AAPL - Apple Inc.

[Uccmal]

 

Apple is beyond my circle of competence

 

No offense Uccmal, but you admit Apple is beyond your circle of competence, yet have tons of posts in this thread telling other people that they're wrong.

 

That is correct DCG.  I'll elaborate for you.  As a value investor Apple is beyond my ability to predict its future reasonably.  I understand enough about business and psychology, and the thinking process of tech nerds, to understand overoptimism, and its effect on Apple's stock price.  Anyone who can claim that superior knowledge of tech and wireless gives them an advantage in this stock is absolutely, and completely delusional. 

 

Things that cannot be determined about Apple:

1) future cash flow

2) future margins

3) where the Apple killer is coming from

4) how they are going to piss away the cash horde

5) whether management starts to degenerate via power struggles, silo formation, bureaucracy, etc.

 

DCG, Can you tell me these things with even a modicum of competence?

 

Things I know about Apple:

1) historic margins were great, sales were awesome, competition was late, and hence cash flow was spectacular.

2) book value - patent value, break up value - which is far below market price for the stock.

 

I need only look at Dell, MSft, or worse, nokia, and rimm to see what Apples future May look like.

 

So, rather than saying Apple is out of my circle of competence, I will say its in the too hard pile.

[polangevin]

Things that cannot be determined about Apple:

1) future cash flow

2) future margins

3) where the Apple killer is coming from

4) how they are going to piss away the cash horde

5) whether management starts to degenerate via power struggles, silo formation, bureaucracy, etc.

 

Maybe you can't predict future cash flow for more than a couple of years but you can definitly calculate the implicit growth needed to justify Apple actual stock price. Once you do this, you might come to the conclusion that the stock price is too low.

 

The penetration rate for smartphones is still less than 50% worldwide and according to multiple market analysis firms (ex. IDC, NPD Display) tablets are going to grow 20%+ per year for at least 4 to 5 years. That being said, Apple is the leader in profit margins and their customer tend to be really sticky. The Apple case is different than what we've seen with Nokia and RIM. Apple has an ecosystem that none of the previous one ever had...

 

Since you accept to rely on the past to say that Apple has had a great performance and that this is coming to an end, maybe you should also rely on the past to see how they used their cash horde so far and notice that they have not pissed it away like many tech companies have done before.

[Uccmal]

polangevin,

 

Where is your margin of safety if things dont unfold as some seem to expect.  You may want to review the 65 pages of thread here.  All the arguments have already been made, on both sides.

 

 

[Guest valueInv]

Valueinv, You're trying to bait me over on the Rim thread.  I am not biting but I will point out a few things you need to learn about investing over here:

You told me that I don't understand a company within the industry I work in. Who do you think is doing the baiting?

 

 

1) Tim Cook telegraphed that there would be some margin compression at Apple.  Dont expect this to be the first time he says this.

Would you mind telling us about the two ways in which margin compression occurs? What happens when manufacturing yield decreases?

What is Tim Cook say about margins going forward? Why did you leave that part out?

 

2) Take a good long look at the behaviour of parabolic stocks AFTER they pass their peak.  I suggest NFlx, msft, nintendo, motorola, nokia, rim, cisco, dell, for starters.  I am sure a fellow as smart as you can dig out twenty or more names.  If you look at their stock behaviour, they reach their peak, pull back 40% or more, and take 20+ years to regain that peak, if ever.  Apple peaked on euphoria, and is now on the downtrend.  Once they start handing out the cash look for the stock to drop even further.

It sounds like this is the extent of analysis you have done for Apple. Let me give you a brilliant insight:

 

All the stocks in your portfolio will one day cease to exist. Nothing lasts forever. So why don't you sell all stocks, put your money in treasuries and stop wasting your time reading this board?

 

Don't buy Wells Fargo, look at Bear Sterns. Don't buy PG&E, look at Enron.

 

You remind me of a stoner friend of mine from college. We were hanging out in his house one day and his roommate starts cleaning the windows. My friend goes, "Why are you cleaning the windows? Its only gonna get dirty again." I couldn't stop laughing.

 

 

None of this is EMT.  It ties into what I, and others have been saying on this thread, about competition, supplier greed, consumer exhaustion, etc.  Tim Cook, Ive, and the gang at Apple know all this. You dont seem to comprehend it at all, despite your supposed mobile knowledge. 

Of course, people who work within the industry and ship products  would know nothing about competition, suppliers, consumer behavior, etc right? They don't deal with any of these groups right?  That kind of advanced knowledge is only limited to value investors, correct? When companies decide what to include in their next release, they give no thought to any of those groups, right?

 

Apple is beyond my circle of competence, as an investment for this reason: you cannot predict the future cash flows, Period.  No one can. 

1, If you don't understand something, you cannot determine whether someone is wrong about it. This is a simple concept that has escaped your grasp.

2, Just because you don't understand something, doesn't mean that no one else can. This is the second simple concept that escapes you.

 

When I refer to Apple being a fad, I am talking about the lineups for the products, the quick sells, and the ever increasing sales numbers.  This part is done now!  Apple will remain solidly profitable for years to come, but at a reduced rate. 

So you don't understand Apple but you are confident about predicting doom and gloom? You think that people will lose money by paying 12x earnings for a company that even you say will remain solidly profitable? How much did Buffet pay for a solidly profitable tech company with no growth?

 

Of course you will disagree with me on all this, and insult my knowledge etc, and tout how you are the wireless expert who knows more than anyone else on the topic of wireless.  That all amounts to a hill of beans, since this is business, and psychology we are talking about, not wireless.

Wow, Uccmal. You have found the Holy Grail of investing!! No need to do any research or analysis, no need to understand a company. All you need are some universal rules of business and psychology and you can make Buffet look like Madoff.  :o :o

 

Dude, you need to spend some serious time understanding what circle of competence means and why value investors consider it important.

[Guest valueInv]

I understand enough about business and psychology, and the thinking process of tech nerds, to understand overoptimism, and its effect on Apple's stock price.

No, you don't. Firstly, tech nerds are not the holders of Apple's stock. Its hedge and mutual funds. You should try to understand your own psychology and why drives you to call people wrong on a stock and industry you, by your own admission, don't understand.

 

Anyone who can claim that superior knowledge of tech and wireless gives them an advantage in this stock is absolutely, and completely delusional. 

You need to re-read this sentence and think about how much sense it makes.

 

Things that cannot be determined about Apple:

1) future cash flow

2) future margins

3) where the Apple killer is coming from

4) how they are going to piss away the cash horde

5) whether management starts to degenerate via power struggles, silo formation, bureaucracy, etc.

 

DCG, Can you tell me these things with even a modicum of competence?

Clearly, you can't but continue to tell everyone that they are going to be bad.

 

 

I need only look at Dell, MSft, or worse, nokia, and rimm to see what Apples future May look like.

Again, this Holy Grail of investing. No need for any analysis, let's just find similar stocks, we can predict the future. So easy. After all, as Buffet and Graham have taught us, the foundations of value investing is generalizations not analysis.

 

So, rather than saying Apple is out of my circle of competence, I will say its in the too hard pile.

Have you considered that it might be in a too hard pile for you because it is outside your circle of competence? If it is in a too hard pile, you cant make any predictions including negative ones? This is simple logic here, this is not rocket science.

[hardincap]

ValueInv, I really get a kick of you obliterating Uccmal's specious arguments with sound facts and reasoning. Keep it up!  ;D

[hardincap]

Alot of investors here seem to be mindlessly following Buffett's folksy mantras on putting tech into his "too hard pile". Do you guys realize that he invested 10% of BYD? BYD is trying to revolutionize electric vehicles; it is the ultimate tech company. As Buffett's CFO has repeatedly said, pay attention to what Buffett does, not what he says.

[DCG]

& last time I checked IBM does not sell soda or candy.

[Uccmal]

Okay guys.  We will see.  Hardincap, He obilterated nothing because he is flat out wrong.  I am being proven right for the last month and a half.  This baby is going to hit a wall and the stock is going to tank.  Sorry, but it always happens that way.  You guys are all too young to have been investing during the limitless growth of the late 90s.  Cisco, MSft, Dell etc. were all going to grow until Kingdom come.  It was in the news every day, exactly as Apple was until the last few weeks. 

 

I wouldn't hitch my horse on valueinv's commentary.  He knows nothing about investing or growth stock behaviour.  You blindly siding with him makes you look even more naive. 

 

Take your shots... I am right and you three are wrong.  The difference is it isn't going to cost me a cent. 

[Palantir]

I think Apple is definitely within the "too hard" pile. I think it will continue to do well in the future, but it's tough to see what their cash flows will look like. Apple is not a firm whose majority of customers have very high switching costs the way MSFT or Oracle or IBM do. It's essentially a producer and retailer of premium products within a relatively commoditized industry.

 

To those who are more knowledgeable - how will Apple respond to Android taking market share? Will they slash prices or be happy being a niche product?

 

[Guest hellsten]

My take on Apple's moat:

 

- Great products

 

Not a long-lived moat. Competition will adapt. See what Microsoft is doing.

 

- Network effect (iTunes, AppStore, iCloud, multiple devices that are synced with each other)

 

Not a moat in my case. Like most consumers?, I don't care if I loose my iOS apps or games. Most games are trivial and I loose interest in them in a couple of days or weeks. iTunes works on PCs.

 

What happened to Commodore, Nintendo and Atari (who all had the best content at the time) can happen to Apple.

 

http://www.onlineeconomy.org/how-strong-are-apple%E2%80%99s-iphone-network-effects

 

Apple has a narrow moat with developers (and designers) who like to develop for iOS because of various reasons. Developers can easily switch to another platform.

 

- Enterprise market

 

Nonexistent moat. People and enterprises care if they loose something like Adobe Photoshop, Microsoft Office, or all their corporate data. Microsoft is lightyears ahead of Apple in the enterprise market:

http://articles.businessinsider.com/2010-02-10/tech/29961217_1

 

Buffett should have bought MSFT instead of IBM.

 

- Design culture (Jonathan Ive and his design team)

http://www.businessinsider.com/meet-the-members-of-apples-elite-industrial-design-team-2012-8?op=1

 

Narrow moat, i.e. not a long-lived moat. See what Microsoft and Nokia are doing.

 

You could also argue Apple has copied great design ideas from others:

http://www.cultofmac.com/188753/the-braun-products-that-inspired-apples-iconic-designs-gallery/

http://simonphillips.com.au/apple-vs-braun

 

- Engineering culture

http://www.businessinsider.com/management-lessons-i-learned-working-at-apple-2010-7?op=1

 

Narrow moat. HP or DELL could never create iOS, an iPhone, or an iPad because of the internal bureaucracy and culture. However, Microsoft and Google can.

 

- Apple fans

 

Very narrow moat. People who like design would never own a DELL or HP computer.

 

- Unix

 

Very narrow moat. Engineers like OSX because it's Unix based. However, most users are not engineers. OSX can run the latest open source software, which is not always the case with MSFT.

 

Engineers can switch to whatever they like the most (Linux / Android). Switching is easy for an engineer.

 

 

To summarize, I don't see any long-lasting moat, just great products and momentum. This article pretty accurately reflects my thoughts on Apple, Microsoft and Google:

http://articles.businessinsider.com/2012-03-05/research/31123118_1_ios-android-platform/2

 

And yes, I own almost every Apple product that exists :) I'm just waiting for someone to design better hardware and software.

[Guest valueInv]

I wouldn't hitch my horse on valueinv's commentary.  He knows nothing about investing or growth stock behaviour.  You blindly siding with him makes you look even more naive. 

 

Uccmal, majority of my portfolio looks just like yours and of other investors:

Long AIG, BAC, Berk, FFH, LUK, WFC, etc.

 

If I know nothing about investing, by association, neither do you  ;D ;D ;D

 

The choice you're offering to people is not between my analysis and yours but between analysis and generalizations. For some reason, you can't tell the difference between the two.

 

My analysis could well be wrong or even subject to the impact of unpredictable events, but I believe that over the long term and over multiple investments, I will be better off than if I were using generalizations. Generalizations force you to use top down thinking, analysis allows for bottom up also. I prefer the latter.

[Guest valueInv]

To those who are more knowledgeable - how will Apple respond to Android taking market share? Will they slash prices or be happy being a niche product?

They are more likely to be happy being a niche product. The entire company, business model and culture is built around creating premium products and charging a higher price for it. They are somewhat similar to BMW. Sure, Toyota sells more cars but BMW is playing a different game. One of the reasons why I hold Apple instead of HTC or Amazon is because of this very reason. They are not going to sell products at cost or subject themselves to destructive price wars.

 

There are more options to the market share question than meets the eye. Any market consists of multiple price segments. Typically, Apple enters the market at a high price segment. All the growth you see is within that segment, as that is the only segment being served. Competitors introduce "me too" products but Apple continues to dominate. Competitors start dropping prices and as a result, start addressing lower price segments which are much bigger than the higher price segments that Apple is addressing. Soon, Apple is looking bad from the market share perspective even though it is doing well in the price segments it competes in. The overall marketshare drop is not from Apple selling fewer devices but from competitors quickly addressing bigger price segments that Apple is not entering. If you look at the the US smartphone market, where Apple addresses more price segments ($0, $99, $200+) due to operator subsidies, Appel's marketshare actually increased slightly this year. However, in Europe operators don't subsidize phones to the same extent and even a 3GS costs more than 500 Euros in many countries. Combine that with more people moving to lower price segments due to the financial crisis, Apple's marketshare takes a bigger hit over there. A similar situation in highly populated emerging countries where the lower price segments are much, much larger than the higher price segments.

 

Apple has found ways around this in the past - they introduce new form factors and device tiers that address the lower price segments. For example, the classic iPod was supplemented by the mini, shuffle, etc. These address different use cases, so someone who owns a classic might also buy a nano for the gym - so it helps lower cannibalization, provide overall increase in profits and reduces the hit on gross margins.

 

This is the same strategy Apple is following with the iPad mini. The smaller device addresses many use cases better than the bigger one (Gaming, books, mobility, etc). Also, it allows Apple to compete in a new price segment without a massive hit on GMs(there is going some hit initially due to manufacturing yields).  Overall, they should make more money from iPads next year over this year.

 

There are rumors (from WSJ) that they will follow the same strategy with the iPhone.

 

Apple is not playing a marketshare/commoditization/price war game but a price segmentation game. This is what most people fail to get when they look at Apple's marketshare numbers.

 

 

P.S. Uccmal, this is an analysis.

[Palantir]

The overall marketshare drop is not from Apple selling fewer devices but from competitors quickly addressing bigger price segments that Apple is not entering. If you look at the the US smartphone market, where Apple addresses more price segments ($0, $99, $200+) due to operator subsidies, Appel's marketshare actually increased slightly this year.

 

This is a very good point, and not something I thought about. So essentially it is only competing against the high end products from Android, like say the GS3, rather than the full range.

 

Even in the lower price range, they sell the premium product. (iPod Shuffle, which is twice the cost of comparable small MP3 players).

[Uccmal]

I wouldn't hitch my horse on valueinv's commentary.  He knows nothing about investing or growth stock behaviour.  You blindly siding with him makes you look even more naive. 

 

Uccmal, majority of my portfolio looks just like yours and of other investors:

Long AIG, BAC, Berk, FFH, LUK, WFC, etc.

 

If I know nothing about investing, by association, neither do you  ;D ;D ;D

 

The choice you're offering to people is not between my analysis and yours but between analysis and generalizations. For some reason, you can't tell the difference between the two.

 

My analysis could well be wrong or even subject to the impact of unpredictable events, but I believe that over the long term and over multiple investments, I will be better off than if I were using generalizations. Generalizations force you to use top down thinking, analysis allows for bottom up also. I prefer the latter.

 

lol, Valueinv, I have done in depth analysis to come up with normalized earnings on a BAc thread, old  FFh threads, SSW thread, and a few others posted here and on the old board.

 

Apple defies bottom up analysis as it requires too many flights of fancy.  Put another way, normalizing margins and earnings on Apple products, and perhaps the wireless industry as a whole doesn't paint a nice picture at all. 

 

And the majority of your portfolio (or mine) looks nothing like most retail investors, mutual funds, or etfs  ;)

 

Who else in the world holds 1/2 their portfolio in (formerly) disdained US financials?  lol.

 

 

[Guest hellsten]

Woz's latest comments on MSFT and AAPL:

http://techcrunch.com/2012/11/14/keen-on-steve-wozniak-why-woz-worries-microsoft-is-now-more-innovative-than-apple-tctv/

 

More comments by Woz on MSFT's consumer products:

http://www.huffingtonpost.com/2012/07/10/steve-wozniak-surface-tablet-microsoft_n_1661902.html

http://www.neowin.net/news/steve-wozniak-windows-phone-is-intuitive-and-beautiful

[hardincap]

Uccmal, you sound very much like the guy who ridiculed Michael Burry online for buying Apple stock and other tech investments many years back.

 

It might also surprise you that Henry Singleton of Teledyne, whom Warren Buffett counts as one of the greatest investors and businessman of all time, also invested in Apple in a big way back in the day.

 

I wouldn't hitch my horse on valueinv's commentary.  He knows nothing about investing or growth stock behaviour.  You blindly siding with him makes you look even more naive. 

 

Uccmal, majority of my portfolio looks just like yours and of other investors:

Long AIG, BAC, Berk, FFH, LUK, WFC, etc.

 

If I know nothing about investing, by association, neither do you  ;D ;D ;D

 

The choice you're offering to people is not between my analysis and yours but between analysis and generalizations. For some reason, you can't tell the difference between the two.

 

My analysis could well be wrong or even subject to the impact of unpredictable events, but I believe that over the long term and over multiple investments, I will be better off than if I were using generalizations. Generalizations force you to use top down thinking, analysis allows for bottom up also. I prefer the latter.

 

lol, Valueinv, I have done in depth analysis to come up with normalized earnings on a BAc thread, old  FFh threads, SSW thread, and a few others posted here and on the old board.

 

Apple defies bottom up analysis as it requires too many flights of fancy.  Put another way, normalizing margins and earnings on Apple products, and perhaps the wireless industry as a whole doesn't paint a nice picture at all. 

 

And the majority of your portfolio (or mine) looks nothing like most retail investors, mutual funds, or etfs  ;)

 

Who else in the world holds 1/2 their portfolio in (formerly) disdained US financials?  lol.

[tooskinneejs]

For those who think Apple will forever reign supreme, take a look at these phone and tablet devices being developed by a consortium of Japanese companies - the models are about as thick as a US dime (see video):

 

http://www.huffingtonpost.com/2012/11/19/japan-display-innovation-vehicles_n_2161224.html

 

 

[Guest rimm_never_sleeps]

japan is known for incredible technology feats that fail miserably with consumers. japan inc. has totally missed the smartphone mega trend. as for apple, it's not an expensive stock. the expectations aren't that high for it. it just has to grow earnings at 5% to 10% rates per annum to justify the p/e, which is lower than a market multiple when you account for the cash. it's not some bubble stock. it's not a bubble concept stock. it does not have to "reign supreme" forever. it just has to basically do what most good companies do, grow earnings at close to 10% a year.

[Guest valueInv]

Branding at its best:

 

http://techcrunch.com/2012/11/26/former-apple-retail-chief-details-apple-store-planning-and-philosophy-in-unaired-video/

[JAllen]

http://thenextweb.com/asia/2012/11/28/apple-maintains-70-grip-on-chinas-tablet-market-as-industry-sales-jump-63-year-on-year/

[Guest valueInv]

Whoa, incredible when you compare the marketing spend:

 

http://www.asymco.com/2012/11/29/the-cost-of-selling-galaxies/

 

 

[Uccmal]

Uccmal, you sound very much like the guy who ridiculed Michael Burry online for buying Apple stock and other tech investments many years back.

 

It might also surprise you that Henry Singleton of Teledyne, whom Warren Buffett counts as one of the greatest investors and businessman of all time, also invested in Apple in a big way back in the day.

 

 

 

Oh please, Hardincap.  I'll ask you a few simple questions?  Not to be answered by Valueinv.

 

Whay do you project Apples earnings to be next year, and in three years?

What do you project their margins to be next year, in three years?

Decribe their competitors relative postions today, and in three years?

Decribe to me how mobile data will be handled in TWO years?

 

I can do all these things will relative ease for BAC, SSW, and FFH, and be Mostly in the ballpark. 

[Uccmal]

You guys should be getting a big dividend in the coming weeks!

[hardincap]

do you think WB knows what BYD will be earning in three years? or even next year?

 

he's betting on management, company culture, and the industry. different kind of investment than bac, yes, but no less legitimate way to make money

 

Uccmal, you sound very much like the guy who ridiculed Michael Burry online for buying Apple stock and other tech investments many years back.

 

It might also surprise you that Henry Singleton of Teledyne, whom Warren Buffett counts as one of the greatest investors and businessman of all time, also invested in Apple in a big way back in the day.

 

 

 

Oh please, Hardincap.  I'll ask you a few simple questions?  Not to be answered by Valueinv.

 

Whay do you project Apples earnings to be next year, and in three years?

What do you project their margins to be next year, in three years?

Decribe their competitors relative postions today, and in three years?

Decribe to me how mobile data will be handled in TWO years?

 

I can do all these things will relative ease for BAC, SSW, and FFH, and be Mostly in the ballpark.