AAPL - Apple Inc.

[Liberty]

Looks like the traditional watch industry is having a bad time:

 

http://www.bloomberg.com/news/articles/2015-08-07/apple-helps-push-u-s-watch-sales-to-biggest-drop-in-seven-years

[Mephistopheles]

So they can't borrow money overseas, bring it back in dollars, and use their overseas profits to pay back that debt, right? (Without being taxed)

 

No matter what is brought back, it's taxed as long as you have untaxed foreign income?

[jawn619]

Does anyone know the reason behind Apple issuing debt overseas? Does this mean, apple can bring the money raised overseas (in the form of debt) home and use it for shareholder returns without paying taxes on it?

 

Apple issues all of its debt in the US. Though some of it is raised by foreign banks (Mitsubishi, CS, etc) in foreign currencies (JPY, EUR, GBP, CHF), it is issued at the US corporate level. All cash raised can be used for buybacks/dividends with the interest being tax-deductible at the US tax rate.

 

This is not true.

 

http://www.bloomberg.com/news/articles/2015-02-10/apple-said-to-offer-750-million-swiss-francs-of-bonds-in-debut

[Viking]

The key to Apple's stock price in the near term (next year) will be how well the new iPhone models sell (6S and 6S plus). If you expect Apple to sell more iPhone's in fiscal 2016 than they did in fiscal 2015 then you likely view the current share price as cheap.

 

John Gruber has posted some survey results posted by Benedict Evans: http://daringfireball.net/2015/08/most_important_device (correct link now posted)

 

Most important device used to connect to the Internet:

2013: laptop & PC = 75%, tablet and smartphone = 25%

2015: smartphone and tablet = 52%, laptop and PC = 44%

 

The trend towards mobile and especially smartphones looks to continue into 2016. As more people look to use their smartphone as their primary device to connect to the Internet this should support further growth of large screen smartphones. This trend is supportive of continued strong sales of the new iPhone 6S and 6S Plus models over the next year.

[jason]

I actually think Tim Cook is handling this brilliantly.  For instance some analysts who were so bullish on Apple 2 weeks ago have now turned pessimistic.  Couple that with the fact a guy like Carl Icahn is buying shares based on the value increasing significantly due to buy backs what do we have.

 

Well its very simple Apple could reduce their guidance for the following quarter.  The stock still tanks but fundamentals dont change i.e. they now have 200 billion in their war chest.  Why is this good for Apple?  Well of course they can pick up WAYYYY more shares at a cheaper level knowing deep down nothing has changed.

 

So next quarter if they have a beat the shares sky rocket again and they remove all the weak hands that get jittery over a $15 drop on the greatest cash flow generating company in history.

[johnny]

Seems a little too cute. Remember that Cook's RSUs are tied to the relative performance of AAPL v. the S&P, assessed annually. I don't think he will deliberately tank the stock in order to get us shareholders a better bargain on the buybacks.

 

Recall back in early 2014...the shares had a bit of a tumble and I think started approaching $500/share. Management did a massive buy over a period of a few days. THEN they threw out a press release about it, basically softly announcing they were setting a floor on the stock. I think that gives you insight into how they view/treat buybacks. They are a tool to keep the share price where it "ought" to be.

[bci23]

Seems a little too cute. Remember that Cook's RSUs are tied to the relative performance of AAPL v. the S&P, assessed annually. I don't think he will deliberately tank the stock in order to get us shareholders a better bargain on the buybacks.

 

Recall back in early 2014...the shares had a bit of a tumble and I think started approaching $500/share. Management did a massive buy over a period of a few days. THEN they threw out a press release about it, basically softly announcing they were setting a floor on the stock. I think that gives you insight into how they view/treat buybacks. They are a tool to keep the share price where it "ought" to be.

 

I agree I think this was their mindset 18 months ago but people learn and change and theres always the possibility that uncle Carl has shaped a new mindset for them and how to view share buybacks.

[DeepSouth]

Does anyone know the reason behind Apple issuing debt overseas? Does this mean, apple can bring the money raised overseas (in the form of debt) home and use it for shareholder returns without paying taxes on it?

 

Apple issues all of its debt in the US. Though some of it is raised by foreign banks (Mitsubishi, CS, etc) in foreign currencies (JPY, EUR, GBP, CHF), it is issued at the US corporate level. All cash raised can be used for buybacks/dividends with the interest being tax-deductible at the US tax rate.

 

This is not true.

 

http://www.bloomberg.com/news/articles/2015-02-10/apple-said-to-offer-750-million-swiss-francs-of-bonds-in-debut

 

What's not true? That's CHF debt issued at the US corp level under NY law.

[Patmo]

Seems a little too cute. Remember that Cook's RSUs are tied to the relative performance of AAPL v. the S&P, assessed annually. I don't think he will deliberately tank the stock in order to get us shareholders a better bargain on the buybacks.

 

Recall back in early 2014...the shares had a bit of a tumble and I think started approaching $500/share. Management did a massive buy over a period of a few days. THEN they threw out a press release about it, basically softly announcing they were setting a floor on the stock. I think that gives you insight into how they view/treat buybacks. They are a tool to keep the share price where it "ought" to be.

 

I agree I think this was their mindset 18 months ago but people learn and change and theres always the possibility that uncle Carl has shaped a new mindset for them and how to view share buybacks.

 

Maybe, but they also follow their own interests first. If Apple's compensation incentivizes against this behavior, then I can guarantee you it's not going to happen.

[Viking]

My guess is Apple feels their shares are undervalued even when trading at their recent high of $132ish. They are going to earn $10 per share in fiscal 2016; apply a 15 PE multiple and you get $150 share price (not including their $20+ per share in net cash). Not an outrageous valuation.

 

Apple is going to continue to purchase as many shares as they possible can while remaining within previously announced buyback parameters. If they view the current share price as crazy low they may announce an another accelerated purchase and even front load the previously announced buyback (currently set to expire in March of 2017).

 

I think they want to see the shares priced fairly (ie something like $150 per share) because of all the stock options employees have. The best employees want to be rewarded financially and a rising share price works magic on employee morale and retention. Cook is watching this far more than what his own personal stake may be doing (as he is already crazy rich). What motives Cook is delivering the goods and the best way to do this is to attract and retain the best employees and a valued stock option program with a rising stock price is key to making this happen.

[Liberty]

Cook has already said he will donate all his money to charity, so he's probably motivated by the share price to an extent, but that doesn't seem to be his prime motivator. He seems to have a real love for Apple and its employees, and to the extend that a low share price might hurt recruiting and retention, that's probably what bugs him.

 

I wrote something in my investing journal last week about Apple. It wasn't written with public posting in mind, but I figure, why not share it. Just some stuff I had on my mind at the time:

 

The modern smartphone is a very special product. Historically, it might be a bigger thing than the car or the TV. Everybody on Earth will someday have one, and this thing is giving people at least thousands and thousands of dollars of value. It’s a camera for video and photos, an internet-connected computer (which means it can do million things and access the sum of human knowledge in real-time), a gaming device, a GPS, a phone and a video-phone, you get weather forecasts, streaming video, music, etc. Your smartphone can get a car or food to you, you can shop on it, stay in touch with friends and family, etc. And it’s personal and private, a kind of second brain, secret garden, whatever. Yet smartphones don’t cost anywhere close to the value they deliver, and because of this relatively low absolute cost, premium models are affordable to a lot of people (unlike, say, premium cars). This helps them being upgraded much more frequently than computers (low cost + very high utility + big improvements every generation + more personal/visible than other products = easy to justify), which is what makes smartphones so special too.

 

Among people who can afford iPhones, there will always be a fairly large segment of the population who doesn’t mind paying a bit more to have the “best” product experience. They want to buy it in a nicer store, have fewer things to worry about while owning it, they want it to look and feel nice, be supported for a long time, have access to all the hot new apps, etc.

 

Almost everything else is optional. I sometimes compare Apple to Nike and Porsche when I explain how they can have higher margins because a certain segment of the population will always be ready to pay more for the best, but that’s actually an unfair comparison; Apple is in a much better position than Nike and Porsche. There are much higher barriers to entry to compete against Apple, and there’s an ecosystem/network effect that creates barriers to exit (stickiness).

 

Almost everything else is optional - nice shoes, nice car - but a smartphone isn’t. It’s easy to justify buying one, and if you want an iPhone, it’s easy to justify paying a bit more for one (unlike going from a Corolla to a BMW).

 

The reason why the iPhone will stay the biggest thing for Apple is the same reason why the rest of Apple products are building an ecosystem around the iPhone to make it more valuable and stickier; A computer or a tablet are optional, but not a smartphone. The Watch might someday become less optional, but at first it will be (over time it’ll become our physical manifestation in the digital world, because it’s better in that role than a phone is - it’ll unlock our car and house doors, pay for stuff, contain all ID tokens we need for various things, keep track of our health, alert us when we need to know things, work with home automation stuff, maybe control your Apple TV, interact with beacons in public places/stores, etc).

 

One last thing that grinds my gears: The whole media circus around “is the Watch a flop or not? Did it sell enough at 2 million? 3 million? 4 million?” is r-i-d-i-c-u-l-o-u-s. Analysts and journalists have pulled out all kinds of numbers right out of their butts, and now they are benchmarking against them. I’m sure Apple only had a vague guess how many they would sell, and obviously that wasn’t enough since they were supply constrained despite launching in the part of the year when they supply chain should have a lot of slack.

 

The Watch is a brand new thing. It’s not a small iPhone on your wrist (unlike the Android Wear stuff that mostly shrinks existing paradigms), it has very different use case (you go to the phone, the watch comes to you) and pros & cons. The target market isn’t current watch wearers…

 

I think most of the current backlash against the Watch comes from mis-calibrated expectations. No other product will be the iPhone, ever. This was a special thing like the car or the TV. And not every product needs to do everything like the iPhone.

 

I think that when pundits get over the fact that the Watch isn’t actually magical and perfect and that it’s a lot harder to easily encapsulate the use case of this mostly passive, brand new device, they’ll realize how cool it actually is to have all this stuff on your wrist at all time. Being able to just glance at ‘complications’ that show every-day useful things like the weather, your calendar events, health stats, message and notifications, and whatever else third-party complications are next to catch on once watchOS 2.0 is released.

 

People also forget to skate where the puck is going to be. The Watch will iterate into something better, just like the original iPhone did. It’ll get thinner, have more battery life (though that’s already not a problem), get new health sensors, get standalone GPS, etc. Just having native apps next fall will make a big difference in speed, and developers are still figuring out how to make a good watch-sized UI, so apps will keep getting better and more useful. All this takes time.

 

Lastly, the Watch is part of an ecosystem of products and services. If some other company was making the Apple Watch as its only product, that would be one thing. But Apple is making it, and the long-term impact of the Watch should be judged in relation to the whole; how many people buy iPhones because they want a Watch? How many people are even less likely to leave the iOS ecosystem because they also have a Watch? It’s the same as with Macs and iPads: Once you’ve bought one Apple product, you are much more likely to buy more, and once you have a bunch, have bought a bunch of apps and all your photos are synched into iCloud, it becomes a lot harder to leave.

And what matters is not how many Watches are sold in the first year, but how many are sold in the 5th year. You have to plant seeds for the long term even when everybody discourages you to do things if they won’t have a big impact by the 2H…

 

[jawn619]

The modern smartphone is a very special product. Historically, it might be a bigger thing than the car or the TV. Everybody on Earth will someday have one, and this thing is giving people at least thousands and thousands of dollars of value. It’s a camera for video and photos, an internet-connected computer (which means it can do million things and access the sum of human knowledge in real-time), a gaming device, a GPS, a phone and a video-phone, you get weather forecasts, streaming video, music, etc. Your smartphone can get a car or food to you, you can shop on it, stay in touch with friends and family, etc. And it’s personal and private, a kind of second brain, secret garden, whatever. Yet smartphones don’t cost anywhere close to the value they deliver, and because of this relatively low absolute cost, premium models are affordable to a lot of people (unlike, say, premium cars). This helps them being upgraded much more frequently than computers (low cost + very high utility + big improvements every generation + more personal/visible than other products = easy to justify), which is what makes smartphones so special too.

 

To add to this, I believe Apple in the future will be fundamentally a consumer products company. The stability of income that a PG provides is very attractive in an investment. But there's no denying that growth, sales, and pricing power will likely deteriorate over time. The question is how much, and i think it is likely to be less than the market thinks or is pricing currently.

[Viking]

Liberty, thanks for sharing your thoughts; very insightful and supports Apple as a long term hold in a portfolio.

 

Apple surprised me last year with the 6 and 6 plus with their pricing strategy. EVERYONE assumed last year that iPhone average selling price had peaked and we were entering the period of ever declining prices. Commoditization would run its course. And what happened? Apple tweaked storage and this resulted in an effective price increase. And they launched the 6 plus at a much higher price than the 6. Combined, these two factors drove significant average unit price increases for the iPhone category. My point is Apple is not reliant solely on iPhone unit growth to grow profitability; they also have pricing power with iPhone which is not reflected in the price of the stock.

 

Add the unit growth we have seen this year and this results in the blowout fiscal 2015 Apple is in the process of completing (at the same time most other large multinationals have had their earnings killed by the strong US$; Apple overcome this and, once again, gets no credit). What Apple demonstrated is the ability to raise prices and sell more units; that is called brand strength. As the smartphone becomes even more ubiquitous expect more price increases from Apple in the future. My family owns multiple iPhones, a Mac, iPads, iPods and the TV puck (about $6,000 invested so far); if the price of iPhone goes up $100 will I switch to something cheaper? No; and it is a very easy decision. As more people join the Apple family and, over time, buy the full range of products they will not leave unless they are given a very powerful reason. Ex China, all smartphone competitors of Apple are in decline (once started rarely reverses). All of this tells me Apple is in pretty good shape the next few years and a therefore solid investment today at $115.

[Picasso]

Good post Liberty.  The value proposition of a smartphone is incredible.  I'm sure for a lot of iPhone users it becomes impossible to use another product because it isn't worth saving $50 or $100 to lose the ecosystem.  Maybe $200+ of savings would entice some people, but there's no way to get a decent device at that price.  As long as Apple can keep that ecosystem flourishing then they'll keep pulling in the vast majority of the industry profits.

 

But there are a lot of moving parts with the smartphone business.  It is sort of intriguing to see Apple and IBM at the same multiple.  Having thought about it some more I could see how the current price has a reasonable margin of safety. 

[Liberty]

Ben Thompson makes an interesting point that is similar to my thinking in today's Stratechery update (you'll need to subscribe to see it and get the daily updates):

 

https://stratechery.com/2015/verizon-changes-rate-plans-the-importance-of-upgrades-imessage-and-the-u-s-market/

 

Moreover, contra conventional wisdom, I suspect that people’s willingness to pay for a smartphone — and for the iPhone specifically — is actually increasing, not decreasing. The argument has long been put forward that as cheap Android becomes “good enough” the iPhone would come under pricing pressure, but I think there is an even stronger force operating in opposition: the fact that people are buying their second (or third or fourth) smartphone. As I’ve noted previously, before one buys a smartphone, one is inclined to simply think of it as a phone: a “tool” you own that does the job its asked just as well as its competitors. Once one has a smartphone, though, one comes to realize just how essential said smartphone is to nearly every part of one’s life: it is the most important thing you own, and if you are going to splurge on any one single object, shouldn’t it be the one that you use the most? If anything, as the smartphone market becomes saturated (like it is in the U.S.), I think it likely that the iPhone’s position becomes stronger, not weaker.

[DCG]

What affect will Verizon ending subsidies and contacts have to iPhone sales?

 

http://www.fool.com/investing/general/2015/08/10/verizon-just-punkd-apple.aspx?source=eogyholnk0000001

 

 

CultofMac argues that it could be possibly good for Apple:

 

 

http://www.cultofmac.com/384691/why-verizon-killing-subsidized-phones-is-good-for-apple/

 

[Liberty]

What affect will Verizon ending subsidies and contacts have to iPhone sales?

 

 

http://money.cnn.com/2015/08/07/technology/verizon-monthly-plans/

 

That's what the Thompson piece linked above is about. Conclusion is basically that there's a lot of semantic crap in there, but Verizon was never subsidizing it in the real sense of the word subsidy, and they're now almost doing the same thing they were. Bottom line is, this might be a slight positive for the iPhone because it's easier to upgrade and the upfront costs are eliminated.

 

https://stratechery.com/2015/verizon-changes-rate-plans-the-importance-of-upgrades-imessage-and-the-u-s-market/

 

Perhaps I’m missing the good analysis, but it seems to me that much of what has been written about this announcement is completely wrong, particularly the seemingly widespread assumption that this is a significant change that will adversely affect the iPhone. I think it’s the opposite: a rather insignificant adjustment that will likely help Apple.

 

First off, Verizon et al were never subsidizing phones, at least according to the actual definition of “subsidization”, which means to assist in buying something without the requirement of payback. The cost of the phone beyond what a customer paid up front ($450 in the case of a new 16GB iPhone) has always been baked into the monthly bill, which could only be escaped through the payment of a termination fee that tracked suspiciously close to the amount needed to pay off said phone. In other words, given that Verizon will now finance the purchase of new phones, plus the fact that if and when you leave Verizon you will need to pay back whatever you still owe, the new plan is much more of a semantic shift from the old model than a substantive one.

 

[...]This is obviously theoretically possible: customers could opt for a cheap Android that adds $10~$15 to their monthly bill instead of the iPhone’s $25~$30. In fact, though, this option has been available for quite a while: amongst national carriers T-Mobile and Sprint have been undercutting Verizon in price (the former with basically the same model that Verizon is proposing), and smaller regional carriers do the same. Verizon, however, has continued to add subscribers — and the iPhone has been selling like gangbusters — which makes perfect sense once you remember the market is segmented at a fundamental level between consumers who pay for quality and consumers who prioritize price; both Verizon and the iPhone are standard-bearers for the former. To put it another way, I suspect customers who are first and foremost motivated by price aren’t using iPhones on Verizon anyways.

 

[...]There’s another angle to this shift that plays in the iPhone’s favor: under the old “subsidy” model you could only upgrade every two years. With Verizon’s new model, though, you can upgrade after 12 months (if you choose the 20-month financing plan) or after 18 months (if you choose the 24-month financing plan). And again, this upgrade comes with no upfront cost. [...]

 

Again, though, I come back to the centrality of smartphones in people’s lives: improvements, even small ones, are magnified the more one uses a device. Moreover, the fact one uses one’s smartphone all the time means said phone is more likely to break or degrade in performance, all of which drive upgrades. I on balance remain bullish that upgrades will remain attractive to more customers than not.

[Viking]

It looks like HTC can be diagnosed as being terminal. For all the worry about Apple and iPhone (sales are so good there is no way they can match last year...) it looks to me like Samsung and Galaxy sales could be a major story in 2016. Galaxy sales are way down in 2015 and if the decline continues into 2016 then Samsung will have some difficult decisions to make. Outside of China, iPhone is doing serious damage to all premium smartphone sellers.

[Liberty]

Samsung recently slashed prices on its S6 (100 euros less, not sure how much in the US). One more price cut and they won't even be able to call themselves premium... Just one more commodity phone maker.

 

I wouldn't be surprised if soon Samsung makes more money from selling components to Apple than from its own phones...

[adesigar]

Im on Verizon and due for an upgrade. I have to do it in the next couple of days (before the 13th) and ive been looking at the iPhone 6/Plus vs the Samsung Galaxy S6. I really want to get the iPhone 6 but...

 

Samsung is cheaper, much better screen, much better camera, better performance single threaded, way better multithreaded, wireless charging, Google now..

iPhone has better build, apple app store gets some apps before android, better security, easier to use .

There is no clear winner anymore

 

Till a couple of years ago Apple was much better than the competition now its just one of the good phones.

 

 

 

[supertutti]

In terms of sales and profits, I think there is a very clear winner.

 

As some one who has used every type of smart phone over the years (Palm, blackberry, android, webOS, windows), I finally got an iPhone 2 years ago, and it has been the best phone for me. While the Galaxy and Android have some cool features, the build quality and overall stability and ease of use of the iPhone has just been better for me. But this is a personal choice with personal taste and needs to be taken account of. You'll be happy with either.

[Liberty]

Im on Verizon and due for an upgrade. I have to do it in the next couple of days (before the 13th) and ive been looking at the iPhone 6/Plus vs the Samsung Galaxy S6. I really want to get the iPhone 6 but...

 

Samsung is cheaper, much better screen, much better camera, better performance single threaded, way better multithreaded, wireless charging, Google now..

iPhone has better build, apple app store gets some apps before android, better security, easier to use .

There is no clear winner anymore

 

Till a couple of years ago Apple was much better than the competition now its just one of the good phones.

 

You're looking at a list of specs. That's not what the experience of using a product is. And good luck keeping your OS updated in a year or two on the Samsung... But it's your choice.

[adesigar]

Im on Verizon and due for an upgrade. I have to do it in the next couple of days (before the 13th) and ive been looking at the iPhone 6/Plus vs the Samsung Galaxy S6. I really want to get the iPhone 6 but...

 

Samsung is cheaper, much better screen, much better camera, better performance single threaded, way better multithreaded, wireless charging, Google now..

iPhone has better build, apple app store gets some apps before android, better security, easier to use .

There is no clear winner anymore

 

Till a couple of years ago Apple was much better than the competition now its just one of the good phones.

 

You're looking at a list of specs. That's not what the experience of using a product is. And good luck keeping your OS updated in a year or two on the Samsung... But it's your choice.

 

Nope that's not it. You can compare side by side the screen and tell the difference instantly its that big. The camera I took identical pictures (this feature is very important since I take pics of the kids and I hate it when they turn our blurry and you miss a magic moment). The optical stabilizer in the 6 plus helps somewhat but its still not as good as the galaxy s6 camera. The performance of Apple apps is great its the tons of 3rd party ones where the 1GB ram vs 3GB and the multithreading shows up. As for wireless charging and google now that's just not there. Finally the apple keyboard is crap but they don't allow to support 3rd party keyboards. Its even more crap on the iPad where they use half the screen and don't put numbers/basic punctuation on the main keyboard.

 

On the flip side aluminum body is great, developers still prioritize apple over android (fewer devices), the permissions on install in android is terrible, custom UI from phone developers vs stock android gives apple an even bigger advantage than it should have in ease of use. Apple used to have the best screen, the best camera, best performance and best features in the OS. Not anymore.

[Liberty]

It's your choice. There are too many dealbreakers in the Android experience for me, even if there's part A or B that is better or whatever, it doesn't matter in the end.

 

btw, you can use third party keyboards on iOS. And on the iPad, you can do a split keyboard if you want it smaller.

[supertutti]

Nope that's not it. You can compare side by side the screen and tell the difference instantly its that big. The camera I took identical pictures (this feature is very important since I take pics of the kids and I hate it when they turn our blurry and you miss a magic moment). The optical stabilizer in the 6 plus helps somewhat but its still not as good as the galaxy s6 camera. The performance of Apple apps is great its the tons of 3rd party ones where the 1GB ram vs 3GB and the multithreading shows up. As for wireless charging and google now that's just not there. Finally the apple keyboard is crap but they don't allow to support 3rd party keyboards. Its even more crap on the iPad where they use half the screen and don't put numbers/basic punctuation on the main keyboard.

 

On the flip side aluminum body is great, developers still prioritize apple over android (fewer devices), the permissions on install in android is terrible, custom UI from phone developers vs stock android gives apple an even bigger advantage than it should have in ease of use. Apple used to have the best screen, the best camera, best performance and best features in the OS. Not anymore.

 

Sounds like you have your mind made up. However, one correction. Apple does allow 3rd party keyboards. Swype and all that jazz.