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Apple: Analyzing It With Owner Earnings And Free Cash Flow

By Peter George Psaras of oldschoolvalue.com

Wednesday, July 1, 2015 2:53 PM EDT

 

http://www.talkmarkets.com/content/us-markets/apple-analyzing-it-with-owner-earnings-and-free-cash-flow?post=68076

 

Looking ahead to fiscal 2016, we will be in year two of the iPhone cycle. Margins for Apple typically increase quite a bit in year two of the iPhone cycle as they do not need to spend the same amount in year two on plant and equipment. This should provide a great tailwind for fiscal 2016.

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http://www.wsj.com/articles/apples-share-of-smartphone-industrys-profits-soars-to-92-1436727458

 

Roughly 1,000 companies make smartphones. Just one reaps nearly all the profits.

 

Apple Inc. recorded 92% of the total operating income from the world’s eight top smartphone makers in the first quarter, up from 65% a year earlier, estimates Canaccord Genuity managing director Mike Walkley. Samsung Electronics Co. took 15%, Canaccord says.

 

Apple and Samsung account for more than 100% of industry profits because other makers broke even or lost money, in Canaccord’s calculations.

 

I also enjoyed this Bloomberg piece form 2007 explaining why the iPhone will fail:

 

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRelVKWbMAv0

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This chart is certainly clear:

 

http://si.wsj.net/public/resources/images/BT-AD014_SMARTP_16U_20150712190305.jpg

 

But I remember what it was like in 2013. Everyone thought Samsung was "disrupting" (used incorrectly of course) Apple, exactly as Apple had broken Blackberry. Apple's margins were experiencing some decline, and the rate of growth was slowing. Thompson's "Two Bears" article was contrarian! (Whereas it's now obvious consensus.)

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Here is what Apple has launched in the last 12 months... simply amazing how many seeds they have planted. Over time their moat continues to grow. Thanks to Red Oak for the list.

 

Apple Watch

Apple Pay

Apple Music

HealthKit

HomeKit

Swift 2.0

HBO on-boarded

CarPlay momentum

MacBook

IBM Enterprise Push

China Mobile

Retail Store Accelerated Build-Out

 

Upcoming,

iPhone 6S, 6C

iPad Pro

iOS 9 / OS X El Cap

Apple TV

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The fact that the iPhone is contributing over 90% of the operating profits in mobile phone sales has penetrated even as far as the Wall Street Journal. However, it’s not yet commonly known that the Mac captures a majority of personal computer operating profits, at least when considering the sale of hardware.

 

My calculations suggest at least 60% of operating margin in personal computing hardware is captured by Apple. This is mainly due to the fact that the average Mac sells for more than $1200 while the average PC sells for less than $450.That is equivalent to $1.5 billion per quarter for Apple vs. 930 million for all the other PC makers combined.

 

If we are to consider the iPad as a “PC equivalent” computer[1] then another $billion/quarter is contributed to the profit pool. It increases Apple’s share of profits to 73%. As a result, Apple absolutely dominates computing profits.

 

http://www.asymco.com/2015/07/17/how-ipad-educates/

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The Watch is seeming like a dud so far. I've literally only seen I think 2 people that actually have one of these things.

 

How many did you expect to see at this point after release?

 

Depends on the time.

 

 

 

;D

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Been using Apple Music for a couple weeks and find the interface pretty overly complicated. This just doesn't really feel like what you'd expect from Apple. It's not terrible, but just not overly well designed and organized.

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If you have not tried Google photos is the best place for photos. It's super fast and with lots of AI, it can find things and let you search with varying criterial among your own huge collection.

 

 

^What else to expect from Apple's services though? My iCloud has never worked to sync photos, OneDrive works so much better.

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Been using Apple Music for a couple weeks and find the interface pretty overly complicated. This just doesn't really feel like what you'd expect from Apple. It's not terrible, but just not overly well designed and organized.

 

iTunes is definitely overdue for a big cleanup and rebuild from the ground up. It's kind of the Microsoft syndrome; they have crammed so much stuff into the same place, and have to support so much legacy stuff (what if someone still has an iPod that they need to synch with a USB cable? what if someone bought TV shows in iTunes, what if someone is synching podcasts from there, etc) that it's getting too complex. IMO they should break things out in separate apps or at least rethink the general interface.

 

But still, despite that it still does the job. If people can get used to Windows they can get used to iTunes, I just wish Apple did better there, but there are only so many top engineers to go around in any company, and at Apple the top people want to be on the secret net product or iOS team, not necessarily the iTunes team.

 

Chances are that now that the big behind the scenes work of incorporating the streaming stuff is done, they can start to think about doing some cleaning up. The challenge with Apple is that when they start a new service they immediately start at scale and it's not really their core expertise. Spotify grew up from zero users progressively and they found problems along the way. Apple starts a streaming service and potentially has hundreds of millions of people doing the free tryout all at once, so many more people actually see your version 1.0 and when stuff breaks... Oh well, their cloud stuff has been improving. Cloudkit is apparently very good, but iTunes is built on lots of really old APIs and that needs to change.

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I don't really understand why The Music app and the iTunes iOS app are still separate apps that aren't really integrated.

 

 

Since Jobs died, I've been looking for things I think 'wouldn't pass through Steve Jobs'. Meaning things that wouldn't have seen the light of day under Jobs. Apple Music is really the first product under Cook that's made me scratch my head a bit (I haven't used the Watch enough to have a good opinion of it). Music isn't a bad product/service by any means. By virtually any other company's standard, it would be considered a great app. It just lacks a lot of the simplicity and intuitiveness you expect from Apple. And yeah, you can say the same thing about what iTunes has become.

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I don't really understand why The Music app and the iTunes iOS app are still separate apps that aren't really integrated.

 

You mean the iTunes purchasing app?  I never actually purchase music on iOS devices so I don’t really notice it.

 

Since Jobs died, I've been looking for things I think 'wouldn't pass through Steve Jobs'. Meaning things that wouldn't have seen the light of day under Jobs. Apple Music is really the first product under Cook that's made me scratch my head a bit (I haven't used the Watch enough to have a good opinion of it). Music isn't a bad product/service by any means. By virtually any other company's standard, it would be considered a great app. It just lacks a lot of the simplicity and intuitiveness you expect from Apple. And yeah, you can say the same thing about what iTunes has become.

 

The rollout of the watch at the level of technology wise “readiness” is very similiar to the original iPhone; if anything, it’s better.  The improvements are coming.

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I don't really understand why The Music app and the iTunes iOS app are still separate apps that aren't really integrated.

 

 

Since Jobs died, I've been looking for things I think 'wouldn't pass through Steve Jobs'. Meaning things that wouldn't have seen the light of day under Jobs. Apple Music is really the first product under Cook that's made me scratch my head a bit (I haven't used the Watch enough to have a good opinion of it). Music isn't a bad product/service by any means. By virtually any other company's standard, it would be considered a great app. It just lacks a lot of the simplicity and intuitiveness you expect from Apple. And yeah, you can say the same thing about what iTunes has become.

 

People forget that there's been a bunch of duds under Jobs. He wasn't infallible. MobileMe? Ping? The first iPhone didn't have GPS, couldn't record video, didn't have cut & paste, didn't have third party apps, etc.

 

What matters is avoiding making mistakes on stuff that is unfixable or really central to everything else in the ecosystem. Everybody looks to Apple for big brand new innovations, but its real strenght has always been in incremental improvement. It's their ongoing process that is impressive, not just big flashes of glory. Apple Music/iTunes can be improved if Apple decides to put resources there. The hard decision is pulling resources away from other things...

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I will be looking primarily at two things tomorrow when Apple releases earnings:

1.) how much do they beat on top and bottom line

2.) where do they guide for fiscal Q4

 

At the end of they day Apple is all about iPhone. How iPhone goes the company goes.

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Just had time to look at the numbers, haven't listened to the call yet, but seems very nice. EPS up almost 45%, greater china revenue up 112%, iPhone revenue up almost 60%... And FX was an 8% headwind, so revenue that were up 33% would've been up 41% at constant FX. And that's for a stock selling still at a very low ex-cash multiple. Hopefully it keeps crashing a bit so Apple can do what they did the last time this happened and repurchase $10-20 billion over a week or two.

 

Lately it seems like every year in the summer Mr. Market gets down on Apple, and then the cycle starts again in the Fall..

 

All the speculation about the Watch is pointless at this point, especially without much hard data. It's like trying to prognosticate about the iPod or iPhone a few months after their launch. Did anyone get it right? I guess it's what short-term traders do, but only the long-term will matter to investors.

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Keep in mind, Jobs was the guy who didn't want to open up iOS to outside devs...nor did he originally want the iPod to be able to sync with PCs.He had good instincts, but was far from infallible.

 

He also didn't think you needed to shower.

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