AAPL - Apple Inc.

[berkshiremystery]

Cramer discussing what happened on the conference call. 

 

http://video.cnbc.com/gallery/?play=1&video=3000143376&__source=internal|promo|headerunit|&par=internal

 

"Please Install Flash Player"

 

Grrrr,.... this drives me crazy,... I can never click on those flash video links,... like at the moment,... I know why,... well,... I read this board almost 99% from my iPad. I already know in advance, while seeing the link, that CNBC videos almost never work. the Bloomberg vids work fine.

[Palantir]

Remember, Apple's edge is not "innovation" despite what the media would tell you. Microsoft thought of the tablet long before Apple did. MP3 players existed well before the iPod, same goes for smartphone. It cannot be emphasized enough that their edge is a maniacal focus on putting together a great product. A product that is beautiful to look at and works seamlessly. Something that integrates hardware and software, and creates an intuitive experience for the user. Not many companies are obsessed with making a great product. In attitude Apple is more like a high end niche boutique like Tiffany, Rolex, or Boston Beer Co (versus Bud Light).

 

They can take that basic attitude towards product and use it on a lot of things.

 

 

I think there's a lot of potential for an Apple TV. It could run iOS, have some great graphics card or w/e, you can download games via App Store, select the channels you're interested in via iTunes...surf the internet with a remote mouse.

[Viking]

Berkshire, sorry, the video from Corning and is called "a Day in the Life 2". Pretty cool stuff.

 

I was also thinking about the $137 blillion in cash Apple is sitting on (and growing by $10 billion a quarter). Many articles I have read say you can't give any value to it when you value Apple shares because - insert the reason - management will waste it, they will do nothing with it so it may as well not exist etc.

 

If I was Tim Cook and I had no really cool breakthrough innovation in the pipeline I would go hire the most talented people, give them the Corning video and tell them to make it happen. And tell them they have $10 billion (less their salary) to get started and three years to launch. I think they could come up with some pretty cool stuff. I wonder how much Elon Musk spent to get his electric car into production: http://video.ft.com/v/1974478965001/Elon-Musk-from-electric-cars-to-Mars $10 billion is less than one quarter of profit for Apple... it is peanuts (for Apple).

 

It is probable they will have $200 billion in cash by the end of next year. With their growing cash hoard they have the ability to build or buy on a scale we simply have never seen before. Now all of this cash has really built up over the past 24 months. And we view management as idiots because today they can't tell us exactly what they are going to do with it? No other company has ever experienced anything like what Apple is going through right now. There are no Harvard business cases available on this sort of thing. Kind of reminds me of the investment industry and their line of 'you got to put your money to work' like sitting on cash is a bad thing. Buffett's first rule is don't lose what you got. Perhaps Tim Cook is a lot smarter than people think and Apple will use its cash in a thoughtful, productive and financially rewarding way when it is ready.

 

A question I have is relating to the comments from management about the production challenges regarding the iphones, ipad mini and Macs. What exactly is the issue? Is the issue that they are at maximum capacity in their supply chain? Perhaps they need certain raw materials and there is only so much to go around? Or has growth outstripped equipment? They are spending $10 billion this year on equipment...??? For all the moaning about how management are idiots because they will not launch a cheap iphone or a phablet or strike a deal with China Telecom perhaps the simple truth is growth in the existing business was so fast the past 24 months that they maxed out. If this is the case, as their billions in equipment spending the past 18 months comes on stream they will be able to produce more devices and sales will once again grow. Lots of people are hammering on Tim Cook because 'he is a supply chain guy and he should have all of this figured out'. Samsung is the only other vendor with similar volumes and they are vertically integrated which I am sure helps. Bottom line, nobody expected the iphone or ipad to sell over an 18 month period as quickly as it did. Simply amazing stuff. If anyone has any insight on this question, please share!   

[Guest valueInv]

Remember, Apple's edge is not "innovation" despite what the media would tell you. Microsoft thought of the tablet long before Apple did. MP3 players existed well before the iPod, same goes for smartphone. It cannot be emphasized enough that their edge is a maniacal focus on putting together a great product. A product that is beautiful to look at and works seamlessly. Something that integrates hardware and software, and creates an intuitive experience for the user. Not many companies are obsessed with making a great product. In attitude Apple is more like a high end niche boutique like Tiffany, Rolex, or Boston Beer Co (versus Bud Light).

 

They can take that basic attitude towards product and use it on a lot of things.

 

 

I think there's a lot of potential for an Apple TV. It could run iOS, have some great graphics card or w/e, you can download games via App Store, select the channels you're interested in via iTunes...surf the internet with a remote mouse.

 

Building a great product is innovation. Building the first mp3 player or tablet is invention not innovation.

[Guest valueInv]

Where is our ol buddy Uccmal ro add to this drama?  ;D ;D ;D

[Uccmal]

Where is our ol buddy Uccmal ro add to this drama?  ;D ;D ;D

 

Ah, you miss me.  How touching ;)

 

I am enjoying watching my predictions unfold as I said they would.

 

Since I have been proven mostly right I will add some thoughts.

 

Apple makes awesome products and they aren't going out of business anytime soon.  The slowing of growth has nothing to do with innovation, management, or anything else under Apples control.  Very simply, they have gotten as big as you can get without attracting massive competition, supplier greed, and most importantly, the law of large numbers.  Even adding sales in China, India, and Africa, will not significantly move the needle (work with the numbers if you dont believe me). 

 

I am not a buyer yet.  I believe you will get that opportunity somewhere down the road, when earnings compress a little more.  Hopefully after BAC and AIG are played out. 

 

I would like to see how they are going to handle the cash situation, with the money overseas.  The only person on Earth I would trust allocating that kind of cash is Buffett. 

 

 

Someone mentioned above that Apples ability to simplify the user Interface is unrivaled.  I agree, but have no idea where they could apply this next.  TV strikes me as a losing proposition.  My wife and kids almost exclusively use Nflx now.  I dont watch TV.  Nflx is real close to Apple's style in ease of use, as is cable. 

 

If you asked where I think the stock is going in the short term, I would say sideways or down.  If it got down to the market cap of MSFT ex cash, so about 350 million with cash, I might be getting interested.  But then I am the guy who bought FFh at 80 - 130, BAC at 5, and AIG at 27, just so you understand my criteria. 

 

As to ecosystems I have had months to give this some thought.  It is not relevant.  I am just old enough to have watched people switch from tapes and vinyl, to CD, and now to streaming without batting an eye over the thousands of dollars invested in each stage.  The same with VCRs, And DVDs. 

In fact, I would argue that it is even easier to switch from Apple to something else, without a backward glance. 

 

I dont think that the MAc, and macbook air have alot of mileage left in them.  People are rapidly moving to tablets as their device of choice. 

 

Finally, I wish that Apple would enable the Ipad to use Adobe Flash.  That is frustrating since this is the device I use almost exclusively, now.  Its time to bury Steve on this one.

 

And finally, again.  It will be many years before you see the 700 B market cap again, hence why my purchase price target is so low.  I want to buy great companies, that have sustainable business, at obscenely low prices. 

 

After doing value investing for 15+ years, with > 20% returns the last 8, my need to go up the price curve (Apple), or down the quality curve (Dell/rimm/fbk) are no longer there.  Been there done that.  Something has to be really compelling to get me interested and keep me in it.  When BAC and AIG are played out, if nothing else grabs my attention I will park my money in short term treasuries, and FFH (price willing).  Until something else comes along.  Given we are almost hitting new highs on the S&P 500 I am not expecting alot in the near term.

 

Cheers, A.

 

 

 

 

[Guest valueInv]

Where is our ol buddy Uccmal ro add to this drama?  ;D ;D ;D

 

Ah, you miss me.  How touching ;)

 

I am enjoying watching my predictions unfold as I said they would.

 

Since I have been proven mostly right I will add some thoughts.

 

Apple makes awesome products and they aren't going out of business anytime soon.  The slowing of growth has nothing to do with innovation, management, or anything else under Apples control.  Very simply, they have gotten as big as you can get without attracting massive competition, supplier greed, and most importantly, the law of large numbers.  Even adding sales in China, India, and Africa, will not significantly move the needle (work with the numbers if you dont believe me). 

 

I am not a buyer yet.  I believe you will get that opportunity somewhere down the road, when earnings compress a little more.  Hopefully after BAC and AIG are played out. 

 

I would like to see how they are going to handle the cash situation, with the money overseas.  The only person on Earth I would trust allocating that kind of cash is Buffett. 

 

 

Someone mentioned above that Apples ability to simplify the user Interface is unrivaled.  I agree, but have no idea where they could apply this next.  TV strikes me as a losing proposition.  My wife and kids almost exclusively use Nflx now.  I dont watch TV.  Nflx is real close to Apple's style in ease of use, as is cable. 

 

If you asked where I think the stock is going in the short term, I would say sideways or down.  If it got down to the market cap of MSFT ex cash, so about 350 million with cash, I might be getting interested.  But then I am the guy who bought FFh at 80 - 130, BAC at 5, and AIG at 27, just so you understand my criteria. 

 

As to ecosystems I have had months to give this some thought.  It is not relevant.  I am just old enough to have watched people switch from tapes and vinyl, to CD, and now to streaming without batting an eye over the thousands of dollars invested in each stage.  The same with VCRs, And DVDs. 

In fact, I would argue that it is even easier to switch from Apple to something else, without a backward glance. 

 

I dont think that the MAc, and macbook air have alot of mileage left in them.  People are rapidly moving to tablets as their device of choice. 

 

Finally, I wish that Apple would enable the Ipad to use Adobe Flash.  That is frustrating since this is the device I use almost exclusively, now.  Its time to bury Steve on this one.

 

And finally, again.  It will be many years before you see the 700 B market cap again, hence why my purchase price target is so low.  I want to buy great companies, that have sustainable business, at obscenely low prices. 

 

After doing value investing for 15+ years, with > 20% returns the last 8, my need to go up the price curve (Apple), or down the quality curve (Dell/rimm/fbk) are no longer there.  Been there done that.  Something has to be really compelling to get me interested and keep me in it.  When BAC and AIG are played out, if nothing else grabs my attention I will park my money in short term treasuries, and FFH (price willing).  Until something else comes along.  Given we are almost hitting new highs on the S&P 500 I am not expecting alot in the near term.

 

Cheers, A.

 

You've been right about nothing. First, iPhone prices have been stable. Second iPhone grew more than 30% this quarter despite supply constraints.

[DCG]

Finally, I wish that Apple would enable the Ipad to use Adobe Flash.  That is frustrating since this is the device I use almost exclusively, now.  Its time to bury Steve on this one.

 

 

I don't really agree with this, as nearly the entire online world is quickly moving away from flash. Google even dropped flash support with Android Jelly Bean, and it even sounds like Adobe will be discontinuing updating flash in the very near future.

[DCG]

 

You've been right about nothing. First, iPhone prices have been stable. Second iPhone grew more than 30% this quarter despite supply constraints.

 

He's been pretty right about the stock price.

[Uccmal]

 

You've been right about nothing. First, iPhone prices have been stable. Second iPhone grew more than 30% this quarter despite supply constraints.

 

He's been pretty right about the stock price.

 

Thankyou, and the rationle behind it, which you hit on in an earlier post DCG (The law of large numbers).  Also increased competition, reduced margins, and price cuts (although Apple disguises them as smaller models). 

 

See this article from Bloomberg.  The part about Australia:

http://www.bloomberg.com/news/2013-01-24/apple-s-growth-slowdown-fuels-concern-of-shift-to-value-stock.html

 

[Guest valueInv]

 

You've been right about nothing. First, iPhone prices have been stable. Second iPhone grew more than 30% this quarter despite supply constraints.

 

He's been pretty right about the stock price.

 

Thankyou, and the rationle behind it, which you hit on in an earlier post DCG (The law of large numbers).  Also increased competition, reduced margins, and price cuts (although Apple disguises them as smaller models). 

 

See this article from Bloomberg.  The part about Australia:

http://www.bloomberg.com/news/2013-01-24/apple-s-growth-slowdown-fuels-concern-of-shift-to-value-stock.html

Ok, if you, as a value investor, feel vindicated by Mr.market's schizophrenia, I would suggest reading Ben Graham.

 

Secondly, you have just proven that you do no analysis. The ASP has been stable- the average selling price across all iPhones. For that the be stable, the device mix has to be stable and the price of each device. Get it?

 

BTW, for all for 2012, iPhone shipments grew 46%.

 

I believe you can look up how much cash they added yourself. ;)

[txlaw]

 

You've been right about nothing. First, iPhone prices have been stable. Second iPhone grew more than 30% this quarter despite supply constraints.

 

He's been pretty right about the stock price.

 

Thankyou, and the rationle behind it, which you hit on in an earlier post DCG (The law of large numbers).  Also increased competition, reduced margins, and price cuts (although Apple disguises them as smaller models). 

 

See this article from Bloomberg.  The part about Australia:

http://www.bloomberg.com/news/2013-01-24/apple-s-growth-slowdown-fuels-concern-of-shift-to-value-stock.html

Ok, if you, as a value investor, feel vindicated by Mr.market's schizophrenia, I would suggest reading Ben Graham.

 

Secondly, you have just proven that you do no analysis. The ASP has been stable- the average selling price across all iPhones. For that the be stable, the device mix has to be stable and the price of each device. Get it?

 

BTW, for all for 2012, iPhone shipments grew 46%.

 

I believe you can look up how much cash they added yourself. ;)

 

I think Al was referring to ASP decline for iPads, not iPhones, because he said that Apple disguises them as smaller models.

[txlaw]

 

You've been right about nothing. First, iPhone prices have been stable. Second iPhone grew more than 30% this quarter despite supply constraints.

 

He's been pretty right about the stock price.

 

Thankyou, and the rationle behind it, which you hit on in an earlier post DCG (The law of large numbers).  Also increased competition, reduced margins, and price cuts (although Apple disguises them as smaller models). 

 

See this article from Bloomberg.  The part about Australia:

http://www.bloomberg.com/news/2013-01-24/apple-s-growth-slowdown-fuels-concern-of-shift-to-value-stock.html

Ok, if you, as a value investor, feel vindicated by Mr.market's schizophrenia, I would suggest reading Ben Graham.

 

Secondly, you have just proven that you do no analysis. The ASP has been stable- the average selling price across all iPhones. For that the be stable, the device mix has to be stable and the price of each device. Get it?

 

BTW, for all for 2012, iPhone shipments grew 46%.

 

I believe you can look up how much cash they added yourself. ;)

 

I think Al was referring to ASP decline for iPads, not iPhones, because he said that Apple disguises them as smaller models.

 

Although I suppose he might be referring to the rumored smaller iPhone as well.

[Uccmal]

txlaw, Right on both counts. 

 

I wont be posting again on this topic for 3 months, or unless I change my mind and see an entry point for Apple.  Regards.

[Guest valueInv]

 

You've been right about nothing. First, iPhone prices have been stable. Second iPhone grew more than 30% this quarter despite supply constraints.

 

He's been pretty right about the stock price.

 

Thankyou, and the rationle behind it, which you hit on in an earlier post DCG (The law of large numbers).  Also increased competition, reduced margins, and price cuts (although Apple disguises them as smaller models). 

 

See this article from Bloomberg.  The part about Australia:

http://www.bloomberg.com/news/2013-01-24/apple-s-growth-slowdown-fuels-concern-of-shift-to-value-stock.html

Ok, if you, as a value investor, feel vindicated by Mr.market's schizophrenia, I would suggest reading Ben Graham.

 

Secondly, you have just proven that you do no analysis. The ASP has been stable- the average selling price across all iPhones. For that the be stable, the device mix has to be stable and the price of each device. Get it?

 

BTW, for all for 2012, iPhone shipments grew 46%.

 

I believe you can look up how much cash they added yourself. ;)

 

I think Al was referring to ASP decline for iPads, not iPhones, because he said that Apple disguises them as smaller models.

 

Although I suppose he might be referring to the rumored smaller iPhone as well.

 

He's been referring to iPhones in the past since that's what makes most of the money. It should be clear that I am talking about iPhones.

[Guest valueInv]

txlaw, Right on both counts. 

 

I wont be posting again on this topic for 3 months, or unless I change my mind and see an entry point for Apple.  Regards.

 

Oh, don't leave just as you've been proven wrong.  ;D ;D ;D

 

Yeah, you keep saying that you won't be posting. $25 bucks says you will post in this thread within the next month.  ;)

 

 

[bmichaud]

Sanjeev,

 

Your ability to average down in the face of uncertainty is amazing, IMO, and inspiring as I have learned a lot just from observing your actions in the two years I've been part of this board. That said, I can honestly say I don't understand your Apple purchase....

 

Just over a year ago Apple was selling for $400 per share with $59 of adjusted cash per share (total cash and investments minus current liabilities minus long-term deferred revenue x (1-10% repatriation tax)) and $35 of LTM EPS, for an adjusted PE of 9.7X....

 

Currently, Apple trades for $450 with $84 of adjusted CPS (same formula as stated above) and $45 of LTM EPS, for an adjusted PE of 8.1X....

 

Just over a year ago, Apple had tremendous operating momentum and a near-term event tied to it via its capital return announcement.....

 

NOW....you have declining operating momentum, no near-term catalyst (perhaps you have a special insight into Apple parting with its cash....??) and likely large downside price pressure (as it appears you are anticipating) as growth and momentum guys scramble to get out.....

 

YET....Apple trades at a virtually identical valuation on an LTM basis as it did last year. I could understand at 5 or 6X earnings, but here?

 

Curious what you see, if anything, or if it's just playing the volatility and assuming growth investors will eventually come back driving the valuation higher?

[Parsad]

Sanjeev,

 

Your ability to average down in the face of uncertainty is amazing, IMO, and inspiring as I have learned a lot just from observing your actions in the two years I've been part of this board. That said, I can honestly say I don't understand your Apple purchase....

 

Just over a year ago Apple was selling for $400 per share with $59 of adjusted cash per share (total cash and investments minus current liabilities minus long-term deferred revenue x (1-10% repatriation tax)) and $35 of LTM EPS, for an adjusted PE of 9.7X....

 

Currently, Apple trades for $450 with $84 of adjusted CPS (same formula as stated above) and $45 of LTM EPS, for an adjusted PE of 8.1X....

 

Just over a year ago, Apple had tremendous operating momentum and a near-term event tied to it via its capital return announcement.....

 

NOW....you have declining operating momentum, no near-term catalyst (perhaps you have a special insight into Apple parting with its cash....??) and likely large downside price pressure (as it appears you are anticipating) as growth and momentum guys scramble to get out.....

 

YET....Apple trades at a virtually identical valuation on an LTM basis as it did last year. I could understand at 5 or 6X earnings, but here?

 

Curious what you see, if anything, or if it's just playing the volatility and assuming growth investors will eventually come back driving the valuation higher?

 

Hi Bmi, cash per share is higher than what you have...about $103/share now after all current liabilities are paid and it will be closer to $120/share after current liabilities are paid by mid-year.  $450-$120=$330, $330/$45=7 times earnings assuming no growth from here.  That is the magic number for us when we start to look at investments!

 

In a year, the moat has just gotten bigger...in terms of stickiness.  Once you start using an iPhone, iPad and Mac, it will be difficult not to continue and even add other Apple products like Apple TV.  Google is not an issue, as I see the current environment akin to Coca-cola and Pepsi.  Both will do well, both will make money and both will dominate the landscape.  Our purchase is like Dell...we buy for years out, but if the market values it up quickly, we are happy to walk away with the profits. 

 

At 7 times earnings after taking cash into account, Apple is cheaper than Microsoft after cash, and 45% of Google's valuation after cash...does that difference in valuation make sense?  To us it doesn't.  It's a 5% position right now, which is a third of a full position for us...I hope it keeps going down.  Cheers!

[bmichaud]

The difference in the cash number is likely due to me taxing at 10% and backing out long term deferred revenue. I imagine on an "apples-to-apples" basis using your valuation, Apple was pretty close to this valuation last year, which was my point - why now? Perhaps the moat is larger as you say....

 

UCCMAL has outlined my long term concerns quite eloquently in frequent posts on this thread.....how is Apple comparable to MSFT and GOOG, which both have stable long term predictable earnings streams (for tech companies), and nobody has any clue what margins and volumes will look like for Apple five years out, which has to be relevant in order to "buy for years out".

 

But then again, the fact that I am even questioning your purchase is likely a buy signal  8)

[SI]

The question for me on Apple has always been the margins. I remember Jeff Bezos telling Charlie Rose last year, I don't care to make any margin on the kindle hardware and in a NYTimes piece Bezos saying, "your margin is my opportunity."

 

So more explicitly back to Apple, Dataroma had a cnbc clip of David Rolfe on CNBC. Given this "value investor"(Berkshire his #2 position) had a 9% position, I gave in and listened to the CNBC clip. They also had Glen Yeung from Citi on who pointed out that GM were down 4 quarters in a row which was pretty difficult for the CNBC audience to hear. He went on to say that Samsung's operating margins are 1300bps below apple's in phones. I am not involved here but a great case study so I have been trying to follow from the cheap seats. 

 

http://www.dataroma.com/m/home.php

 

Anyway, I put through Samsung's OM on all Apple's revenue and used Apple's tax rate and Net Interest Income to get to an EPS of $24/share(well below the $44 Bernstein uses). Historically, hardware has trade at a 10-12x multiple but I will give Apple credit for 12x b/c they do have software here so you back into a share price of $290 in EV per share. Adding the cash of $145/share(Bernstein #) is a $435 fair value.

 

Is 12x too high, is the OM too low/high, can revenue grow, will they squander the cash(conservative would suggest taxing it)? I am not sure but I thought it was a good way to frame this market price.

[Parsad]

You guys are assuming that the cash needs to be brought back here?  Why?  Apple's manufacturing is in China.  There are options available to them to increase shareholder value without repatriating capital.  Cheers!

[SI]

To get a bit farther out on my skis....

 

Cook said on the call that Apple's goal is to make the world's best products. You can spend a lot on products without increasing ROIC - I think that is the big risk with my back of the envelope - that credit for the cash whether b/c it needs to be repatriated and dividended out or b/c their return on incremental capital is pedestrian means that a shareholder is unlikely to ever see that benefit. What has MSFT ever been able to do with its cash, GE in the past decade, etc. Companies with large cash piles are saying something about the ability to deploy that capital at high return opportunities, apple's screams.

 

 

[Guest valueInv]

The difference in the cash number is likely due to me taxing at 10% and backing out long term deferred revenue. I imagine on an "apples-to-apples" basis using your valuation, Apple was pretty close to this valuation last year, which was my point - why now? Perhaps the moat is larger as you say....

 

UCCMAL has outlined my long term concerns quite eloquently in frequent posts on this thread.....how is Apple comparable to MSFT and GOOG, which both have stable long term predictable earnings streams (for tech companies), and nobody has any clue what margins and volumes will look like for Apple five years out, which has to be relevant in order to "buy for years out".

 

But then again, the fact that I am even questioning your purchase is likely a buy signal  8)

 

That's funny, how are Google's margins faring the last few quarters?

[Guest wellmont]

I don't think you can predict msft or goog's margins 5 years out.

[Parsad]

The difference in the cash number is likely due to me taxing at 10% and backing out long term deferred revenue. I imagine on an "apples-to-apples" basis using your valuation, Apple was pretty close to this valuation last year, which was my point - why now? Perhaps the moat is larger as you say....

 

UCCMAL has outlined my long term concerns quite eloquently in frequent posts on this thread.....how is Apple comparable to MSFT and GOOG, which both have stable long term predictable earnings streams (for tech companies), and nobody has any clue what margins and volumes will look like for Apple five years out, which has to be relevant in order to "buy for years out".

 

But then again, the fact that I am even questioning your purchase is likely a buy signal  8)

 

That's funny, how are Google's margins faring the last few quarters?

 

Unless you have a monopoly, margins will always contract due to competition.  That was always my argument with Apple when the bulls were rampant.  Now, how do investors explain the difference in valuation between Google and Apple?  How is Google's moat any better or worse?  And then let's compare Amazon as well on a valuation basis relative to those two...which is the priciest of them all.  Cheers!