AAPL - Apple Inc.

[Viking]

Apple is executing exceptionally well. They have the number one brand in the world. They are the clear leaders in every category they compete in. Their sales and profits are growing (in a lumpy way) and they have a long runway ahead; mobile is in the first or second inning. Watch and TV are brand new categories with decades of development ahead. Apple's moat is GROWING over the competitions in every category they compete in. They have been growing R&D spending at +30% growth rate for years. They are master capital allicators (buying back 15% of the company in the past 10 quarters) and they still growing their net cash position. They are absolutely nailing everything.

 

And they are a very secretive organization (bordering on paranoid). Nobody has a clue what they are planning to do in the next 3-5 years.

 

So what do we do? We assume it is all going to disappear. Poof! Of course Apple is going to fail. We have wonderful theories to explain their impending failure; anyone heard of disruption theory? A professor thought this one up and they are really smart. Or it's basic math that explains why they Apple is guaranteed to fail; anyone heard of the law of large numbers? it is a LAW you know! Or it's cause Steve Jobs is no longer there...really... and he was responsible for everything that the company did good. Steve is dead so Apple is doomed.

 

There is one more reason that I expect Apple will fail: aliens will arrive on the planet shortly and current technologies will become irrelevant. Really, it could happen!!! And because it could happen Apple shares should trade at an 11 PE.

 

All of the hand wringing regarding Apple is comical.

 

Looking at the facts and what Apple has done the past 10 years and then looking forward 10 years Apple is crazy cheap and 'Mr Market' has clearly lost his mind. Personally I love it. The company can buy back even more shares. The earnings will continue to load like a spring and eventually the shares will take off just like they did 2 years ago. Growing earnings, reduced share count, higher PE multiple = very large increase in share price. Patience is the key.

[innerscorecard]

I think it's not so much that the market is crazy, but that there is an easy difference of opinion - the market thinks mobile is in one of the last innings (saturation, "low hanging fruit" gone), rather than one of the first innings.

[giofranchi]

Thanks all for the discussion.  I'm about 50% persuaded that my commoditisation concerns apply to Android only and will, if I find the time, do more work here.

 

Unlikely to sell my MSFT to fund it though ;)

 

Thank you, Pete! It is always a pleasure to have a discussion with you.

 

By now you must know that I like to keep it simple: I look for a complicated investment idea only when a simple one doesn’t convince me… ;)

 

With Apple I am satisfied answering these two questions:

a) Is the smartphone the most important object we will carry with ourselves for the foreseeable future? YES

b) Does the iPhone provide its customers with the best quality for the price they pay? YES

 

That’s basically it for Apple as far as I am concerned: those two answers tell me the iPhone is and will remain the best business on earth.

 

If and when those two answers change, I’ll change my mind.

 

Cheers,

 

Gio

 

[petec]

And per-share value can do well if they keep buying back lots of stock at those low multiples.

 

 

Now here I do disagree.  I'd FAR rather have the cash as a dividend.  But that's because I don't have the same confidence that the company's intrinsic value is sustainable.

 

You could sell a percentage of your shares equal to the buybacks every year. You'd probably get a better tax treatment. I know it's not exactly the same, but in theory it works. But they also have a decent dividend that has gone up pretty quickly.

 

I don't know if you've read this thread (probably not worth going back to the start..), but a few months ago I wrote some thoughts about what I see as the barriers to entry for competitors to Apple. You can take that how you want, but I believe it's at the center of deciding whether Apple's position is sustainable or not.

 

Thanks - at come point I'll probably try to skim through the thread.  God knows when!

 

I know I can in theory sell shares but I find the psychology of deciding whether to reinvest my dividends much easier than the psychology of deciding whether to sell some shares, so it's worlds apart for me.

[giofranchi]

Track Your Heart with Your Phone

 

http://www.technologyreview.com/news/543306/track-your-heart-with-your-phone/

 

Cheers,

 

Gio

[Viking]

Apple has two basic ways it can grow revenue and profits.

 

1.) Apple can sell more units. This is how most people look at Apple and question its growth potential - how can it possibly sell more smartphones... think units.

 

2.) Or Apple can sell the same number of units for a higher price. This can be accomplished two ways.

 

2a.) charge more for the same product. In Canada, three years ago iPhone's cost the same as in the US as our currency was at parity. Today in Canada an iPhone costs 35% more than 3 years ago as our currency has depreciated versus the US$. My guess is Apple will sell more iPhone's in Canada this year than they ever have. When you have the number one brand in the world you have pricing power. A second example of pricing power is what Apple did last year when they changed the storage options for iPhones; most people decided to buy a higher storage tier iPhone and this increased average iPhone selling price. Because it is such a strong brand Apple is actually GROWING average selling price per unit of iPhone. And they are not done. Apple will find creative ways in the future to do this again. And people will be happy to pay MORE. Mr. Market does not understand this.

 

2b.) launch a new form factor. A recent example of this is the iPhone plus. Last year Apple launched a slightly larger form factor and charged more. The 'experts' were saying Apple should go down market and launch a cheap iPhone. What did Apple do? It went upmarket and launched a premium device. This helped average selling price for iPhone go up. Another example of this is the iPad Pro launch this week. This is a premium device. Apple may not sell more total iPad units; however, we can expect average selling price per unit to start to go up meaningfully. The interesting thing is the iPad Pro is not targeted at the tablet market; it is clearly targeted at the pc market. I wonder if Apple is not telling us that ARM powered devices are the future of the pc market; if true Apple will have lots of profitable growth ahead in pc's in the coming years (ARM chips are much, much cheaper than Intel chips; in the next few years ARM chips will likely blow past Intel chips in terms of performance).

 

In summary, I am not concerned about Apple being able to grow revenue and profit moving forward. They can raise prices on existing products. They can do line extensions and charge a higher price. They can enter new categories (hardware and software). They can launch entirely new platforms (watch, TV).

 

The problem for investors is Apple is so secretive we do not have a clear road map ahead. This great secrecy is actually one of their great competitive advantages; it is one of the ingredients that makes this company great.

 

Either we trust 'the Apple way' and invest or we do not and stay away.

[Palantir]

Looking at trailing metrics, AAPL looks as cheap as it did at $70. Want to see a more aggressive div policy.

[merkhet]

Looking at trailing metrics, AAPL looks as cheap as it did at $70. Want to see a more aggressive div policy.

 

Why dividends over buybacks?

[innerscorecard]

Viking, I think some may be discouraged on your 2nd point by increasingly promotional pricing on Apple Watch. First the $50 off bundle in select Apple Stores, then $100 Target gift cards on Black Friday. That implies to some that Apple's pricing power is limited to iPhone.

 

Of course, to me, Apple's far worse execution on iPad, Apple Watch, and anything else compared to iPhone and Mac only adds fuel to the fire of this point of view. Though not bad (I personally love my iPad and Apple Watch), it's clear that Apple for some reason doesn't execute as well on non-iPhone (and also non-Mac, imo) product lines.

[Liberty]

I think the correct way to look at the Watch is to remember that it is first generation. Compare it to the first iPhone or the first iPad with regards to where it is compared to where it could be. I think they're doing quite well, it's not their fault that people have unrealistic expectations ("oh, why don't they put a GPS and LTE radio and have the battery last a week and make it thinner and cost half the price?".

[johnny]

Viking, I think some may be discouraged on your 2nd point by increasingly promotional pricing on Apple Watch. First the $50 off bundle in select Apple Stores, then $100 Target gift cards on Black Friday. That implies to some that Apple's pricing power is limited to iPhone.

 

I don't think it is correct to say that the Watch is a pricing power problem.

 

The Watch is still a completely new category, and Apple is itself not exactly sure what use case is going to get traction with the mass market. Remember: the iPhone was originally presented as a phone that played your mp3 collection and could browse the web. Neither of those three things is really what drives iPhone sales today.

 

I think they're doing quite well, it's not their fault that people have unrealistic expectations.

 

This is a little bit generous. It is Apple’s responsibility to shape expectations so that they can be met (or exceeded). We can strawman the Watch dissenters by making fun of those that are oblivious to the basic physics/engineering limitations of the Watch, but the reality is that the Watch is still not a mass market product, and it seems increasingly likely that they misjudged the appropriate volumes for the first revision. That isn't anybody else's fault.

 

 

I think that the Watch, the iPad, and to a great extent the iPad Pro do demonstrate -some- weaknesses in how Apple views its role in proving products. I think they are becoming a little to comfortable just making some nice hardware and clean APIs and assuming that a hoard of developers will figure out exactly how to utilize all those available pixels and clock-cycles to do something great.

 

This worked perfectly fine for the iPhone, because it took a few years for the absolute brutal equilibrium of App Store economics to become apparent to everybody. By the time they were, there were already 100,000 people with a lot of objective C expertise that simply continued to hammer away, and just enough lottery-winners to keep people emotionally invested in the platform.

 

This has worked less well with the iPad. In a world where the primary iPad problem is that developers seem insufficiently incentivized to actually take advantage of the additional speed and pixels of the iPad Air 2 (over the iPhone), it is an interesting choice to simply release another iPad with yet more speed and yet more pixels.

 

Even Apple's own first-party apps on the iPad Pro betray a complete obliviousness to how to use the additional space. Certain of the first-party apps (the iWork suite) didn't even support the iPad Pro resolution when they shipped them (though they've since been updated).

 

I think there is an emerging theme here...Apple needs to get far more serious about the software side of things. Instead of just making sure they have some "good enough" first party solution to common problems, they need to be funneling way more resources into figuring out how these things they've made can actually be used. This is why I think the IBM partnership was such a great idea. Putting IBM in a position where they can have some small teams think very deeply about how to optimally use 10 or 13 inch tablets to improve a pilot/salesman/surveyor's life is, I think, attacking a problem that has so far been ignored.

[innerscorecard]

I think just as dumb as it is to start from the perspective that Apple's doom is just around the corner as a first principle, it's also equally wrong to start from the opposite first principle that everything Apple does is right due to a secret unforeseen reason. Something things have been simple and obvious mistakes. For one small example, I don't think anyone can argue that omitting Calculator, Stocks and Weather from the iPad has any real rational reason. (And I mean Apple does make long-term mistakes with strategic implications, not just short-term quality control issues.)

 

The saving grace is that few of these mistakes, to my eye, ever occur on the core iPhone platform, in either hardware or software.

[innerscorecard]

I also think it's too early to tell, but it does not seem as if retail has been executing a lot above expectations since Ahrendts joined. I thought the try-on spiel Apple Store employees gave for the initial Apple Watch rollout were cringeworthy, for example.

 

Of course, none of this is decisive on my investment thesis for Apple at current prices. Revenue growth can slow quite a bit and I will be completely unphased.

[Viking]

Palantir, I think at its low a couple of years back Apple actually traded at a 10PE to trailing 12 month earnings. When it dropped to $102 in August it got under 12 (trailing 12 month earnings).

 

What has Apple done the past 30 months?

 

Products

1.) launched 6 - larger screen phone

2.) launched 6 plus - premium phone (to regular iPhone)

3.) launched iPad Air

4.) launched iPad Pro

5.) launched Mac Pro

 

New Platforms & Products Launched

1.) Watch

2.) TV

 

Software

Fixed Maps

Launched Apple Music

iOS catching and passing Andoid

OSX progressing nicely

Launched CarPlay; health kit; home kit

Launched Apple Pay

 

Chip Development

A7, A8 & A9, A9X: development putting them years ahead of the competition

 

How is the competition doing?

Samsung is much, much weaker as a company than they were 30 months ago. Their brand is losing its luster; it is no longer considered cool or aspirational. Their share of the premium smartphone segment is shrinking.

Other smartphone competitors? Other than the Chinese companies all competitors are weaker today than they were 30 months ago.

 

The above is a quick list of just some of the things that Apple has DONE the past 30 months (I am sure I have missed lots of other important things). It is simply amazing what they have accomplished. Their moat is wider than it has ever been. The good news is they are just getting started. All this stuff is still in its infancy. Their best days (years, decades) are still in front of them.

 

Bottom line, Apple is a much stronger company today then it was 30 months ago. I would be very surprised to see it trade at 10 times trailing 12 month earnings (but anything is possible).

[Liberty]

I think just as dumb as it is to start from the perspective that Apple's doom is just around the corner as a first principle, it's also equally wrong to start from the opposite first principle that everything Apple does is right due to a secret unforeseen reason. Something things have been simple and obvious mistakes. For one small example, I don't think anyone can argue that omitting Calculator, Stocks and Weather from the iPad has any real rational reason. (And I mean Apple does make long-term mistakes with strategic implications, not just short-term quality control issues.)

 

The saving grace is that few of these mistakes, to my eye, ever occur on the core iPhone platform, in either hardware or software.

 

I'm certainly not saying that everything Apple does is perfect. Far from it. But it's still better than the competition, and they keep making their stuff better over time with a cohesive strategy. Judging the Watch after less than a year is short-sighted. They got a lot right with it, and they'll get more right next version, and even more the next one... That's how they built all their successes.

 

And Apple can't do everything. Their teams are kept relatively small and they constantly shift resources around to work on big new projects. They probably didn't create iPad versions of the Weather or Calculator app because there's an app store with hundreds and hundreds of those. The engineering time was better spent elsewhere (apps are nice, but they get much more leverage from improving their platforms and creating new ones (iOS, OS X, watchOS, tvOS, Carplay, etc). IMO that's rational.

[intothebreach]

Palantir, I think at its low a couple of years back Apple actually traded at a 10PE to trailing 12 month earnings. When it dropped to $102 in August it got under 12 (trailing 12 month earnings).

 

...

 

Bottom line, Apple is a much stronger company today then it was 30 months ago. I would be very surprised to see it trade at 10 times trailing 12 month earnings (but anything is possible).

 

I have not done the exercise, but I wonder what this comparison looks like done on an ex-cash basis.

[giofranchi]

Palantir, I think at its low a couple of years back Apple actually traded at a 10PE to trailing 12 month earnings. When it dropped to $102 in August it got under 12 (trailing 12 month earnings).

 

What has Apple done the past 30 months?

 

Products

1.) launched 6 - larger screen phone

2.) launched 6 plus - premium phone (to regular iPhone)

3.) launched iPad Air

4.) launched iPad Pro

5.) launched Mac Pro

 

New Platforms & Products Launched

1.) Watch

2.) TV

 

Software

Fixed Maps

Launched Apple Music

iOS catching and passing Andoid

OSX progressing nicely

Launched CarPlay; health kit; home kit

Launched Apple Pay

 

Chip Development

A7, A8 & A9, A9X: development putting them years ahead of the competition

 

How is the competition doing?

Samsung is much, much weaker as a company than they were 30 months ago. Their brand is losing its luster; it is no longer considered cool or aspirational. Their share of the premium smartphone segment is shrinking.

Other smartphone competitors? Other than the Chinese companies all competitors are weaker today than they were 30 months ago.

 

The above is a quick list of just some of the things that Apple has DONE the past 30 months (I am sure I have missed lots of other important things). It is simply amazing what they have accomplished. Their moat is wider than it has ever been. The good news is they are just getting started. All this stuff is still in its infancy. Their best days (years, decades) are still in front of them.

 

Bottom line, Apple is a much stronger company today then it was 30 months ago. I would be very surprised to see it trade at 10 times trailing 12 month earnings (but anything is possible).

 

+1

 

I think this is a very good post. Emphasis mine.

 

Cheers,

 

Gio

[Palantir]

Palantir, I think at its low a couple of years back Apple actually traded at a 10PE to trailing 12 month earnings. When it dropped to $102 in August it got under 12 (trailing 12 month earnings).

 

...

 

Bottom line, Apple is a much stronger company today then it was 30 months ago. I would be very surprised to see it trade at 10 times trailing 12 month earnings (but anything is possible).

 

I have not done the exercise, but I wonder what this comparison looks like done on an ex-cash basis.

 

Not adjusting anything for cash held offshore (to simplify as cash was offshore back then as well), but about $205M cash, backed out of a $650M Capitalization - about $445M, if you do back out offshore cash taxes, it comes out to be 650-164= $486M. Compared to Net income of $54M, and FCF of $70M(!).

 

So yeah...may be approaching no-brainer status again.

[fareastwarriors]

Apple’s Opportunity: The Payment System’s Profits

 

Apple’s plans for a new peer-to-peer payment system could send waves through the payment-processing and card industries.

 

http://www.wsj.com/articles/apples-opportunity-the-payment-systems-profits-1447360493

[Viking]

A near term watch out for Apple is the impending EU ruling regarding the validity of tax arrangements many US multinationals have with various Euro governments. Will back taxes be assessed? What will be the tax rate moving forward? Given how much Of Apple's earnings flow through Ireland this will be a material piece of news.

 

A medium term watch out for Apple is the amount of debt they are taking on. Earnings generated in the US pay dividends and are used to repurchase shares. Earnings from outside of US must be repatriated and additional taxes paid before they can be used to pay ydividends or repurchase shares and Apple so far has left this cash offshore. For the past 30 months, since it ramped up its share repurchase activity, Apple has had to borrow significant amounts. Given they had no debt, taking on debt was not an issue. Looking out 2 or 3 years Apple will need to issue lots more debt to continue paying dividend and repurchasing large amount of shares. Yes, they will continue to have a massive amount of net cash (currently $150 billion). However, looking out a couple of years as the debt total grows to over $100 billion I can see this becoming a concern. One potential solution is tax reform in the US (looking out a few years).

 

Taxation would be my number one watch out for Apple.

 

 

[jawn619]

Apple’s Opportunity: The Payment System’s Profits

 

Apple’s plans for a new peer-to-peer payment system could send waves through the payment-processing and card industries.

 

http://www.wsj.com/articles/apples-opportunity-the-payment-systems-profits-1447360493

 

Peer to peer payments is not particularly profitable. Paypal acquired Venmo only as a way to acquire users. Luckily, Paypal didn't overpay for it. Apple's new payment service might bring a lot of users but profits and and more importantly material profits will probably not follow.

[jawn619]

A near term watch out for Apple is the impending EU ruling regarding the validity of tax arrangements many US multinationals have with various Euro governments. Will back taxes be assessed? What will be the tax rate moving forward? Given how much Of Apple's earnings flow through Ireland this will be a material piece of news.

 

A medium term watch out for Apple is the amount of debt they are taking on. Earnings generated in the US pay dividends and are used to repurchase shares. Earnings from outside of US must be repatriated and additional taxes paid before they can be used to pay ydividends or repurchase shares and Apple so far has left this cash offshore. For the past 30 months, since it ramped up its share repurchase activity, Apple has had to borrow significant amounts. Given they had no debt, taking on debt was not an issue. Looking out 2 or 3 years Apple will need to issue lots more debt to continue paying dividend and repurchasing large amount of shares. Yes, they will continue to have a massive amount of net cash (currently $150 billion). However, looking out a couple of years as the debt total grows to over $100 billion I can see this becoming a concern. One potential solution is tax reform in the US (looking out a few years).

 

Taxation would be my number one watch out for Apple.

 

I would love to see Apple take on more debt. Since Apple can issue bonds at near treasury like levels, it can lower a portion of their cost of capital to below 3%.

[TheAiGuy]

Apple’s Opportunity: The Payment System’s Profits

 

Apple’s plans for a new peer-to-peer payment system could send waves through the payment-processing and card industries.

 

http://www.wsj.com/articles/apples-opportunity-the-payment-systems-profits-1447360493

 

Peer to peer payments is not particularly profitable. Paypal acquired Venmo only as a way to acquire users. Luckily, Paypal didn't overpay for it. Apple's new payment service might bring a lot of users but profits and and more importantly material profits will probably not follow.

 

Well, not directly from p2p but it's a good strategic move in terms of 1) strengthening iOS, 2) strengthening Apple Pay, & 3) preventing other vectors of competition.

[giofranchi]

Apple's iTunes is alienating its most music-obsessed users

 

http://www.wired.com/2015/11/itunes-alternatives/?mbid=social_twitter

 

Cheers,

 

Gio

[Liberty]

This year's estimate of smartphone industry profit share. Apple 94%, Samsung 11%, everybody else negative.

 

http://9to5mac.com/2015/11/17/aapl/