AAPL - Apple Inc.

[Jurgis]

What were the approximate prices of latest BRK Apple buys?

[rb]

Seems like the stock is in free fall. Down another 5% today. What do you guys think.

 

Roughly looking at this, in the past 4 years they've made somewhere between 60 and 70 billion pre-tax. Market cap 880B, backing out 230 in cash you get 650B for the business. So that works out to between 9.3x and 10.8x pretax.

 

I understand that demand may be turn out to be a little soft. But really that soft? I also think that they may have have made a mistake with the product mix. The new line may be too expensive as they may have overshot their pricing power. Ok, but it shouldn't be such a big problem to realign the product portfolio back down. The numbers we're seeing here point to basically a cratering demand for iphone not a soft patch or a mistake.

 

What do you guys think?

[johnpane]

I thought this article about the supply-chain indicators of demand to be interesting. Interested if this seems credible to readers here.

 

https://appleinsider.com/articles/18/11/19/poor-news-curation-at-bloomberg-cnbc-reuters-creating-misleading-iphone-supply-chain-panic

 

[johnny]

I think backing out every penny on the balance sheet while ignoring the 12-figure debt is aggressive and unrealistic. That debt is priced based on the balance sheet cash. They're not going to be able to roll that debt at a 100bp treasury spread when they are levered infinity to zero.

 

Excess cash is probably more like $110B, so I have a net valuation of $730, or 12x

 

iPhone units have been basically flat for four years. Incredibly impressive hardware accomplishments in this period have had very little measurable impact on share. So I don't think it's reasonable to expect much unit growth from here, even ignoring the signaling value of their announcement re: unit disclosure).

 

They're edging up the ASPs on the phone, but this is more than offset by the clearly longer phone lifecycles. So if you think about the company in terms of (# of regular customers * lifetime customer value) we're probably a lot closer to flat over the past few years than either the bulls or bears are inclined to admit.

 

I love the Watch, and suspect it's going to become an increasingly important component of keeping the customer lifetime value stable as the phone lifespans continue to increase.

 

But nowhere do I see the obvious signs of growth. They're a great company that makes great products, but the stability of iPhone sales suggest that incredible hardware improvements are table stakes.

 

This is what makes today's situation way different from 2013, where everybody basically agreed that the category had huge growth in its immediate future, and the only argument the bull needed to win was that the iPhone wasn't going to completely disappear within half a decade. This was basically the only argument one needed back in 2016 as well, where by my math the cash-adjusted PE was 7 (though industry growth expectations by that time were much closer to today's).

 

Paying 12x for a business that requires backflips just to tread water is a harder sell.

[rb]

Johnny, re backing out cash, you don't think that a company can carry a debt load that's 1.5x pre-tax income?

[hardincap]

+1 johnny

 

backed up the truck on this in '13 and still have 25-30% of those shares. current situation is far less enticing than back then. i am holding on to the rest of my shares though because it is still attractive to me (growing services, platform monopoly, repurchases, brand, etc).

[johnny]

Johnny, re backing out cash, you don't think that a company can carry a debt load that's 1.5x pre-tax income?

 

Not at 100bp spreads on 30 year debt. Ultimately I don't wrestle too hard with the hypothetical because nothing about the company to this point suggests they'll ever adopt an aggressive capital structure. For all the noise they make about how much, in absolute terms, they've spent in capital return, the fact of the matter is that they're fundamentally very conservative about the thing. By my "excess cash" calculation, they've been within $10B of $100B over the past 3 years, so somebody more bearish than me could argue -I'm- being delusional by even backing out that $100B.

[DooDiligence]

Kind of unrelated to the present discussion, but you can now use Waze & Google maps with Apple CarPlay.

 

I've been using Waze this week & the interface is much better that Apple maps.

 

I'll give Google maps a spin next week.

 

Now if they'd just make Siri suck a little less?

[Cardboard]

Some anectodal evidence of some slowdown in sales:

 

Recently I had to shop for a new cell plan. Having a IPhone SE (6S with 5 size), I was looking to upgrade to the new ones. However, I quickly realized that providers were no longer offering enticing bargains on getting a new Apple.

 

After some search on the Internet and finding a video explaining the difference between my SE and a Iphone 8 for example, I decided to keep my SE and save the money being only 2 years old, works perfectly, fast, etc. I would have liked a larger screen but, the pocket size SE is also a big advantage.

 

This was a very different decision 2 years ago when my 4S was so slowed down by an IOS upgrade that it annoyed the heck out of me.

 

Discussing with some friends about my dilemma who are huge Apple fans and much more tech savvy than I am: have Apple watch, tablet, phones, I was shocked to hear that they were sticking with their IPhone 7...

 

So I wasn't that surprised about this slowdown in sales in recent weeks with a reason being: what is in it for me with these new phones vs mine to spend $1,000?

 

For disclosure, I don't have a position. However, while a great company, I would be thinking that a flattening of sales is on the horizon.

 

Cardboard

[TorontoRaptorsFan]

I've been picking up shares during this market correction.

 

Lots of cash sitting in their bank account. Tim Cook runs a smooth ship. I'm not worried if sales slow down. They're well positioned for the future.

 

[SHDL]

I think that at current prices this is probably a decent investment. 

 

The baseline scenario I have in mind is one where the company maintains its low-mid single digit growth rate and its current (enviable!) ROE for a long time, and in that case I can see a long term buyer today coming out with something like an 8-10% real IRR.  There are some pretty obvious downside risks (like trade wars and such) but I think there is also some chance that they surprise us on the upside at some point.  So all things considered, I see this as an investment with good expected returns and relatively high risk/uncertainty.

 

For the time being, I decided to take advantage of the the recent spike in volatility by writing some near-term OTM puts at pretty good prices.  (I see that Dynamic and boilermaker75 have done similarly.)

 

If the stock price drops dramatically from here I will happily back up the truck again, but my hunch is that that will not happen this time given the pace of their share buybacks and Berkshire’s involvement.

[Dynamic]

For the time being, I decided to take advantage of the the recent spike in volatility by writing some near-term OTM puts at pretty good prices.  (I see that Dynamic and boilermaker75 have done similarly.)

 

If the stock price drops dramatically from here I will happily back up the truck again, but my hunch is that that will not happen this time given the pace of their share buybacks and Berkshire’s involvement.

 

As you mentioned, having seen my post on 'What Are You Buying Today?' I've sold 7 Dec $170 strike puts on Tuesday for $2.38 per share which would re-establish a modest position in my concentrated portfolio at $167.62 or would earn an annualised 35% return over a short period = 1.42% in 17 days.

 

If it falls substantially further,, even a fairly low growth future would produce attractive returns and any recovery would be a huge bonus in terms of bottom line growth and probably multiple expansion. Low stock price would also be a boon to the Buyback program.

[aws]

I sold some puts too but that has looked silly this week.  A $185 Dec put at $5 on Monday is now $15.  A $170 Dec put is now almost $6.  The stock just slipped below the closing price on the first trading day of the year, and is getting awfully close to losing its top spot as world's most valuable company. I really figured we would see some stabilization with presumably massive repurchases, strong consumer, Santa Claus rally, etc., but if nothing else my timing was atrocious.  Between getting into this and increasing some oils bets around $63 I've had a very painful few weeks.

[Spekulatius]

I sold some puts too but that has looked silly this week.  A $185 Dec put at $5 on Monday is now $15.  A $170 Dec put is now almost $6.  The stock just slipped below the closing price on the first trading day of the year, and is getting awfully close to losing its top spot as world's most valuable company. I really figured we would see some stabilization with presumably massive repurchases, strong consumer, Santa Claus rally, etc., but if nothing else my timing was atrocious.  Between getting into this and increasing some oils bets around $63 I've had a very painful few weeks.

 

Well, the stock had a wonderful run up until just a few weeks ago. It might be a bit early, but it looks like Apple May have overestimated their pricing power and the plan to increase Selling prices is now back firing. This could mean that they have to lower sales prices for their phones which implies a earnings reset a lower levels. Again, this is reading tea leaves here a bit, but once an earnings reset occurs, the stock may not look that cheap any more. Buybacks don’t really help when the business is pressured and the Santa Claus rally has been cancelled apparently.

[rb]

Spekulatius, I agree that Apple may have overestimated their pricing power. But the fact is that the expensive phones haven't really gone out for sale. So why do you think that earnings need to be re-based lower than what's been going on for the past few years?

[johnny]

At ~$170, you’re paying 12x TTM earnings.

At ~$170 a year ago, you were paying closer to 16x TTM earnings.

 

As Apple themselves stated, the transition to the X was, from a design perspective, maybe the biggest device overhaul since the invention of the device, so if you consider normalized iPhone business performance to look more like the 7 generation than the X generation, then the price isn’t a bargain.

 

With all of that said, I still don’t see any evidence of iPhone users defecting, just becoming less excited/enthusiastic about each new device generation.

[Liberty]

https://www.wsj.com/articles/trump-expects-to-move-ahead-with-boost-on-china-tariffs-1543266545

 

https://www.cnbc.com/2018/11/26/trump-says-us-could-slap-10percent-tariffs-on-iphones-laptops-from-china.html

[Viking]

https://www.wsj.com/articles/trump-expects-to-move-ahead-with-boost-on-china-tariffs-1543266545

 

https://www.cnbc.com/2018/11/26/trump-says-us-could-slap-10percent-tariffs-on-iphones-laptops-from-china.html

 

Liberty, i thought the risk for Apple was China would relaiate against US sanctions by targeting US multinationals; or at a miminum stoke the flames of nationalism to the detriment of US based companies like Apple. This may yet play out.

 

What i did not expect was for Trump to launch a direct assault on multinationals with operations outside of the US and threaten tarrifs if they do not bring production back to the US.

 

I am such a simpleton :-)

[rb]

Looking at the situation I'm not as concerned about Trump tariffs when it comes to Apple. Sure tariffs may make Apple more expensive, but it'll also make Samsung and other manufacturers as well. The reason to consider Apple is that it has a brand. Brands have that power to transcend barriers like tariffs. Most people in the US couldn't give a flyer about Trump's opinion on what they should do.

 

The situation in China is more concerning because there the people do give a flyer about what the government wants them to do. See Japanese auto sales in China during the Senkaku Islands dispute (and those are just a pile of rocks). I guess a real test of the Apple brand will be how it performs in China during this mess.

[Spekulatius]

Looking at the situation I'm not as concerned about Trump tariffs when it comes to Apple. Sure tariffs may make Apple more expensive, but it'll also make Samsung and other manufacturers as well. The reason to consider Apple is that it has a brand. Brands have that power to transcend barriers like tariffs. Most people in the US couldn't give a flyer about Trump's opinion on what they should do.

 

The situation in China is more concerning because there the people do give a flyer about what the government wants them to do. See Japanese auto sales in China during the Senkaku Islands dispute (and those are just a pile of rocks). I guess a real test of the Apple brand will be how it performs in China during this mess.

 

Apple has already been fading (losing market share) in China for years. I think the high prices may haves something to do with it, as well as the annual refreshment cycle (Chinese companies refresh faster) and maybe the government gently favoring their national champions on China Mobile. Note that China is aggressively pushing 5G too and the newest Apple devices don’t have it. This means that the competitors have a 12 month head start.

[Liberty]

https://www.wsj.com/articles/trump-expects-to-move-ahead-with-boost-on-china-tariffs-1543266545

 

https://www.cnbc.com/2018/11/26/trump-says-us-could-slap-10percent-tariffs-on-iphones-laptops-from-china.html

 

Liberty, i thought the risk for Apple was China would relaiate against US sanctions by targeting US multinationals; or at a miminum stoke the flames of nationalism to the detriment of US based companies like Apple. This may yet play out.

 

What i did not expect was for Trump to launch a direct assault on multinationals with operations outside of the US and threaten tarrifs if they do not bring production back to the US.

 

I am such a simpleton :-)

 

"The difference between stupidity and genius is that genius has its limits."

[Liberty]

https://stratechery.com/2018/antitrust-the-app-store-and-apple/

[DCG]

As Apple themselves stated, the transition to the X was, from a design perspective, maybe the biggest device overhaul since the invention of the device, so if you consider normalized iPhone business performance to look more like the 7 generation than the X generation, then the price isn’t a bargain.

 

With all of that said, I still don’t see any evidence of iPhone users defecting, just becoming less excited/enthusiastic about each new device generation.

 

 

At $1000 each, there's not the desire for people to upgrade their phones for many years. The phone replacement cycle has gone (and is going) from 2 years, to more of the replacement cycle with computers, which can often be 6+ years. I don't really get why they raised prices to $1K other than just trying to make more money per phone in a time when people are buying less phones, but it's discouraging people from buying new phones even further. You can get good Android phones with equal-sized screens and equal processing speed etc. for a few hundred $.

[johnny]

You can't really compare phone and PC upgrade cycles until the performance gains in the underlying hardware begin looking similar. We're not close yet.

 

My intuition is that, to the extent we are seeing a pronounced change in average-upgrade-cycle, I think it's being driven a lot by the every-year upgraders migrating to two years, and less by every-three-years upgraders migrating to four. No data here at all, just a hunch.

[Viking]

As Apple themselves stated, the transition to the X was, from a design perspective, maybe the biggest device overhaul since the invention of the device, so if you consider normalized iPhone business performance to look more like the 7 generation than the X generation, then the price isn’t a bargain.

 

With all of that said, I still don’t see any evidence of iPhone users defecting, just becoming less excited/enthusiastic about each new device generation.

 

I agree that as the phones get much more expensive people will replace them less frequently. We currently get about 4 years of use out of each of our iPhones. My oldest daughter is the most motivated to upgrade; my youngest daughter would be next and me, my wife and son are all tied for last (not in a hurry to upgrade). My son and i both have the SE due to its smaller size.

 

When we first started buying iPhones i think they were $600 (Can and US $ were at parity). The new iPhone is $1,379. When you add taxes and extended warranty the price has increased more than 100%. Strong brand.

 

At $1000 each, there's not the desire for people to upgrade their phones for many years. The phone replacement cycle has gone (and is going) from 2 years, to more of the replacement cycle with computers, which can often be 6+ years. I don't really get why they raised prices to $1K other than just trying to make more money per phone in a time when people are buying less phones, but it's discouraging people from buying new phones even further. You can get good Android phones with equal-sized screens and equal processing speed etc. for a few hundred $.