AAPL - Apple Inc.

[clutch]

Seems like they just got way too greedy with pricing. I'd love to get a new iPhone, but paying $1000 (+ tax) for a phone seems pretty ridiculous. Would be one thing if you paid that much and the phone lasted a long time. You pay that much, and then just 2 years later, they make sure your phone runs super slowly and that the battery craps out.

 

There are 7.6 Billion people on Earth.  There are over 5 Billion with mobile phones, but only a little over half have smartphones. But an average of 66% of new subscribers are smartphones.

( https://www.businessinsider.com/world-population-mobile-devices-2017-9

  https://www.gsmaintelligence.com/research/?file=3df1b7d57b1e63a0cbc3d585feb82dc2&download )

 

The world is getting less poor. About 130,000 people per day escaping extreme poverty for example.

 

Is it not unreasonable to think that eventually there will be 7 Billion mobile users and 5-6 Billion smartphone users?  And for Apple to become a luxury brand and find enough buyers to sell 50M+ high priced phones per year fairly consistently?  Plus watches and other products?  The growth will slow, but it could become a study as she goes business that generates a lot of cash, buys back a lot of shares, and pays a nice dividend for the foreseeable future.  Also with an option on any new innovations/products that they do come up with in the future.  People are freaking because the growth rate has slowed down, but Apple isn't really priced for growth anyway (12 P/E).

 

But I don't think Apple's semi-luxury brand strategy aligns with this mass adoption hypothesis. For mass adoption to occur, the product must be commoditized, which is not what Apple wants.

[clutch]

Also, the fact that a lot more people in the world will have smartphones is not necessarily a tailwind for companies like Apple. Think about what happened in the auto and airline industries.

 

IMO, Apple has to again introduce a significant innovation and possibly create a new product category... Just relying on the growth of the existing market wouldn't be enough.

[rkbabang]

Seems like they just got way too greedy with pricing. I'd love to get a new iPhone, but paying $1000 (+ tax) for a phone seems pretty ridiculous. Would be one thing if you paid that much and the phone lasted a long time. You pay that much, and then just 2 years later, they make sure your phone runs super slowly and that the battery craps out.

 

There are 7.6 Billion people on Earth.  There are over 5 Billion with mobile phones, but only a little over half have smartphones. But an average of 66% of new subscribers are smartphones.

( https://www.businessinsider.com/world-population-mobile-devices-2017-9

  https://www.gsmaintelligence.com/research/?file=3df1b7d57b1e63a0cbc3d585feb82dc2&download )

 

The world is getting less poor. About 130,000 people per day escaping extreme poverty for example.

 

Is it not unreasonable to think that eventually there will be 7 Billion mobile users and 5-6 Billion smartphone users?  And for Apple to become a luxury brand and find enough buyers to sell 50M+ high priced phones per year fairly consistently?  Plus watches and other products?  The growth will slow, but it could become a study as she goes business that generates a lot of cash, buys back a lot of shares, and pays a nice dividend for the foreseeable future.  Also with an option on any new innovations/products that they do come up with in the future.  People are freaking because the growth rate has slowed down, but Apple isn't really priced for growth anyway (12 P/E).

 

But I don't think Apple's semi-luxury brand strategy aligns with this mass adoption hypothesis. For mass adoption to occur, the product must be commoditized, which is not what Apple wants.

 

I think you misunderstand my point.  Women's hand bags are a mass-adopted commodity product.  But a Hermes hand bag isn't.  If it was rare for a woman to use a hand bag there would be no market for Hermes handbags.  If 1 out of every 50 people is willing to pay more for a luxury smartphone then when you have a market size of 5-6 Billion smartphones there will be more people willing to buy the luxury smartphone than if you have a market size of 2 Billion smartphones.  And as the world gets richer, maybe that 1/50 could be 1/48 then 1/45...

 

You have smartphone adoption growth continuing for another few decades (even if it is smaller than it used to be), you have population growth continuing (even if it is slower than it used to be), you have people getting richer and escaping poverty on a global basis.  All of these trends are multi-decade trends and all of them are tailwinds.

 

[Viking]

Tim Cook, in Apple’s recent news release, stated that “we plan to become net-cash neutral over time.”

 

Does this mean Apple plans to spend much of the $130 billion net cash? On share buybacks? Have they ever discussed timing or how fast they will get to net-cash neutral?

 

They should earn around $55 billion this year. If they utilize $25 billion of their net cash they will have about $80 billion for buybacks. This would allow them to retire 10% of shares outstanding. Do that for a couple of years in a row and we will see meaningful share reductions.

 

Apple has been bringing their share count down meaningfully for years.

 

“Looking ahead our profitability and cash flow generation are strong, and we expect to exit the quarter with approximately $130 billion in net cash. As we have stated before, we plan to become net-cash neutral over time.”

 

Here is a real world example. My daughter’s high school graduation present was a new phone. She picked iPhone 8. She would have picked the XR, but the size was too big (if it was offered in the smaller iPhone 8 size she would have picked it). When she did her research she decided the XS was not enough of an upgrade to justify the mich higher price. We paid CAN $900 for the 8; the XS would have cost about $1,500 (taxes included; no Apple care). Another factor is she with buying the 8 will be able to upgrade her phone a year earlier than if we had purchased the XS.

 

iPhone unit sales at Apple are very lumpy. If you smooth unit sales over a couple of years you will see a solid upward move. Unit sales will slow, especially if world economic growth slows. However, Apple continues to grow base of total users. iPhones last 3-4 years (we get about 4 to 4.5 years of use out of our iPhones). People will need to upgrade their phones over time. My guess is Apple will launch another must have device (like they do every 3 or 4 years) and we will see record unit sales again = record profits. And with the share count down 20-30% this will = record EPS.

 

Having said the above, i also think this year could be a very soft years for iPhone sales, especially in China. That will not be good for total profits. And the narrative, just like 5 years ago, will be very negative and constant: Apple is finished. The same narrative as when Steve Jobs passed. Funny how history keeps repeating itselft with this company :-)

[rkbabang]

Also, the fact that a lot more people in the world will have smartphones is not necessarily a tailwind for companies like Apple. Think about what happened in the auto and airline industries.

 

IMO, Apple has to again introduce a significant innovation and possibly create a new product category... Just relying on the growth of the existing market wouldn't be enough.

 

"wouldn't be enough."  Enough for what?  To grow at the rates it has in the past?  You are correct.  To generate huge amounts of free cash flow every year, buy back a ton of stock, pay a nice dividend, and have an increasing stock price?  I think you are wrong.

 

[walkie518]

"Apple hardware priced so high that no one wants to buy it? It's 1983 all over again"

https://www.theregister.co.uk/2019/01/21/apple_lisa_at_36/

[clutch]

Also, the fact that a lot more people in the world will have smartphones is not necessarily a tailwind for companies like Apple. Think about what happened in the auto and airline industries.

 

IMO, Apple has to again introduce a significant innovation and possibly create a new product category... Just relying on the growth of the existing market wouldn't be enough.

 

"wouldn't be enough."  Enough for what?  To grow at the rates it has in the past?  You are correct.  To generate huge amounts of free cash flow every year, buy back a ton of stock, pay a nice dividend, and have an increasing stock price?  I think you are wrong.

 

What I'm saying is this:

 

Let F be the success of Apple. Let A be the overall market growth and let B be the strength of Apple (pricing power, brand value, ecosystem, ability to innovate, etc.)

 

F is significantly more dependent on B than A.

 

Do you really think that the success of Hermes is more dependent on the "growth of handbag ownership" or their marketing/brand execution? For sure the former is not the primary reason behind their success. Otherwise, how do you explain the fact that luxury watch companies such as Rolex or Patek are still able to increase their prices while the overall demand for watches is shrinking?

 

Another way to think about this: Let's say the smartphone market grows at 10% a year. Will Apple also grow at 10% a year simply because they participate in the market? Or will it be some cheap brands taking the bigger slice of the growth? Is Apple more dependent on market growth or are the cheap brands more dependent on it?

 

I'm pointing out that your hypothesis: the growth of overall market -> success for Apple, is false. But not refuting the point that Apple can be successful due to its intrinsic strength...

[johnny]

What I'm saying is this:

 

Let F be the success of Apple. Let A be the overall market growth and let B be the strength of Apple (pricing power, brand value, ecosystem, ability to innovate, etc.)

 

F is significantly more dependent on B than A.

 

oh now i get it

[Liberty]

Q4 results (their fiscal Q1):

 

https://www.apple.com/newsroom/2019/01/apple-reports-first-quarter-results/

[gfp]

And the updated Capital Return doc - slowed down repurchase activity and built net cash by +$7 Billion.

 

https://s22.q4cdn.com/396847794/files/doc_downloads/Return_of_Capital_and_Net_Cash_Position.pdf

 

Year end share count was 4,729,803,000

[vince]

And the updated Capital Return doc - slowed down repurchase activity and built net cash by +$7 Billion.

 

https://s22.q4cdn.com/396847794/files/doc_downloads/Return_of_Capital_and_Net_Cash_Position.pdf

 

Year end share count was 4,729,803,000

 

Cant believe how many times i see mgmt's aggressively buy in their stock at higher valuations (where the price is somewhat close to intrinsic value) and then slow down when the stock is obviously cheap.  Just off the top of my head Appl, Ads, and Aal are guilty this year.

[Spekulatius]

And the updated Capital Return doc - slowed down repurchase activity and built net cash by +$7 Billion.

 

https://s22.q4cdn.com/396847794/files/doc_downloads/Return_of_Capital_and_Net_Cash_Position.pdf

 

Year end share count was 4,729,803,000

 

 

Cant believe how many times i see mgmt's aggressively buy in their stock at higher valuations (where the price is somewhat close to intrinsic value) and then slow down when the stock is obviously cheap.  Just off the top of my head Appl, Ads, and Aal are guilty this year.

 

As are the master capital allocators at most major banks and specifically GS.

 

[John Hjorth]

Yes, vince & Spekulatius,

 

It's a bit odd, actually. Why build cash, when the company is swimming in it?

 

- - - o 0 o - - -

 

This one came out quite close.

 

- - - o 0 o - - -

 

A *POS*? [somebody here called AAPL that] - well, if it's a *POS*, then it is a *POS* generating USD 20 B in earnings in a quarter, while in peak hours and challenged! ...

[Dynamic]

Attached is what I call a rational decryption of the press release with regard to new guidance for the quarter just ended. I hope it appears selfexplanatory, if you refer to the numbers in the top of the press release.

 

Your attachment to that post was remarkably close, as you say, John.

 

I made some rough estimates yesterday anticipating a slight earnings beat on the revised expectations and I slightly underestimated the cash per share at the end of the quarter and slightly overestimated the buybacks, although I was expecting them to illogically reduce the repurchase rate even as prices fell (it was somewhat logical to reduce the buyback rate during October and the first part of November when prices were fairly high, however and increase it later, which they could bake into any automated buyback plan lodged with their broker).

 

Average daily volume is probably around 30 million shares, so their broker could probably snap up 3-5 million a day with minimal effect on market price, over more than 60 trading days a quarter, or 200-300 million shares per quarter. If they did the majority of repurchasing at the price available in the last 30 trading days of the quarter, it might be 100-150 million shares at around $170 per share on average, or $15-25 billion spent on repurchases.

 

At that level EPS would have been around $4.28, and they'd have been making good progress towards their long term target of be cash-debt neutral while benefiting existing shareholders (assuming the price paid is indeed below Intrinsic Value).

 

Likewise, an plan like that could probably have snapped up maybe 75-100 million shares in January to date, averaging perhaps $150 and 'returning' around $11-15 billion of capital during the month.

 

I think even if the price settles out at around $165 per share after these results, it's probably fairly rational to buyback at about that rate now.

 

I'm guessing they are tempted to assume that market pricing is 'correct' rather than estimate IV independently.

 

Presumably what they need if they do estimate IV is a policy that is simple enough to leave with a broker and let them run with so that they can buy even in the close period, and one that would increase the rate of buybacks when prices fall.

 

A simple first-order approach would be to buy back in proportion to the TTM earnings yield (with the limit at 25% of daily volume per Safe Harbor Rules).

 

Another simple method would be to set a few price ranges and target percentage of daily volume beside each and update the instruction annually according to the revised estimate of Intrinsic Value per Share, then you could aim to buy perhaps:

0.5% of daily volume when prices exceed $250 just to keep 'returning capital as promised',

1.0% of daily volume when prices are $200-$249.99,

2.0% at $180-199.99

4.0% at $160-179.99

8.0% at $140-159.99

16.0% at <$139.99

and they could also set a limit for the quarter if they want to restrict the total spend or the total shares retired during a certain period.

[johnny]

This is the second time they've responded to a collapse in the stock price by massively reducing their buyback spend (2016, same story). It's absolutely disgusting behavior that there's simply no excuse for, given the amount of resources they have at their disposal (not just cash, I mean the ability to have Warren Buffett pick up the phone any time you have a question about anything).

 

I suspect that there's some period/hurdle gaming here where management would prefer to have the share price linger low for a bit (pricing new RSU/options?) and then commit the capital to absolutely goosing the stock price by a few percentage points once it's already at 20x earnings. I don't think this is necessarily Tim Cook trying to get rich (my vague recollection of his personal RSU agreement was that it wasn't egregiously asymmetrical), but obviously management looks at buybacks as a way of managing the stock price and employee comp, and not as a way of optimizing the capital structure and increasing intrinsic value per share.

 

The buyback number is I think, by far, the most alarming element of the quarter.

[zen]

The buyback number is I think, by far, the most alarming element of the quarter.

 

100% agree. I'm a skeptical investor but mistakenly have always given Apple management a pass. It's my largest position which I am considering reducing after many years. Luca dodged the first analyst question asking about it. The only semi-plausible explanation I've seen is they couldn't buy in Dec because of the disclosure and Jan because of the earnings blackout period. But I'm not sure either of those explanations are accurate. End of the day Apple's buyback strategy is the same as every other moronic plan - buy when it's high and freeze up when it drops.

[Gregmal]

This is the second time they've responded to a collapse in the stock price by massively reducing their buyback spend (2016, same story). It's absolutely disgusting behavior that there's simply no excuse for, given the amount of resources they have at their disposal (not just cash, I mean the ability to have Warren Buffett pick up the phone any time you have a question about anything).

 

I suspect that there's some period/hurdle gaming here where management would prefer to have the share price linger low for a bit (pricing new RSU/options?) and then commit the capital to absolutely goosing the stock price by a few percentage points once it's already at 20x earnings. I don't think this is necessarily Tim Cook trying to get rich (my vague recollection of his personal RSU agreement was that it wasn't egregiously asymmetrical), but obviously management looks at buybacks as a way of managing the stock price and employee comp, and not as a way of optimizing the capital structure and increasing intrinsic value per share.

 

The buyback number is I think, by far, the most alarming element of the quarter.

 

And yet, at least for many here, the biggest driver fo the long thesis is capital allocation... hmmmm.

[Liberty]

I don't think this is necessarily Tim Cook trying to get rich (my vague recollection of his personal RSU agreement was that it wasn't egregiously asymmetrical),

 

https://www.cnbc.com/2015/03/26/apples-tim-cook-will-give-away-all-his-money.html

[johnny]

Yeah, I have always considered it delusional to just "back out the cash" on the valuation. I'll take them at their word that they're heading towards zero-net-cash, but 1) it's going to be another 4-5 years 2) it will be preferentially at share prices above the 200DMA, and 3) it's going to partially achieved by spending that cash on fucking sitcoms so that we can sit here and be fed horseshit about Apple being a services company every 3 months.

 

That said, the Airpods and Watch continue to be, I think, total sleeper hits that are dramatically underappreciated because of their relatively modest impact on earnings.

 

It's a really tough position for me. I lose respect for the entire management team every time I listen to them talk. But there's still something really impressive going on in the middle levels of the company. Maybe having all the executives focus on this dipshit TV non-strategy is actually a great way of distracting them and keeping their input out of the actual products. That's probably worth a few billion a year.

[johnny]

I don't think this is necessarily Tim Cook trying to get rich (my vague recollection of his personal RSU agreement was that it wasn't egregiously asymmetrical),

 

https://www.cnbc.com/2015/03/26/apples-tim-cook-will-give-away-all-his-money.html

 

Not sure what value this link adds:

 

1) I already let Cook off the hook here, for the more substantive reason that I remember him taking a hit on his incentive comp voluntarily once.

 

2) A dude with no natural heirs, and substantially below-average prospects for producing any, telling me he plans on giving away his wealth when he dies isn't exactly blowing my mind. We sort of assume that is going to happen, don't we?

[Liberty]

I don't think this is necessarily Tim Cook trying to get rich (my vague recollection of his personal RSU agreement was that it wasn't egregiously asymmetrical),

 

https://www.cnbc.com/2015/03/26/apples-tim-cook-will-give-away-all-his-money.html

 

Not sure what value this link adds:

 

1) I already let Cook off the hook here, for the more substantive reason that I remember him taking a hit on his incentive comp voluntarily once.

 

2) A dude with no natural heirs, and substantially below-average prospects for producing any, telling me he plans on giving away his wealth when he dies isn't exactly blowing my mind. We sort of assume that is going to happen, don't we?

 

I don't think you took it the way I intended it. I wasn't playing some "gotcha" or whatever.

 

You mentioned something about Cook getting rich and it reminded me of this, so I pointed it out in case you or others were unaware. Nothing more. If you already knew about it, no harm, just keep going.

[johnny]

That post came off as way more hostile than I intended, I just wanted to convey how eye-rolling I find those sorts of announcements to be, even though I think we're substantively in agreement about Cook's personal motivations.

[gfp]

https://www.idc.com/getdoc.jsp?containerId=prUS44826119

 

These unit shipment estimates from IDC (scroll down for table) do a good job of showing what happened to Apple in China (and other emerging markets) in the quarter.  Huawei shipped 60.5 million phones in the quarter.  Huawei's smartphone business is growing very quickly at the moment.

[Dynamic]

Yeah, I have always considered it delusional to just "back out the cash" on the valuation.

 

I agree. When I value Apple, I usually use do not back out cash because I'm investing for total return on the total money I'm putting in to buy it, not a measly return on the cash portion (or a return of excess cash) plus an acceptable return on the other capital. I'm fairly pleased to see share count reducing at a good 5%+ rate annually most of the time, and while I'd be delighted to see excess cash returned by buybacks at a high rate when it's advantageous, I won't hold my breath or expect it to form part of my return.

 

If I'm looking at a simple metric like earnings yield (E/P) or FCF yield (FCF/P) I usually take it as a percentage of the full stock price, but I will also look at yield on the stock price less net cash as an additional data point out of interest - but I cannot say I'm expecting capital return to be done with any urgency or in the most rational and opportunistic way possible. Apple are great at making their products and services, but they're not great capital allocators.

 

In fact I'm considering that the people in charge of buybacks at Apple's Treasury may have possibly been trained in 'conventional' ideas like CAPM and Efficient Markets Hypothesis and all those clean academic ideas without the concept of there being an Intrinsic Value that is independent of Market Price really playing any part in their thinking.

 

The upshot is, it encourages me to be more patient and insist on a slightly greater margin of safety before buying a company like Apple. (But if I buy, as a concentrated investor I will take a big position with a high conviction - 20 May 2016 I bought about a 25% position at $95)

 

I guess it also encourages me to Value Trade out of Apple and into an opportunity with better upside potential versus downside risk a little sooner with a smaller hysteresis band in place to prevent me from over-trading.  I got out of Apple at a little over $188 on 24 May 2018 (with no tax payable) to invest elsewhere with better risk/reward balance, though I didn't think Apple overvalued at the time or foresee their reduced guidance. I didn't mind missing a little more of their upside above $200 and probably would otherwise have switched into Berkshire Hathaway anyway at the end of July or in mid September when Berkshire was pretty cheap with minimal downside or when Apple was over $1 trillion and Berkshire still wasn't expensive, still missing out on some 10% or more of Apple's gains to its peak.

 

Recently my margin of safety criterion has led me to miss out on buying Apple in the low $140s because it didn't quite reach my required margin of safety and had competition from other opportunities. This could easily become obvious as an error of omission, but I'm feeling OK with my other opportunities and positions and with my indirect Apple exposure through Berkshire Hathaway is enough for now. However, AAPL would not have had to go an awful lot lower before I would have backed up the truck, so I would gladly welcome more negative sentiment weighing on Mr Market in the coming months to perhaps let me take a serious position in Apple again. Somehow though, I doubt it will get that bad given the recent recovery, unless they adjust their guidance even lower in April or a recession looms.

 

If were I buy AAPL at 9% or 10% current FCF yields (which is much what I did when I bought at $95 in 2016 - about 9.5% yield on full price, 10.5% yield on price net of cash), I'd get a fair return if FCF or EPS remained flat for a decade - which could even include a 5% annualised decline in the bottom line with 5% reduction in share count per year - so long as capital is not waster. Any serious positives on the next major iPhone release are likely to generate particularly good returns well in excess of 10% from a re-rating of the stock, and I'd be reasonably optimistic that there will be a new must-have phone that generates huge sales in the next year or two, or maybe 3-4 years if there's a recession soon. There's also a small chance of another major product category emerging and producing a major boost in value, but I don't price that into my long-term projections.

 

As an AAPL shareholder or potential shareholder I'd always be wary of signs of serious erosion in their high-end cachet among price-insensitive users who spend willingly on extra services, content like music/movies and paid apps, and also on privacy/security-conscious users. One pillar is build quality for devices and O/S, another is device longevity and resale value, and indications also include the queues outside Apple stores when a new device is released and the penetration among art and design professionals too. This aura allows them to achieve margins far higher than the best of the Android competitors.

 

If they had to seriously lower their pricing and begin competing on price with the likes of Samsung without a profitable shift in business model (such as selling more phones at smaller margins while achieving higher services earnings and that these would actually compensate for the foregone earnings on the phones), I'd become very concerned that their unique competitive position was permanently weakened and perhaps that the rationale for my investment was no longer in place - a good reason to sell.

 

I would be OK, however, with Apple opening up Apple TV content to more devices and smart TVs so that they'd have a chance to compete with normal platform-agnostic content providers. Otherwise, they'll remain an also-ran beside Netflix, Amazon and major TV channels with Chromecast and similar support in their apps.

 

Disclosure: I also took a modest but short-lived position in AAPL at an effective price of $167.62 on 7 Dec 18 when cash-covered puts I wrote were exercised, and I sold them all at $165 to fund other purchases later in December as prices elsewhere fell further. I might have written some out-of-the-money puts after the January guidance cut were it not for being fully invested (in fact very slightly on margin) and not having the cash cover for those puts. I decided instead to keep what I had and to rearrange my portfolio to buy AAPL only if it reached my target, which didn't happen, rather than take that risk.

[Charlie]

From another message board:

 

The Apple's CFO announced:

 

"So we are now announcing a new plan, so simple that even we at Apple’s finance division should be incapable of messing it up. We feel that current market prices undervalue our shares, so we are going to accelerate our purchases over the next six quarters. Since we will have about $50-$80 billion more coming in earnings over that time period, we need, and expect to pay out about $23 billion in dividends, we now intend to repurchase $147-$177 billion over the next six quarters, for an average of $24-$30 billion each quarter. That means almost $500 million worth every trading day, or 3 million shares at current prices, which is almost 10% of our average trading volume. In addition, breaking from our recent practice, we will put in place a plan to automatically purchase more shares when the prices are lower."

 

Sounds like intelligent capital allocation.  :)