AAPL - Apple Inc.

[abyli]

People in China travel to US say Baidu map is already way ahead of google map!

[innerscorecard]

Unfortunately, a head-to-head comparison is impossible. Google Maps is blocked in China (and if you access via a VPN, it's not very good, due to being blocked and thus not being able to update data through things like street view). And Baidu Maps has basically no data outside of China. It's literally a blank except in China.

 

Anyways, going back to Apple, the point is that services, especially ones that are simply "good enough," aren't so hard after all...when what is "good enough" has already been established through the passage of time. It's making services that do new things that is hard.

[Jurgis]

Do you guys know for sure that Apple built map database from zero up? I.e. they are not using someone else's map DB? I'd be quite surprised if this is the case. It took Google 4+ years to gather the data and I have not seen any indications of "Apple maps" vans/cars collecting data. Most likely they are using 3rd party DB. Just whose?

 

Any pointers to actual info would be helpful.

[Picasso]

Apple used TomTom.

[Jurgis]

Thanks Picasso.

[Liberty]

Do you guys know for sure that Apple built map database from zero up? I.e. they are not using someone else's map DB? I'd be quite surprised if this is the case. It took Google 4+ years to gather the data and I have not seen any indications of "Apple maps" vans/cars collecting data. Most likely they are using 3rd party DB. Just whose?

 

Any pointers to actual info would be helpful.

 

They use data from various other sources depending on the country, but that's not the same as having a fully-featured Maps app at all.

[DukeCrow]

Do you guys know for sure that Apple built map database from zero up? I.e. they are not using someone else's map DB? I'd be quite surprised if this is the case. It took Google 4+ years to gather the data and I have not seen any indications of "Apple maps" vans/cars collecting data. Most likely they are using 3rd party DB. Just whose?

 

Any pointers to actual info would be helpful.

 

As Picasso mentioned, Apple has been using Tomtom. But it's no secret that they also have vans driving around collecting data. They freely post the schedule for their mapping vehicles.

http://maps.apple.com/vehicles/

[johnny]

Living in China has made me realize that maps is not at all a winner-take-all market...Having a good-enough mapping service isn't some insurmountable goal - it's mere table stakes.

 

Definitely true that maps (and music) are viewed as table stakes by all the big players. I think we're seeing "payments" being added to that as well now.

 

It is counterintuitive, but important to note, that one of the major missions of Apple Maps is actually keeping Google Maps on the iOS platform, and produced at a high level. Apple suffered enormously when OSX got sub-par versions of important software franchises (Office, all games) and I'd say they would probably prefer a world where Google continues to pour a lot of effort into Google Maps for iOS, rather than a world where Apple Maps pushes all other solutions off the platform, suddenly providing a switching rationale for users.

[innerscorecard]

Living in China has made me realize that maps is not at all a winner-take-all market...Having a good-enough mapping service isn't some insurmountable goal - it's mere table stakes.

 

Definitely true that maps (and music) are viewed as table stakes by all the big players. I think we're seeing "payments" being added to that as well now.

 

It is counterintuitive, but important to note, that one of the major missions of Apple Maps is actually keeping Google Maps on the iOS platform, and produced at a high level. Apple suffered enormously when OSX got sub-par versions of important software franchises (Office, all games) and I'd say they would probably prefer a world where Google continues to pour a lot of effort into Google Maps for iOS, rather than a world where Apple Maps pushes all other solutions off the platform, suddenly providing a switching rationale for users.

 

I agree. That's also why apps like Photos and Notes can't be too complete of a solution for all users. As much as people talk about Apple being intergrated, the low-value parts of the ecosystem (software, hardware components) are all very modular.

 

(...at least maybe that explains why Numbers doesn't have the XIRR function. It's almost too big of an exclusion to attribute to incompetence or neglect, although that's probably why.)

[Liberty]

Living in China has made me realize that maps is not at all a winner-take-all market...Having a good-enough mapping service isn't some insurmountable goal - it's mere table stakes.

 

Definitely true that maps (and music) are viewed as table stakes by all the big players. I think we're seeing "payments" being added to that as well now.

 

It is counterintuitive, but important to note, that one of the major missions of Apple Maps is actually keeping Google Maps on the iOS platform, and produced at a high level. Apple suffered enormously when OSX got sub-par versions of important software franchises (Office, all games) and I'd say they would probably prefer a world where Google continues to pour a lot of effort into Google Maps for iOS, rather than a world where Apple Maps pushes all other solutions off the platform, suddenly providing a switching rationale for users.

 

I agree. That's also why apps like Photos and Notes can't be too complete of a solution for all users. As much as people talk about Apple being intergrated, the low-value parts of the ecosystem (software, hardware components) are all very modular.

 

(...at least maybe that explains why Numbers doesn't have the XIRR function. It's almost too big of an exclusion to attribute to incompetence or neglect, although that's probably why.)

 

The parallel between OS X and iOS works differently, IMO. The reason why Mac OS (and later OS X) didn't have all the important software that Windows had was because there wasn't much money to be made on it. It had a small market share, and the most valuable users at the time - businesses - were on Windows. Why spend the resources to develop a Mac version if you are a software developer?

 

Today, iOS has a large market share, and the section of the market that it has is almost the whole profitable end of the market. Google and Microsoft and others will keep developing for iOS because they make more money there than on other platforms. Similarly, startups tend to develop for iOS first and sometimes iOS-only because if they want their business to take off, they need to be in front of people who are ready to pay for products and services, and also because with limited resources, it's less expensive to develop for iOS (you can target the latest version with all the newest features, rather than target a fragmented market where, if you develop for the very latest features, most of your users won't have access).

[johnny]

Liberty, almost everything you say is consistent with my thinking. I certainly wouldn't endorse a claim that OSX and iOS are perfect analogues. iOS is not optional for anybody looking to make money from a mobile app.

 

However, Microsoft and Google are demonstrably not concerned with monetizing every app. And they are certainly not obsessed with maximizing revenue for each. It's nice when it happens, but they have both demonstrated a willingness to completely sacrifice the profitability of entire segments in order to serve a larger platform strategy.

 

Microsoft dragged its feet for years on releasing a usable Office suit for both OSX and iOS. For years, iOS was by far the dominant mobile platform (especially among the sort of people who are interested in using Excel), and Microsoft had a small team playing around with it, but they simply didn't prioritize releasing it, as the Ballmer view was that Office was going to be how they got iOS users to switch to the New Windows Mobile platform. It took multiple failures of that strategy, as well as the beheading of the CEO, before they caved on that plan. Analogous to our Maps discussion, Microsoft's Office hand was in some small part contributed to by Apple's creation of a demonstrably inferior suite of free substitutes: Pages (Word), Keynote (Powerpoint), and Numbers (Excel). Notice that, while the strategic position of iOS and OSX are indeed different, the Microsoft pivot on this platform strategy had the same implications for both. The new version of Office for OSX coming out this year has substantially closed the functionality gap with Windows.

 

The -big- players don't necessarily see individual apps or services as profit centers in their own right, but as pawn pieces for a bigger game.

 

BTW, I'm very interested to see what the action of the stock is today. I have a feeling that Tim is far more likely to use repurchases to try and set floors than to necessarily maximize IRR, and we're breeching $100 in the pre-market. So we'll see what happens...

[innerscorecard]

This just happened:

 

https://twitter.com/carlquintanilla/status/635799629947404288/photo/1

[johnny]

This just happened:

 

https://twitter.com/carlquintanilla/status/635799629947404288/photo/1

 

I think that is pretty strong evidence in favor of my argument that Tim cares more about propping up the share price than letting it tank so that he can retire more shares at a better price.

 

I'm not a trader, but I feel like betting on Tim to defend $100/share wouldn't be the dumbest thing on Earth.

[innerscorecard]

I just purchased some shares in the premarket at $98.88, but I am not so sure Tim Cook will defend $100 specifically.

 

Edit: I'm sure bad at buying at a good price.

[johnny]

I'm fillin up some small IRAs for my relatives right now. I have increased faith in my assessment of Cook. I expect there will be substantial purchases in this area.

 

And if wrong, we're accumulating at around a ~400B valuation minus the long term securities, on ~50B in TTM net income. Seems like a perfectly reasonable valuation to me.

 

That early price action was pretty funny though. I kept having orders rejected at Fidelity and started cursing and woke up the girlfriend.

[GregS]

This just happened:

 

https://twitter.com/carlquintanilla/status/635799629947404288/photo/1

 

I think that is pretty strong evidence in favor of my argument that Tim cares more about propping up the share price than letting it tank so that he can retire more shares at a better price.

 

I'm not a trader, but I feel like betting on Tim to defend $100/share wouldn't be the dumbest thing on Earth.

 

While I might prefer Tim Cook just let the price fall and buyback shares, stock price becomes a big issue for employee retention when so much of their comp is in stock. Unlike many on Twitter I'm not going to criticize if he felt the need to say something.

[abitofvalue]

Since when do CEO's call-in to CNBC to give inter-quarter business updates?  Got to say that was some quality stock management by Cook though. Stock immediately bounced up from there.  He better report a strong quarter or its going to impact his credibility with the street in the future. 

 

I wonder what compelled him to do this.. seems odd to react to a falling stock price by writing to CNBC.

[johnny]

It isn't really a mystery. I think value-investor types have made a mistake in projecting certain aspects of their worldview onto Tim. Like, how one determines the "correct" capital structure for the company, and the primacy of intrinsic-value-per-share as a managerial goal.

 

Share buybacks, from Apple's perspective, are about serving operational purposes. Keep the stock stable so that they don't lose employees/fail to lure new ones (Greg already mentioned this). Keep the capital structure just aggressive enough so that activists don't have an opening to agitate the board.

 

Remember, it took a dinner date with Carl before Tim suddenly saw the light on buybacks. I would say there is no reason to think he is a "true believer" and more evidence pointing to the notion that he views buybacks as simply one of several tactics to deploy for managing the share price. Retweetable emails and CNBC appearances are others.

[Liberty]

This is just my guess, and I could be totally wrong, but I think Tim Cook sees Apple as a company and institution first, and as a financial stock way in second position.

 

I think that for a while he probably had a thousand big investors pester the company with questions about China and about sales, and that made its way to the media... And he had the numbers in hand, he knew this wasn't a problem, but the perception could tarnish the brand and low stock price could affect employee morale, hiring, retention, etc. Didn't want to get into a narrative like a couple years ago of "Apple has lost it" (even if not true).

 

A perfectly ruthless financial operator like Malone would probably have just shut up and watched the stock drop to do bigger buybacks, but Cook has different parameters to play with, and I don't think he wanted to see the brand attacked just so he could boost future CAGR by a couple points a few years down the road. These memes can be hard to shake once they take, even if they aren't based on much.

 

But I don't think he's sitting idle either. Last time the stock fell sharply we learned that they had bought back 14bn in two weeks. I wouldn't be surprised if we find out that during the recent period Apple has been doing accelerate share repurchases to the tune of a few tens of billions. But still, Cook doesn't want a false narrative to take over because the media loves the attention from negative Apple stories (nothing brings in the pageviews so reliably!) and they're always looking for anything to jump on, factual or not.

[Viking]

Is there any logic to repatriating a large chunk of the foreign cash if your stock is trading well below fair value? I am thinking $20 or $30 billion? And to do an accelerated repurchase so you take as many shares out at as low a price as possible.

 

The foreign cash is an issue for Apple (its size and growth). What is the difference if they use foreign cash to buyback stock below $110 a share (and pay repatriation tax) or use borrowing or domestic cash earnings to buyback stock over $120?

 

I had the same thought when the stock was trading in the low $400's in 2013; use international cash to buyback stock when it is trading 20-30% below its fair value. This would allow Apple to reduce the share count much more quickly at very favourable prices.

[Liberty]

Is there any logic to repatriating a large chunk of the foreign cash if your stock is trading well below fair value? I am thinking $20 or $30 billion? And to do an accelerated repurchase so you take as many shares out at as low a price as possible.

 

The foreign cash is an issue for Apple (its size and growth). What is the difference if they use foreign cash to buyback stock below $110 a share (and pay repatriation tax) or use borrowing or domestic cash earnings to buyback stock over $120?

 

I had the same thought when the stock was trading in the low $400's in 2013; use international cash to buyback stock when it is trading 20-30% below its fair value. This would allow Apple to reduce the share count much more quickly at very favourable prices.

 

Depends if you think there's going to be a different tax treatment of the foreign cash at some point (either a temporary tax holiday or a change to the tax code). If that's the case, best to keep borrowing at basically 0% interest and buy back with that.

[DeepSouth]

I wouldn't be surprised if we find out that during the recent period Apple has been doing accelerate share repurchases to the tune of a few tens of billions.

 

Back of the envelope AAPL has $28B in US cash today net of any new buybacks (including leftover ASR at Goldman), and hasn't allowed US cash balance to end a quarter below $18B in years. I doubt they'd have repurchased more than $10B in this quarter.

 

$21.7B Q3 domestic cash + $3.6B Q4 debt issuance + $1B ASR + $1.5B quarter to date US FCF - $3B dividend payment = $28B

[Viking]

Liberty, I hear you. As an example, what if in mid 2013 Apple had repatriated $30 billion and repurchased shares; all purchases would have been under $500 ($70 or below). My assumption is all of these repurchases were in addition to what they actually did. Today they are repurchasing shares at well over $100 (50% higher).

 

Let's say the U.S. changes the tax code in 2 or 3 years. Apple will likely be trading above $150. When your stock is on sale, it looks to me to be a much better deal to pay the repatriation tax today and buy back a very large quantity of shares (10% of the float).

 

My key assumptions are this repurchase would be large, incremental to whatever is currently planned, and can be executed in full while shares are crazy cheap (trading below $110).

 

Right now Apple is having to borrow each year to fund the dividend and current buy backs; how much will the bond market let them borrow at very low interest rates? In a couple more years people may start to get concerned at the size of their debt holdings and this may create constraints.

[Liberty]

Viking, you are probably right that it would be closer to optimal even with the tax hit, as long as the stock is undevalued enough to compensate and you see strong operating performance on the horizon, so you know low prices probably won't last too long.

[johnny]

I think the real issue is the immediate, reported tax implications of such a move. They'd be taking a bath to pull the trick off, and then they'd have to sit around explaining in detail why it was worth killing the numbers to do it. I think there is no chance of that happening.

 

Especially if, again, you believe that TC's entire share buyback thing isn't so much about financial engineering and is more about trying to manage the stock and keep the walls up so that activists don't complain.

 

Now, here is an interesting angle: http://fortune.com/2015/08/25/apple-cook-coincidence/

 

My question is this: Was Tim Cook aware when he sent that note to Cramer that 280,000 of his restricted shares were scheduled to vest that day by a formula that might, in theory, have reduced the value of his holdings by some $14.4 million?

 

That's right, Black Monday was the last day of measurement for this year's chunk of RSUs. Pretty crazy coincidence, if indeed it is.

 

The article says Apple hasn't commented; they haven't publicly. But they have emailed Trello (not the author of the Fortune article, but the analyst the author is piggybacking on) and claimed that Monday's stock performance didn't (and couldn't) have impacted Tim's vesting.