $110 to set a new record, given all the share repurchases the past 15 months (about 9% of shares outstanding).

 

Yesterday, RBC said they see lots of upside in Apple's share price; they see lots of upside potential coming in the fall not yet priced into the shares.

 

Today JP Morgan issued a bullish report; see link below:

http://fortune.com/2014/08/19/8-reasons-jp-morgan-is-bullish-on-apple/

 

Positive sentiment looks to be building as we approach Sept/Oct refresh period. Crazy ride the past 15 months; out of favour at $400 and back in favour at $700 ($100 split adjusted). The big question now is when to sell...

[Liberty]

Up over 60% since the recent lows.

 

I suppose megacaps aren't always efficiently priced after all? ;)

[ni-co]

Up over 60% since the recent lows.

 

I suppose megacaps aren't always efficiently priced after all? ;)

 

This was a great reassurance for me that EMH is complete nonsense in the short term. Really amazing to witness how most of the analysts' estimates simply track the stock price movement of the world's (second) largest company. You could easily see it because really nothing fundamentally changed at AAPL within the past 12 months, except for their improved capital allocation. Yet, even the announcement of this huge buy-back program last year was not enough to change the average analyst's sentiment. It was only after the stock price had started moving in a sustained fashion that analysts changed course.

[hardincap]

Congrats to all longs. It was painful holding through parts of last year, but no pain no gain, literally ;).

[rpadebet]

Up over 60% since the recent lows.

 

I suppose megacaps aren't always efficiently priced after all? ;)

 

This was a great reassurance for me that EMH is complete nonsense in the short term. Really amazing to witness how most of the analysts' estimates simply track the stock price movement of the world's (second) largest company. You could easily see it because really nothing fundamentally changed at AAPL within the past 12 months, except for their improved capital allocation. Yet, even the announcement of this huge buy-back program last year was not enough to change the average analyst's sentiment. It was only after the stock price had started moving in a sustained fashion that analysts changed course.

 

 

The EMH guys will tell you that last year the market did not know the capital allocation policy. Given historically tech titans have pissed away cash flows on high priced acquisitions, they would say it was a decent possibility that AAPL would end up doing the same. With the new capital allocation policy, that risk was mostly mitigated

 

The EMH guys will also tell you that at last time this year we did not know that "new products" would be announced this year. AAPL was an iphone company and margins there were shrinking while the market was saturating. Today we "know" new products will be announced and the market is fairly (in opinion of EMH analysts) pricing the possibility of renewed growth in margins and EPS.

 

In my opinion @390 last year the price out weighed the risks and I went in, now around 700 it's probably fair value or slightly above so trimming. At 110-120+ range, I think the same risks outweigh the price, so I will be out.

 

IMO they are still a electronic hardware company (but trying to build some form of moats around it) betting on the next big product. They might be successful or not, who knows, but around this price, its not a "no- brainer" as Carl Icahn says . I am happy to have jumped over the 1ft hurdle well....will leave the 2,3 and 10 ft ones to the smarter analysts out there.

[Liberty]

Up over 60% since the recent lows.

 

I suppose megacaps aren't always efficiently priced after all? ;)

 

This was a great reassurance for me that EMH is complete nonsense in the short term. Really amazing to witness how most of the analysts' estimates simply track the stock price movement of the world's (second) largest company. You could easily see it because really nothing fundamentally changed at AAPL within the past 12 months, except for their improved capital allocation. Yet, even the announcement of this huge buy-back program last year was not enough to change the average analyst's sentiment. It was only after the stock price had started moving in a sustained fashion that analysts changed course.

 

The simple answer, in my opinion, is that it's not sufficient for a lot of people to be looking at something. If most people misunderstand a company, they're going to misprice it one way or the other, even if it's big.

[PatientCheetah]

Career risk is also a factor. If you are non-consensus and wrong for a few times, an analyst's career could be in jeopardy. There is a lot truth to the saying that "you can't get fired from buying a IBM."

[ni-co]

The simple answer, in my opinion, is that it's not sufficient for a lot of people to be looking at something. If most people misunderstand a company, they're going to misprice it one way or the other, even if it's big.

 

Career risk is also a factor. If you are non-consensus and wrong for a few times, an analyst's career could be in jeopardy. There is a lot truth to the saying that "you can't get fired from buying a IBM."

 

I agree with both of you – and still find it quite amazing. Even if you were down on Apple a year ago it had to be clear that the company wouldn't fall apart immediately. If you just assumed a few years of ongoing cash flow, it was substantially underpriced and this was very obvious – not only to me but to lots of people in this forum, for example. Greenblatt even was on Bloomberg and called it "hiding in plain sight" and AAPL's valuation "nuts" – so it was difficult to figure it out that it was cheap.

 

The EMH guys will tell you that last year the market did not know the capital allocation policy. Given historically tech titans have pissed away cash flows on high priced acquisitions, they would say it was a decent possibility that AAPL would end up doing the same. With the new capital allocation policy, that risk was mostly mitigated

 

The EMH guys will also tell you that at last time this year we did not know that "new products" would be announced this year. AAPL was an iphone company and margins there were shrinking while the market was saturating. Today we "know" new products will be announced and the market is fairly (in opinion of EMH analysts) pricing the possibility of renewed growth in margins and EPS.

 

AAPL hasn't had a record for squandering money, so I don't see why the market should have assumed it. And I looked it up: They announced the buyback program on March 19, 2012. This was before the recent slump. They only broadened it on April 23, 2013 (by the way, both announcements were long before Icahn's announcement of his large stake – though he likes to give himself credit for the buyback program).

[Palantir]

Career risk is also a factor. If you are non-consensus and wrong for a few times, an analyst's career could be in jeopardy. There is a lot truth to the saying that "you can't get fired from buying a IBM."

 

Thing is, it's not just the EMH guys, even dyed-in the wool value investors go on about how megacaps are efficiently priced and you're better off focusing on small stocks where you can "add value". Sure small stocks are great...but there can be good opportunities in these whales as well.

[Liberty]

Some good stuff in there:

 

http://recode.net/2014/08/26/in-defense-of-tablets/

[ni-co]

Great interview with Horace Dediu:

 

The iPad plateau is my biggest surprise in the last year. I still don’t understand what is happening. When you look at penetration data, the tablet product is the fastest growing new technology in the history of consumer technology. It went to 40% penetration in what would be an instant. To have that stop dead in its tracks is unbelievable. It’s not the way logistic or diffusion curves behave.

 

http://www.forbes.com/sites/ericjackson/2014/08/25/interview-with-horace-dediu-what-to-expect-when-apples-expecting/

[Liberty]

It’s not the way logistic or diffusion curves behave.

 

Models are neat, reality is messy.

[rkbabang]

It’s not the way logistic or diffusion curves behave.

 

Models are neat, reality is messy.

 

The models would be perfect if the damn humans of the world would just all do what the equations say they are going to do.

 

 

[LC]

My thought exactly. Oh the drama when reality doesn't fit a market penetration model! This must be a drastically different new world we are entering!

[Liberty]

To be fair, Dediu probably agrees with us, and he's just wondering why things are happening this way. But less smart people who read him probably won't get that and think this means that the iPad is somehow doomed, despite stuff like this:

 

http://recodetech.files.wordpress.com/2014/08/ipad_1-crop-promovar-mediumlarge1.png

 

(except that's just revenue, and if we looked at profits it would be much bigger than those)

 

http://recodetech.files.wordpress.com/2014/08/kpcb-internet-trends-007.jpeg

[ni-co]

(except that's just revenue, and if we looked at profits it would be much bigger than those)

 

I also saw this and thought: Revenue is kind of meaningless when you compare a hardware company with service companies. Maybe you can compare Apple with Tesla, but where's the point comparing it to the social networks? This is a completely different cost structure. AMZN's revenue is greater than BAC's – so what?

[Liberty]

(except that's just revenue, and if we looked at profits it would be much bigger than those)

 

I also saw this and thought: Revenue is kind of meaningless when you compare a hardware company with service companies. Maybe you can compare Apple with Tesla, but where's the point comparing it to the social networks? This is a completely different cost structure. AMZN's revenue is greater than BAC's – so what?

 

My theory: Empire builders (and imaginary/wannabe empire builders, as most financial media readers are) care about size, and revenues leads to bigger numbers. That's why revenues are constantly used everywhere, even if they are not that meaningful.

 

In this specific case, I think they just found a bunch of well known tech companies that their readers would recognize. Also, if they had used profits, they would have to cram like 50 companies in the comparison and the graphic wouldn't be as legible ;)

[ni-co]

My theory: Empire builders (and imaginary/wannabe empire builders, as most financial media readers are) care about size, and revenues leads to bigger numbers. That's why revenues are constantly used everywhere, even if they are not that meaningful.

 

Great theory.

 

In this specific case, I think they just found a bunch of well known tech companies that their readers would recognize. Also, if they had used profits, they would have to cram like 50 companies in the comparison and the graphic wouldn't be as legible ;)

Great theory, too. :D

[Liberty]

Sadly, a lot of stuff makes more sense when you think of it from the point of view of financial journalists and financial media consumers rather than from an investor's business-like point of view. We're not really the target audience, and things usually aren't written by people with an investor's mindset.

[Liberty]

I think we're about to see the benefits of controlling a tightly integrated ecosystem:

 

http://daringfireball.net/linked/2014/08/28/september

 

Gruber's not the kind of guy who makes a lot of predictions, so I trust he has a pretty good source for this.

 

Wouldn't it be neat to have a phone with a secure enclave, a good fingerprint scanner, and NFC to allow you to quickly and securely pay for stuff, and a wearable that also has that secure enclave and NFC so you don't even have to take the phone out of your pocket/purse? Maybe there's even a fingerprint sensor on the wearable? iBeacon tech would also be really useful for retail.

 

Now that's the kind of mobile payment system that would be secure and convenient enough to get widespread adoption. If Apple were to charge a tiny fee to vendors to support it, they all would, because who wouldn't want to support the most profitable customers out there?

 

That could be a pretty huge and very profitable business; ask Visa and Mastercard.

 

Update: Gurman tends to have decent sources too:

 

http://9to5mac.com/2014/05/29/apple-discussing-iphone-payments-service-with-high-profile-retail-brands/

 

Apple wants to replace yet another daily tool with your iPhone: your wallet.

 

Executives from the Cupertino-based technology company have begun discussions with directors from retail store chains about a mobile payments service, according to a source with direct knowledge of the talks.

 

[...] Apple Senior Vice President Eddy Cue noted last night that Apple has 800 million iTunes accounts with credit cards, and that this arsenal opens up the door for many future products and services. Apple CEO Tim Cook previously hinted that the iPhone’s Touch ID fingerprint identity sensor could someday be leveraged for mobile payment purposes beyond the existing iTunes and App Stores…