AAPL - Apple Inc.

[rkbabang]

I used to call on a restaurant chain in Western Canada called Boston Pizza. I thought it's business, as a restaurant chain, was selling pizza (food and drink) to consumer. I came to realize over time that their core business was attracting very wealthy individuals as franchise owners. If you got the right individuals as owners, treated them well and made them money then they would pull in their other wealthy friends to own franchises. A strong franchise group is the starting point for a successful restaurant chain. Boston Pizza has been a very successful restaurant chain.

 

What if Apple's core business is not iPhone, iPad, Mac, Watch, Apps, Music etc. What if Apple's core business is building a club of wealthy consumers and businesses? Once in the club these groups tend to be VERY loyal and tend to purchase (over time) many different devices. They also tend to upgrade devices over the years. The value of new members could be calculated with a fair bit of accuracy (discount the future revenue stream likely once they join the club).

 

Apple has a virtual monopoly in smart phones, tablets, and pc's. They will likely have a monopoly in smart watches. When I say monopoly I mean a monopoly on profits. Profits allow them to reinvest in the business, buy innovation and buy back shares (shrinking the company).

 

If I have an immediate concern with Apple it is regulatory bodies coming after them and feeling compelled to break up the company's monopoly position in profits, starting with phones. I see Apple widening the gap versus the competition (total company ecosystem) and at some point this will likely get regulators attention. I don't see other competitors as the risk in the near term (the next 3-5 years).

 

+1 the best description of Apple's business I've ever read.    I avoided Apple for years (using Creative Labs mp3 players and Linux and/or Windows PCs, etc), finally after buying iPods for my kids and seeing how much better they were I broke down one day and bought an iPod.  Then an iPad, then an iPad for my wife, now my PC is getting a little old and I'm thinking of going with a Mac, we have a few here at work that I've been playing with, and it is basically an Apple window manager over FreeBCD you can use the terminal window and it is like using unix, why bother with Linux.  If I ever get a smartphone (I'm sure I will eventually) there is no question I'll get an iPhone.  Apple hooks you...

[Drake]

I don't really care about market share past a certain point (need critical mass). I care more about the fact that they make something like 90% of the profits in a growing industry.

 

Profit share > market share

 

Yes, and even better: even though AAPL takes more than 90% of total profits, they sell only less than a fifth of all units being sold. Plus, AAPL was able to grow market share while increasing operating margins in the recent time. So, they are growing market share in a growing market at growing operating margins - amazing!

 

To think from another direction: smartphone markets will continue to grow fast - market researchers assume a doubling of the number of smartphones in the next three to five years, to my knowledge. Does anybody know a better way to invest into that growth market than buying AAPL?

[tombgrt]

There goes another $25 Billion in market cap. :D

 

Has Apple simply become too big to be valued fairly by the market? Does anyone and their friends own Apple stock, directly or indirectly, and are they thus not inclined to buy it? Not that I am interested in buying, I generally shy away from even $1b market cap stocks. I just think you could theoretically have interesting dynamics with a company that became "too big".

[Liberty]

I wasn't planning on buying more, but now I might have to.

 

By my math, the company is now selling at less than 7x TTM FCF ex-cash (with 20% haircut).

 

The last time the stock dropped this much, the company bought back 14bn in 2 weeks. Wouldn't be surprised if something similar happened if this lasts a while.

[TheAiGuy]

There goes another $25 Billion in market cap. :D

 

Has Apple simply become too big to be valued fairly by the market?

 

That's my working theory, but who knows. Anyway, this is a good thing. 

[abyli]

Added more AAPL today. Thank you, Mr. Market.

[Viking]

The sell off is not surprising to me. Apple is an iPhone company. Sales of the 6 and 6 plus greatly exceeded expectations and the stock price increased substantially the past 18 months as sales and profitability jumped. Today there is a lot of uncertainty about how well the new iPhone models (6S and 6S+) will sell starting in September. Will the new models sell more units than last year? Most analysts expect a high single digit increase in units but no one really knows. Apples guidance for the upcoming quarter 'missed' analyst estimates and this is playing into fears of how well the new phone will sell. Economic weakness in China is also fanning the flames. Mr Market hates uncertainty. Apple is also a stock that traders love to play adding to volatility.

 

What to do? I hope the stock keeps going lower. My guess is Apple will earn just north of $9/share this fiscal year (to end of Sept). Estimates for earnings for fiscal 2016 (to End of Sept) are just north of $10/share and this seems reasonable to me. The bottom line is the stock is cheap.

 

How about its competitive position? Over the past 18 months Apple has delivered a number of solid products and services; they are widening the gap versus the competition and my guess is this will continue as we begin fiscal 2016 on Oct 1. 

 

Great company, widening its moat. Cheap stock, getting cheaper. What not to like?

 

Good summary of the current situation: http://www.fool.com/investing/general/2015/08/04/7-reasons-i-just-bought-more-apple-inc-stock.aspx?source=eogyholnk0000001

 

Good summary of Q3 earnings: http://www.fool.com/investing/general/2015/07/22/apple-inc-delivers-a-solid-q3-and-still-looks-chea.aspx

[innerscorecard]

I just bought more AAPL, and may even sell some long-dated puts. I am arrogant enough here to think there is nothing the market thinks that I don't. I merely think that Apple looks a lot like dead money in the short term to many, and that matters not to me.

[rpadebet]

why buy now?

Iphone 6/6+ released a year ago...the cycle is 2 years at least until now.

 

It has been 1 year since launch. The comparable's are going to be really tough going forward for a few quarters. Meanwhile the next iteration is at least 4 quarters away.

 

the other products basically don't move the needle, so no point betting on the gravy now.

 

I agree it is cheaper than it was a month ago but not 2013 cheap yet. I don't think it is a short. I am a believer in the ecosystem story as well. I also believe they will take greater market share from Android going forward (Samsung was going to eat their lunch 2 years ago, I think the actual risk is Samsung phone being eaten by iPhone). Longer term I think the Mac will be power house as well.

 

I think next 2-3 quarters this is at best dead money. Long term I am bullish. Will get back in once rumors of next iphone start surfacing and if the upgrade makes even a little bit of sense.

[innerscorecard]

I think the one thing I am not willing to be arrogant about is timing when a stock is going to be or not going to be dead money for the short term. I think that really is a fool's game, especially for mega-caps. Look at the BAC thread - people always seem to give up hope right at the wrong times, or be bullish and generate tons of pages right at the wrong times

[jawn619]

I think the one thing I am not willing to be arrogant about is timing when a stock is going to be or not going to be dead money for the short term. I think that really is a fool's game, especially for mega-caps. Look at the BAC thread - people always seem to give up hope right at the wrong times, or be bullish and generate tons of pages right at the wrong times

 

+1

[abyli]

I think the one thing I am not willing to be arrogant about is timing when a stock is going to be or not going to be dead money for the short term. I think that really is a fool's game, especially for mega-caps. Look at the BAC thread - people always seem to give up hope right at the wrong times, or be bullish and generate tons of pages right at the wrong times

 

+2

[DCG]

why buy now?

Iphone 6/6+ released a year ago...the cycle is 2 years at least until now.

 

 

Well, 5S owners like myself will be upgrading to the 6S.

[rmitz]

why buy now?

Iphone 6/6+ released a year ago...the cycle is 2 years at least until now.

 

 

Well, 5S owners like myself will be upgrading to the 6S.

 

I have a 5s as well.  This is the first year I am hesitating, the 6 form factor just seems too big to me.  We’ll see when the time comes.

[Liberty]

I have a 5s as well.  This is the first year I am hesitating, the 6 form factor just seems too big to me.  We’ll see when the time comes.

 

A lot of people were hesitant when the 6 came out, but most of those who have upgraded that I've been following (podcasters, friends, etc) find the 5s screen almost unusably small now. What makes a difference, I think, is that the 6 is thinner, so the total volume isn't that much bigger, and that's what you feel when you hold it and carry it on your person. It's not like those thick early phablets by other companies that were just giant bricks.

 

My wife has the 6 with Apple's base silicone-like case (which feels fantastic, no need for leather IMO) and to me that's the perfect balance between size and non-slippery.

[rkbabang]

I think the one thing I am not willing to be arrogant about is timing when a stock is going to be or not going to be dead money for the short term. I think that really is a fool's game, especially for mega-caps. Look at the BAC thread - people always seem to give up hope right at the wrong times, or be bullish and generate tons of pages right at the wrong times

 

Agreed.  If only I was omniscient enough to time the market, but I can't.  So I just bought some more AAPL today.

 

[innerscorecard]

I have a 5s as well.  This is the first year I am hesitating, the 6 form factor just seems too big to me.  We’ll see when the time comes.

 

A lot of people were hesitant when the 6 came out, but most of those who have upgraded that I've been following (podcasters, friends, etc) now find the 5s screen almost unusably small now. What makes a difference, I think, is that the 6 is thinner, so the total volume isn't that much bigger, and that's what you feel when you hold it and carry it on your person. It's not like those thick early phablets by other companies that were just giant bricks.

 

My wife has the 6 with Apple's base silicone-like case (which feels fantastic, no need for leather IMO) and to me that's the perfect balance between size and non-slippery.

 

Both my spouse and I are likely going to upgrade or buy this fall. The one fly in the ointment is that it looks from supply chains leaks that quite probably there will still be an ugly and annoying protruding camera bump, and there will almost certainly be the ugly antenna stripes (for which Apple filed a patent to coat while keeping functionality, but that won't be ready for this cycle).

[Liberty]

Both my spouse and I are likely going to upgrade or buy this fall. The one fly in the ointment is that it looks from supply chains leaks that quite probably there will still be an ugly and annoying protruding camera bump, and there will almost certainly be the ugly antenna stripes (for which Apple filed a patent to coat while keeping functionality, but that won't be ready for this cycle).

 

The Apple case takes care of both things. You don't see the antennas and you the camera is flush with the rest of the case.

[Picasso]

Every time Apple stock goes down 10%, I see all kinds of investors complain how Mr. Market is severely undervaluing shares.  It's such a widely held and religiously followed stock that I can never get myself to buy it even when it goes through these corrections.  If Apple goes from a $700 billion company to $2 trillion and I miss out on an "easy" multi-bagger, so be it.  I would argue that the time and attention people give Apple takes away from other opportunities that are in all likelihood much more lucrative. 

 

No matter what investors know or understand about the Apple product line, the majority of the cash flow is coming from the phone.  You can argue all you want that Coke or Visa are one product companies, but the market is just not going to give Apple a 20x ex-cash multiple.  Well, maybe it will one day since the market can do crazy things. 

 

I have to wonder what the stock would do when that nice little chart of new iPhones showing higher sales per iteration actually goes down for once.  God forbid there is a flop in the iPhone 6s, 7, 8s, I would not even want to hazard a guess how the stock would overreact on the downside.

 

So maybe the upside for the Apple bulls is a perpetually undervalued stock as Apple keeps generating a ton of sales, cash flow, and levers up their capital structure to give you a nice return.  It seems like the highest probability outcome.  It just kind of irks me when investors want the stock to reflect a price that makes it seem like the iPhone is a riskless, perpetually growing product.  Who knows, maybe it will be.

[APG12]

No matter what investors know or understand about the Apple product line, the majority of the cash flow is coming from the phone.  You can argue all you want that Coke or Visa are one product companies, but the market is just not going to give Apple a 20x ex-cash multiple.  Well, maybe it will one day since the market can do crazy things. 

 

I have to wonder what the stock would do when that nice little chart of new iPhones showing higher sales per iteration actually goes down for once.  God forbid there is a flop in the iPhone 6s, 7, 8s, I would not even want to hazard a guess how the stock would overreact on the downside.

 

So maybe the upside for the Apple bulls is a perpetually undervalued stock as Apple keeps generating a ton of sales, cash flow, and levers up their capital structure to give you a nice return.  It seems like the highest probability outcome.  It just kind of irks me when investors want the stock to reflect a price that makes it seem like the iPhone is a riskless, perpetually growing product.  Who knows, maybe it will be.

 

What do you think would happen to Apple's P/E if it began paying out a significant portion of its free cash flow as a dividend?

 

[Picasso]

I have no idea what the P/E would look like if the dividend went up significantly.  As it is, I think Apple is doing a much better job with capital allocation. 

 

If people still want the dividend and buybacks to increase significantly (like Icahn), then it goes to show that you can never fully satisfy everyone.  Apple's compounded 30% a year for a long time.  Sucking out the last few percent a year probably puts Apple in a silly position it doesn't need to be.

[APG12]

I have no idea what the P/E would look like if the dividend went up significantly.  As it is, I think Apple is doing a much better job with capital allocation. 

 

If people still want the dividend and buybacks to increase significantly (like Icahn), then it goes to show that you can never fully satisfy everyone.  Apple's compounded 30% a year for a long time.  Sucking out the last few percent a year probably puts Apple in a silly position it doesn't need to be.

 

I guess my point was that there are certain mechanisms which 'force' market participants to recognize that they own a business and not just a piece of paper. Returning cash directly to shareholders is one way. If apple were to dividend all of its annual FCF, would it really trade at (by Liberty's estimate) a 14% dividend yield?

[innerscorecard]

Every time Apple stock goes down 10%, I see all kinds of investors complain how Mr. Market is severely undervaluing shares.  It's such a widely held and religiously followed stock that I can never get myself to buy it even when it goes through these corrections.  If Apple goes from a $700 billion company to $2 trillion and I miss out on an "easy" multi-bagger, so be it.  I would argue that the time and attention people give Apple takes away from other opportunities that are in all likelihood much more lucrative. 

 

No matter what investors know or understand about the Apple product line, the majority of the cash flow is coming from the phone.  You can argue all you want that Coke or Visa are one product companies, but the market is just not going to give Apple a 20x ex-cash multiple.  Well, maybe it will one day since the market can do crazy things. 

 

I have to wonder what the stock would do when that nice little chart of new iPhones showing higher sales per iteration actually goes down for once.  God forbid there is a flop in the iPhone 6s, 7, 8s, I would not even want to hazard a guess how the stock would overreact on the downside.

 

So maybe the upside for the Apple bulls is a perpetually undervalued stock as Apple keeps generating a ton of sales, cash flow, and levers up their capital structure to give you a nice return.  It seems like the highest probability outcome.  It just kind of irks me when investors want the stock to reflect a price that makes it seem like the iPhone is a riskless, perpetually growing product.  Who knows, maybe it will be.

 

It's funny - it almost seems as if Apple is so big that there is some structural inefficiency in how it's valued due to sheer size alone.

 

I'm pretty sure the possibility that Apple is just "one iPhone flop" away from disaster is already the market consensus and thus more-or-less priced into the stock. Companies that have this much high quality growth with no real end in sight don't trade at these multiples unless there is a reason.

 

Also, Apple also doesn't need to get to a 2 trillion dollar company. It can just keep eating itself with buybacks. So far, management's buybacks (along with general capital allocation policy) have been intelligent and at good average prices.

[Picasso]

Right, I guess my point is the stock should trade within a band that assumes some level of a flop in the future.  Because we're talking about a $700 billion company that have achieved its success primarily from a phone.  I think if you didn't have a history of Blackberry's or Nokia's you might be able to get a higher multiple from the market.  But I just don't see that changing anytime soon.

 

There are obviously a few different ways to get to $2 trillion.  Maybe they return $1.3 trillion in buybacks/dividends and the rest is the residual equity value.  The returns will be there if they can keep it up but this is not going to be the easiest task in the world.  The numbers start to get staggering when you consider where Apple was just 10 years ago.

[Liberty]

Blackberry and Nokia sold phones (capable of checking email and a few things, but still phones). Apple sells computers (pocket computers, but still computers). Comparing it to Blackberry and Nokia doesn't make sense. It's a lot easier to make a phone than it is to make a computer (especially the OS and apps ecosystem part). Phones have little barriers to entry and little that makes them sticky. Computers can be very sticky, especially the OS. Ask Microsoft -- even after doing horrible things for over a decade they still are on the majority of PCs...