AAPL - Apple Inc.

[Viking]

I was surprised to see Tim Cook on Mad Money... Not sure what to think of it (other than Steve Jobs likely never would have).

 

I don't think Apple's issue is commoditization (yet). Rather, I think their issue is saturation in the premium segment. The business appears to be shifting from being driven by new users to being driven by people upgrading. I think the key will be how long people chose to hold on to their phones... If it increases a month or two (on average) then I think it will be difficult for Apple to show growth. I am not concerned that Apple will continue to own the premium segment; I am not confident that they will be able to show much growth in fiscal 2017 (and fiscal 2016 is not looking great). If Apple sales and profits have peaked for the next two fiscal is the company crazy cheap today trading at $94?

[innerscorecard]

Calling Apple a tech commodity company is sort of a joke, right?  Pricing power does not occur in a commodity, but the higher ASP on an apple vs. samsung device is staggering.  You may argue that apple is becoming a tech commodity business, but I have yet to see that in the pricing.  Apple TV vs chrome cast or kindle vs. iPad or whatever microsoft is selling these days.  If they were a commodity product, Apple's ASP would be declining fairly rapidly.  I just don't see that.  Maybe I am looking in the rearview mirror and that may be the case in 2016, given 2015's explosive numbers, but the current brand loyalty does not evidence a commodity company.

 

Do you think Apple will be able to increase prices with inflation? Look at MacBook prices today compared to 10 years ago.

[TheAiGuy]

I was surprised to see Tim Cook on Mad Money... Not sure what to think of it (other than Steve Jobs likely never would have).

 

I don't think Apple's issue is commoditization (yet). Rather, I think their issue is saturation in the premium segment. The business appears to be shifting from being driven by new users to being driven by people upgrading. I think the key will be how long people chose to hold on to their phones... If it increases a month or two (on average) then I think it will be difficult for Apple to show growth. I am not concerned that Apple will continue to own the premium segment; I am not confident that they will be able to show much growth in fiscal 2017 (and fiscal 2016 is not looking great). If Apple sales and profits have peaked for the next two fiscal is the company crazy cheap today trading at $94?

 

Well, no, it's not crazy cheap here. It's still cheap, but if I were to consider a couple of different scenarios, I would say that with flat prospective growth the company is worth ~$100-105ish, and with slow growth $110-120ish.

 

[Graham Osborn]

Calling Apple a tech commodity company is sort of a joke, right?  Pricing power does not occur in a commodity, but the higher ASP on an apple vs. samsung device is staggering.  You may argue that apple is becoming a tech commodity business, but I have yet to see that in the pricing.  Apple TV vs chrome cast or kindle vs. iPad or whatever microsoft is selling these days.  If they were a commodity product, Apple's ASP would be declining fairly rapidly.  I just don't see that.  Maybe I am looking in the rearview mirror and that may be the case in 2016, given 2015's explosive numbers, but the current brand loyalty does not evidence a commodity company.

 

It's risky to dissociate AAPL's pricing power from underlying economic activity.  We are near full employment and consumer sentiment is still pretty good.  It's like the auto industry.  Commodity/ commoditizing industries will look great during a boom and crappy during the subsequent bust.  That IMO is why AAPL is being afforded such a low multiple - anticipation of crumbling moat and reduced pricing power as we enter a recession and consumers realize they can get a product that works almost as well for a fraction of the cost.

[Liberty]

you think Apple will be able to increase prices with inflation? Look at MacBook prices today compared to 10 years ago.

 

Don't forget to look at how much deflation the overall laptop segment saw during the period.

 

Margins are a better indicator since component costs are going down too.

[Liberty]

Whatever they were before, they reinvented themselves as a mobile hardware company.  And sooner or later, hardware gets commoditized.

 

What makes things a bit more complicated than that is that Apple is also a software company. It's just that they monetize through hardware. This is smart since consumers have never shown much inclination to pay for software (unlike the enterprise). Microsoft did the same thing on the consumer side with Windows; they mostly monetized through hardware. Most people never bought windows directly, they just paid for a license when they upgraded their computers.

 

If you don't believe me that Software is a large part of Apple's value, just imagine what margins would do if the iPhone ran Android or if the Mac ran Windows.

 

That software (iOS, OSX, tvOS, watcOS, etc) and its ecosystem (App store, iTunes, iMessage, iCloud, Apple Pay, etc) isn't commoditized, and since it's exclusive to the hardware, it helps differentiate it too.

[ccplz]

I think it's easy to overlook the obvious on AAPL.  Whatever they were before, they reinvented themselves as a mobile hardware company.  And sooner or later, hardware gets commoditized.  If you wanted to dominate the PC, you wanted to be Microsoft or Oracle, not IBM or Xerox.  If you wanted to dominate the Internet, you wanted to be Google or Facebook, not Apple or Samsung.  Characteristically, commodity producers tend to have the lowest multiples right before their largest price declines.  Similarly, this is why software and cloud companies command such high multiples (way too high in some cases).  The tricky thing in tech is commodity producers generally only get one cycle per commodity - whereas a conservatively-financed oil company might enjoy many cycles over a span of decades.

 

Apple is not a commodity producer, and the iPhone is not a commodity.

[Guest roark33]

Calling Apple a tech commodity company is sort of a joke, right?  Pricing power does not occur in a commodity, but the higher ASP on an apple vs. samsung device is staggering.  You may argue that apple is becoming a tech commodity business, but I have yet to see that in the pricing.  Apple TV vs chrome cast or kindle vs. iPad or whatever microsoft is selling these days.  If they were a commodity product, Apple's ASP would be declining fairly rapidly.  I just don't see that.  Maybe I am looking in the rearview mirror and that may be the case in 2016, given 2015's explosive numbers, but the current brand loyalty does not evidence a commodity company.

 

Do you think Apple will be able to increase prices with inflation? Look at MacBook prices today compared to 10 years ago.

 

 

I think deflation of its component parts will occur faster than its overall price of its end-user products.  Just looking at the sticker price ignores how much deflation has occurred in the parts that make up the MacBook. 

[johnny]

Do you think Apple will be able to increase prices with inflation? Look at MacBook prices today compared to 10 years ago.

 

Can't really do product-specific comparisons, but the overall Mac ASP has decreased at only around 1% per year over the past decade.

[Sunrider]

Hmm - some once calculated that the typical apple user pays the company roughly a dollar a day per device they own. It'll be lower for the watch now but higher for those who also subscribe to music.

 

Anyway - with three Apple devices I'm up to about $3 a day ... And actually happy with the experience (thought I don't like to think of this daily amount).

 

[DCG]

Apple is planning big changes to the Apple Music app: http://www.bloomberg.com/news/articles/2016-05-04/apple-to-revamp-streaming-music-service-after-mixed-reviews-departures

 

 

Probably the main thing that has frustrated me the most as an Apple user over the last couple years is the buggy and poorly designed Apple Apps. The iTunes app from 7 years ago was better than the current Apple music app. The Apple Mail and Calendar apps aren't very good, so I currently use Easily Do Mail and Tiny Calendar, which are much better.

 

 

I still use the Apple Podcast app, but it's buggy as hell. It often randomly loads lots of old episodes as unplayed (just this morning it randomly pulled in 42 random episodes form 2014). The button to view details of podcast episodes often just doesn't work.

 

 

I don't understand how Apple employees and developers can actually use some of these apps and be ok with them.

 

 

I think a problem is that they did a great job building great apps in the earlier days of the iPhone, and then felt the need to change them just for the sake of changing them (or to 'modernize' them). But they took things that weren't broken, and changed the functionality, and made them worse (and more confusing to use). These are the areas where I think not having Steve Jobs as the ultimate final filter is really missed.

[rkbabang]

Apple is planning big changes to the Apple Music app: http://www.bloomberg.com/news/articles/2016-05-04/apple-to-revamp-streaming-music-service-after-mixed-reviews-departures

 

 

Probably the main thing that has frustrated me the most as an Apple user over the last couple years is the buggy and poorly designed Apple Apps. The iTunes app from 7 years ago was better than the current Apple music app. The Apple Mail and Calendar apps aren't very good, so I currently use Easily Do Mail and Tiny Calendar, which are much better.

 

 

I still use the Apple Podcast app, but it's buggy as hell. It often randomly loads lots of old episodes as unplayed (just this morning it randomly pulled in 42 random episodes form 2014). The button to view details of podcast episodes often just doesn't work.

 

 

I don't understand how Apple employees and developers can actually use some of these apps and be ok with them.

 

 

I think a problem is that they did a great job building great apps in the earlier days of the iPhone, and then felt the need to change them just for the sake of changing them (or to 'modernize' them). But they took things that weren't broken, and changed the functionality, and made them worse (and more confusing to use). These are the areas where I think not having Steve Jobs as the ultimate final filter is really missed.

 

I generally agree with you. I use Overcast for podcasts and Bookmobile for audiobooks, Google Calendar, and Google Inbox for email. I do use Apple's Music app though.  It isn't that bad for music which is stored on the device.  I have about 14GB of music on my device and I've never purchased a song through Apple and I don't stream music through Apple.  I don't use iTunes at all for anything on my iPhone.

 

One thing to consider is that Apple does get a cut when you purchase 3rd party Apps from the app store, so Apple makes more money from me purchasing Bookmobile then it would have if I used an Apple app for audiobooks.

 

 

 

[fareastwarriors]

Apple and SAP to Develop iPhone, iPad Apps for Businesses

 

http://www.bloomberg.com/news/articles/2016-05-05/apple-and-sap-to-develop-iphone-ipad-apps-for-businesses

[Viking]

Best overview of current state of iPhone that I have read post earnings: http://www.aboveavalon.com/notes/2016/5/2/iphone-warning-signs

 

Apple is an iPhone company. Understanding iPhone sales is key to estimating future profits and ultimately what the stock is worth. There is a risk iPhone sales and margins continue to surprise to the downside in future quarters.

[fareastwarriors]

How Apple Sold a Million Drake Albums in Five Days

 

Feat is rare achievement in age of rapid streaming growth, declining sales of downloads and CDs

 

http://www.wsj.com/articles/how-apple-sold-a-million-drake-albums-in-five-days-1462577580

[Liberty]

I recently sold my AAPL shares. Had bought most during 2013, so the CAGR was decent (with dividends), but obviously it could've been better if my exit was better timed.

 

I try to continuously evaluate my positions and keep a flexible mind even for things that I've discussed in public (my second biggest position I've never mentioned, AAPL was a medium position), and over the past few weeks I realized that while I still don't think the main bear thesis of the past 4-5 years is correct (I still don't think they'll be commoditized, that Android will get "good enough", that they can't do it without Steve, etc), I started being convinced by a different thesis. Not 100% convinced, but enough that my estimate of future returns going forward moved from mid-to-high-teens to high-single-digits/low-double-digits, and I decided that I had a better use for that capital elsewhere at the present time. Maybe I'll come back if the price gets truly ridiculous again.

 

This other thesis is kind of the opposite of the previous bear thesis of commoditization/competition. It's more or less that they've been so successful that they've rapidly conquered most of the low hanging fruits and that going forward it'll be much harder to find large new carriers and geographies to add to move the needle. I still think they're likely to dominate the premium segment for the foreseeable future (don't see who can attack them, nobody else very differentiated since commodity OS), and that by tweaking their strategy they can keep growing for a while (iPhone SE will be interesting, maybe they drop the tic-toc "S" cycle so that every year is as exciting to people who don't understand the technology behind the curtain, a few more iterations and the Watch could be big, maybe VR/AR, cars, LTE still rolling out in China, India, etc). I'm also worried about the upgrade cycle, which is probably slowing down, and by China.

 

Anyway, maybe this is a mistake and I sold at the exact wrong time, but I'm comfortable with where I put that capital, so hopefully even if Apple does well, my other pick does even better :)

 

To be clear, I'm still optimistic about the prospects of the company, just not quite as much as I was...

[rishig]

I recently sold my AAPL shares. Had bought most during 2013, so the CAGR was decent (with dividends), but obviously it could've been better if my exit was better timed.

 

I try to continuously evaluate my positions and keep a flexible mind even for things that I've discussed in public (my second biggest position I've never mentioned, AAPL was a medium position), and over the past few weeks I realized that while I still don't think the main bear thesis of the past 4-5 years is correct (I still don't think they'll be commoditized, that Android will get "good enough", that they can't do it without Steve, etc), I started being convinced by a different thesis. Not 100% convinced, but enough that my estimate of future returns going forward moved from mid-to-high-teens to high-single-digits/low-double-digits, and I decided that I had a better use for that capital elsewhere at the present time. Maybe I'll come back if the price gets truly ridiculous again.

 

This other thesis is kind of the opposite of the previous bear thesis of commoditization/competition. It's more or less that they've been so successful that they've rapidly conquered most of the low hanging fruits and that going forward it'll be much harder to find large new carriers and geographies to add to move the needle. I still think they're likely to dominate the premium segment for the foreseeable future (don't see who can attack them, nobody else very differentiated since commodity OS), and that by tweaking their strategy they can keep growing for a while (iPhone SE will be interesting, maybe they drop the tic-toc "S" cycle so that every year is as exciting to people who don't understand the technology behind the curtain, a few more iterations and the Watch could be big, maybe VR/AR, cars, LTE still rolling out in China, India, etc). I'm also worried about the upgrade cycle, which is probably slowing down, and by China.

 

Anyway, maybe this is a mistake and I sold at the exact wrong time, but I'm comfortable with where I put that capital, so hopefully even if Apple does well, my other pick does even better :)

 

To be clear, I'm still optimistic about the prospects of the company, just not quite as much as I was...

 

Thanks for your thoughts Liberty. Curious, what's the other pick?

[dutchman]

Liberty!!  Where did you put that capital!?  Kindly explain :)

[fareastwarriors]

Apple Shortens App Review Times in Push to Boost Service Sales

 

http://www.bloomberg.com/news/articles/2016-05-12/apple-shortens-app-review-times-in-push-to-boost-service-sales

[TheAiGuy]

I recently sold my AAPL shares. Had bought most during 2013, so the CAGR was decent (with dividends), but obviously it could've been better if my exit was better timed.

 

I try to continuously evaluate my positions and keep a flexible mind even for things that I've discussed in public (my second biggest position I've never mentioned, AAPL was a medium position), and over the past few weeks I realized that while I still don't think the main bear thesis of the past 4-5 years is correct (I still don't think they'll be commoditized, that Android will get "good enough", that they can't do it without Steve, etc), I started being convinced by a different thesis. Not 100% convinced, but enough that my estimate of future returns going forward moved from mid-to-high-teens to high-single-digits/low-double-digits, and I decided that I had a better use for that capital elsewhere at the present time. Maybe I'll come back if the price gets truly ridiculous again.

 

This other thesis is kind of the opposite of the previous bear thesis of commoditization/competition. It's more or less that they've been so successful that they've rapidly conquered most of the low hanging fruits and that going forward it'll be much harder to find large new carriers and geographies to add to move the needle. I still think they're likely to dominate the premium segment for the foreseeable future (don't see who can attack them, nobody else very differentiated since commodity OS), and that by tweaking their strategy they can keep growing for a while (iPhone SE will be interesting, maybe they drop the tic-toc "S" cycle so that every year is as exciting to people who don't understand the technology behind the curtain, a few more iterations and the Watch could be big, maybe VR/AR, cars, LTE still rolling out in China, India, etc). I'm also worried about the upgrade cycle, which is probably slowing down, and by China.

 

Anyway, maybe this is a mistake and I sold at the exact wrong time, but I'm comfortable with where I put that capital, so hopefully even if Apple does well, my other pick does even better :)

 

To be clear, I'm still optimistic about the prospects of the company, just not quite as much as I was...

 

100% agree. I sold off a third of my position yesterday -- it was, and still is, a big position for me -- but it just doesn't look as attractive. I thought we'd see a gradual slow down of the China growth rate (kind of like what happened in the US) and not the abrupt stop that we saw. It could just be cyclical but I find the argument that Apple's growth was driven by distribution deals is compelling, and that materially changes my estimate for China's growth, and consequently the company as a whole. (In a related point, I do think there "moat" is stronger than people think because of this distribution network)

 

It sucks because I had bought on share price weakness and I lost money on the trades, but eh. I still think its a good investment and would expect, like Liberty, prospective returns to be in the high single / low double digits range, down from mid-to high teens.

 

[fareastwarriors]

Apple Shortens App Review Times in Push to Boost Service Sales

 

http://www.bloomberg.com/news/articles/2016-05-12/apple-shortens-app-review-times-in-push-to-boost-service-sales

 

http://www.wsj.com/articles/apple-steps-up-effort-to-reach-classrooms-1463082073

 

Apple Steps Up Effort to Reach Classrooms

 

At 114 schools nationwide, the tech company is providing devices free as part of its education push

[johnny]

I'm happy to see the sentiment in this thread turn a little south. I am in a pretty tough spot with this position. I'm far less concerned with the quarter in "income statement" terms and more concerned with what I've seen as the gradual erosion of Tim's credibility on a lot of issues. I'm now at the point where I think it may be more helpful to simply not listen to what he has to say, because he seems to have said misleading stuff frequently enough that he's simply unlucky or deceptive. That said, Steve Jobs was backdating options, so this isn't a business that requires Buffett-level straight-shooting to perform. Here's my current thinking, although I caution that I'm not 100% on the bull case. If anything I'm constructing this case because I'm seriously contemplating reducing the position.

 

I have a net valuation of the business of around 369B at $90 a share (adjusting for cash, netting out debt and repatriation tax)

 

On the last four quarters, this is a P/E of 7.3

On 2014's earnings, it is a P/E of 9.3

 

2014 was the 5s year, and Tim has explicitly said (multiple times) that the 6s upgrade rate is lower than the 6 year, but higher than the 5s. So that, plus the substantially larger installed base, plus the substantially higher ASPs, should make 2014 a very conservative base case for the next few quarters. Obviously we are going to expect the iPhone SE to lower those ASPs substantially. But the mix would probably have to go to something incredible like 80% SE to counterbalance the other factors.

 

And yet, I don't particularly trust Tim here. Or, maybe more fairly, I don't trust the metrics he uses to make these sort of statements. In some sense this 6s/5s upgrade comparison is such a cut and dry claim that it is hard for me to imagine how he could be making it without the underlying reality conforming, but I feel like we've been burnt a few times already in similar circumstances.

 

I'm still holding the position, but I'm spending a lot of time in Slack and Telegram bashing Tim for catharsis. Feels good, I suggest you all try.

 

Please push back on anything you guys think doesn't make sense.

[Liberty]

http://www.cnbc.com/2016/05/12/reuters-america-apple-invests-1-bln-in-chinese-ride-hailing-service-didi-chuxing.html

[johnny]

Alright, subtract another billion from what I said above

 

The investment gives Apple, which has hired dozens of automotive experts over the past year, a sizeable stake in Uber Technologies Inc's chief rival in China. Cook said in an interview that he sees opportunities for Apple and Didi Chuxing to collaborate in the future.

 

"We are making the investment for a number of strategic reasons, including a chance to learn more about certain segments of the China market," he said. "Of course, we believe it will deliver a strong return for our invested capital over time as well."

 

http://www.bloomberg.com/news/articles/2016-05-13/didi-chuxing-gets-1-billion-strategic-investment-from-apple

 

 

edit: just beaten!

[innerscorecard]

I’ve previously said that if Apple made a big dumb acquisition like Tesla, I would sell.

 

This isn’t an acquisition, and isn’t as big. But it makes me consider the situation:

 

Reasons to hold:

 

Large user base that has no reason or inclination to switch platforms from iOS/OS X;

Cheap by TTM earnings;

History of corporate decisions still generally good in retrospect, even in the post-SJ era.

 

Reasons to sell:

 

Revenues are declining.

Gross margin is declining.

The steady state of Apple’s earnings is unpredictable. The average age of a car on the road in the US is 10-11 years (IIRC), and cars both do get a lot better every year AND have HUGE wear and tear. What’s to say that the replacement cycle for phones couldn’t go to 5 years?

This investment could be the start of less discipline in spending. Increased R&D expenses could mean Apple has already lost discipline and focus.