AAPL - Apple Inc.

[Parsad]

the only thing wrong with apple is they don't know how to manage the capital structure. if people thought they would tender for 12% of the shares it wouldn't be trading at 7 x earnings.

 

At the right price, they will.  They've already done more conventional things that Jobs would not have done...dividend, smaller iPads, reducing margins to increase reach...and I think they will use the cash hoard at some point to buy back stock.  Apple is now a more conventional company with regular management, and the market has finally priced it like that.  Cheers!

IPad mini was agreed up on with Jobs. They have been planning it for two years.

 

Jobs was against the idea for a long time, and then he wasn't completely dismissive of the idea shortly before his death...the only proof of that is an email from Eddie Cue to Tim Cook recollecting that he wasn't completely dismissive.  Whether it would or would not have been developed under his watch is another story.  Cheers!

[SI]

hey can spend $10B more on capex than their nearest competitor...take your choice (GOOG, FB, AMZN, MSFT, et al)....and they will still make more than $40B in net profit in 2013.  Even if you don't include the cash they have when valuing the company, it is still trading at 10 times earnings.

 

 

The point is maybe you have the E wrong. If margins fall to Samsung levels(not a bad level given they dominate smart phones) my crude shorthand suggests the E is halved. Citi has a graph in its report of the AAPL quarter saying that in comparable periods of time in their lifecycle Nokia & RIMM had similar gross margins and they eventually fell to what looks like ~20%.

 

So alternatively for a demonstration, assuming Apple’s GM fall to RIMM/NOK levels of 20% it would equate to $34.5bn in Gross Profit. Taking a stab in the dark, assume that the $20bn in opex would also halve as a result you are looking at $20/share in EPS.

 

I would then throw that number into a normalized earnings version of a gordon growth model where you already know my discount rate per my earlier post. The additional caveat here again is that you would also assume that there is cash generation from here until that point which would support the cash pile. To your point, this pile wouldn't have to be utilized perfectly to make the case that the AAPL investment case should be monitored.

[Guest valueInv]

 

Google is the world's most efficient method of connecting people to what they want.

 

 

Not entirely. I'd say Amazon is becoming the most efficient method for connecting people with the products they want, and Facebook is the most efficient method of connecting people with other people businesses.

 

I don't agree with the last one.  I think Facebook's moat is actually more susceptible to competitors or to a new form of social interaction than Google, Apple or Amazon's moats.  Facebook has a lot of people using the service, but there is no real significant way to leverage that user base into actual revenue and profits.  They've struggled with this and the stickiness as soon as fees are implemented disappears. 

 

I don't think Amazon is significantly hurting Google or Apple right now, but that could change as Amazon leverages the number of homes and customers they service over time.  I think Amazon could actually end up creating the biggest moat over time, but the stock reflects that right now.  Cheers!

 

Parsad, what was the growth in FBs mobile advertising revenue last quarter? What was the number the previous quarter?

 

49% and 36% respectively...but total revenues have only increased a little over 7% last year and about 7% next year.  You don't think Apple or Google can do the same with their products or customer base?  Cheers!

 

http://www.reuters.com/article/2012/10/23/us-facebook-results-idUSBRE89M1D820121023

 

Lets not confuse a moat with the money inside the castle.

 

For evidence of FBs moat, look at G+'s usage.

[Palantir]

I think Facebook has a great moat - network effects. First of all it is a good product that people like using, and some are addicted to it. Secondly, it is the primary way through which people keep in touch with each other. Very difficult to replicate. There have been other social networks, but nothing on this scale.

 

 

It is like Google, there are no switching costs....but why switch when you don't need to?

[DukeCrow]

At the right price, they will.  They've already done more conventional things that Jobs would not have done...dividend, smaller iPads, reducing margins to increase reach...and I think they will use the cash hoard at some point to buy back stock.  Apple is now a more conventional company with regular management, and the market has finally priced it like that.  Cheers!

 

Not reducing margins to increase share is something that Jobs said was a mistake brought about because "Sales guys" were running the company. See this Newsweek interview for details.

http://web.archive.org/web/20040402084235/http://www.msnbc.msn.com/Default.aspx?id=4052227&p1=0

 

If that's so, then why is the Mac market share, even after Apple's recent revival, sputtering at a measly 5 percent? Jobs has a theory about that, too. Once a company devises a great product, he says, it has a monopoly in that realm, and concentrates less on innovation than protecting its turf. "The Mac-user interface was a 10-year monopoly," says Jobs. "Who ended up running the company? Sales guys. At the critical juncture in the late '80s, when they should have gone for market share, they went for profits. They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens."

[no_free_lunch]

With Apple's recent problems (if you can call $10B+ profit / pqtr a problem) I got motivated to pull the trigger on China Mobile (CHL).  The tie-in to Apple is that CHL doesn't have an agreement to sell Iphone's with their 3G network technology.  CHL has a huge user base but only something like 10-15% actually use the 3G network.  There has been constant debate and predictions as to when they will get an agreement with Apple and the general concensus is that it would be a boon for the stock.  Up until now I didn't want to make any predictions on when or if it would happen.  It still might not but with Apple increasingly on the fence and the CEO under pressure that has to increase the odds of a deal getting done.  I think CHL has 700M users, so the potential market is mammoth, even if they are selling a slightly lower margin phone.

[no_free_lunch]

In regards to the durability of Apple's margins I think people underestimate the draw their products have on people.  I think of the company more as a brand company, a Starbucks or Lulu lemon than a technology company.  People don't just buy Apple products because they think they're the best, although that is part of it.  They but them because it makes people feel elite.  I think there's a similarity there to walking around with a lulu lemon bag or a starbucks coffee, it associates you with this nice brand.  So you have to pay an extra $50, $100, $200 for it, whatever for many people that's chump change.  People are not robots, they don't always buy the best deal.  Some do but they are not the ones that go for the Apple thing.  As long as Apple can hold on to that brand, that elitism they will be able to continue to charge high margins.  Yeah they might get compressed a little bit but they are not going down to single digits unless they really flub it.

 

As far as how long the margins can last, have a look at the ipod.  It was released about a decade ago and still commands a price premium.  I just went to bestbuy and they are charging $50 for a 2GB ipod nano which doesn't even have a screen.  A sony 4GB with a little screen is $40 and sony is not exactly considered a low end brand.  Who do you think has higher margins?  Who is selling more?  This is not new technology, in fact it's ancient and there are tons of companies who have tried to make MP3 players but ipod's are still huge.  I truly believe people buy the apple version because of the brand and as long as the price difference is reasonable they will continue to do so.

[Viking]

Regarding China Mobile two things lead me to believe they will be selling Apple products in 2013:

1.) Tim Cook's comments in December that China will be their 'most important market in the not to distant future'. This comment only makes sense if you have a deal in place with China mobile; to publically say this before you have a deal only reduces your leverage. Needless to say, supply will be tight on iphones until later in Q1 so Apple can't supply today anyway. http://techcrunch.com/2013/01/10/tim-cook-meets-with-china-mobile-says-china-will-soon-become-apples-most-important-market/

2.) Starting with Q1 results, Apple now breaks out greater China as a separate operating unit. Why do this now? http://allthingsd.com/20130124/apple-is-killing-it-in-china-and-cook-says-thats-just-the-start/#

 

Regardless, Apple is going to grow in a big way in China in 2013.

[bargainman]

Jobs was against the idea for a long time, and then he wasn't completely dismissive of the idea shortly before his death...the only proof of that is an email from Eddie Cue to Tim Cook recollecting that he wasn't completely dismissive.  Whether it would or would not have been developed under his watch is another story.  Cheers!

 

In the words of Cook and many others, Jobs was the 'greatest flipper of all time'.  He would argue adamantly against an idea and rip into people who talked about it, and the the next day he would bring it up as his own idea and champion it like no one else had ever mentioned it.  It was the nature of the man, so I wouldn't put any weight on what he was or was not dismissive of while he was alive.

[kevin4u2]

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

 

MSFT's gross margins going back to 1993 (20 years) have been between 76-86% . 

 

GOOG's gross margins have been between 55-65% over the past 5 years. 

 

FB's gross margins have been between 69-75% since going public. 

 

APPL's gross margins going back to 2005 are attached.  I don't want to be accused of using data from when they weren't as "popular".  Margins ranged from 30%-47% since 2005.  During the most recent quarter margins fell by 6% to 36%.  They expect gross margins to be 37.5%-38.5% in the next quarter. 

 

Apple's moat is not as strong as one might think. 

 

On another note, who all has listened to the conference call?  Quite arrogant, something you would expect from Jamie Dimon.  The question on guidance was very telling.  The question right at the end on lower price point phones seemed to catch them off guard.  Long period of silence.  I would suggest listening to the actual call.  Reading the transcript doesn't do it justice.  I know some investors are using voice anxiety technology to see if management may is being dishonest or anxious during conference calls.  I would love to know what the analysis of this conference call would predict. 

[jeffmori7]

the only thing wrong with apple is they don't know how to manage the capital structure. if people thought they would tender for 12% of the shares it wouldn't be trading at 7 x earnings.

 

At the right price, they will.  They've already done more conventional things that Jobs would not have done...dividend, smaller iPads, reducing margins to increase reach...and I think they will use the cash hoard at some point to buy back stock.  Apple is now a more conventional company with regular management, and the market has finally priced it like that.  Cheers!

 

 

Their stores are still busy as hell. They need better capital management for sure, maybe use the cash to buy BAC. LOL

 

Wow, never realized they got more cash than BAC current market value!! We should suggest it to Tim Cook!

[Parsad]

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

 

MSFT's gross margins going back to 1993 (20 years) have been between 76-86% . 

 

GOOG's gross margins have been between 55-65% over the past 5 years. 

 

FB's gross margins have been between 69-75% since going public. 

 

APPL's gross margins going back to 2005 are attached.  I don't want to be accused of using data from when they weren't as "popular".  Margins ranged from 30%-47% since 2005.  During the most recent quarter margins fell by 6% to 36%.  They expect gross margins to be 37.5%-38.5% in the next quarter. 

 

Apple's moat is not as strong as one might think. 

 

On another note, who all has listened to the conference call?  Quite arrogant, something you would expect from Jamie Dimon.  The question on guidance was very telling.  The question right at the end on lower price point phones seemed to catch them off guard.  Long period of silence.  I would suggest listening to the actual call.  Reading the transcript doesn't do it justice.  I know some investors are using voice anxiety technology to see if management may is being dishonest or anxious during conference calls.  I would love to know what the analysis of this conference call would predict.

 

Why are you using gross margins?  Use net operating margins and net profit margins...that's a heck of a lot more accurate:

 

Operating Margins:

 

MSFT - 24% to 41% over the last ten years - presently around 28-29%

GOOG - 20%-42% over the last ten years - presently around 27-28%

AMZN - 1% to 6% over the last ten years - presently around 1-1.5%

FB - 12% to 52% over the last three years - presently around 12-13%

 

AAPL - 0% to 35% over the last ten years - presently around 28-30%

 

 

Net Profit Margins:

 

MSFT - 21% to 33% over the last ten years - presently around 21-22%

GOOG - 7%-29% over the last ten years - presently around 22-23%

AMZN - 0% to 4% over the last ten years - presently around 0.5-1%

FB - 4% to 19% over the last three years - presently around 4-5%

 

AAPL - 1% to 27% over the last ten years - presently around 24-25%

 

Now how does Apple's moat compare?  How does its valuation compare to Google, Microsoft and Apple?  Cheers!

[boilermaker75]

In regards to the durability of Apple's margins I think people underestimate the draw their products have on people.  I think of the company more as a brand company, a Starbucks or Lulu lemon than a technology company.  People don't just buy Apple products because they think they're the best, although that is part of it.  They but them because it makes people feel elite.  I think there's a similarity there to walking around with a lulu lemon bag or a starbucks coffee, it associates you with this nice brand.  So you have to pay an extra $50, $100, $200 for it, whatever for many people that's chump change.  People are not robots, they don't always buy the best deal.  Some do but they are not the ones that go for the Apple thing.  As long as Apple can hold on to that brand, that elitism they will be able to continue to charge high margins.  Yeah they might get compressed a little bit but they are not going down to single digits unless they really flub it.

 

As far as how long the margins can last, have a look at the ipod.  It was released about a decade ago and still commands a price premium.  I just went to bestbuy and they are charging $50 for a 2GB ipod nano which doesn't even have a screen.  A sony 4GB with a little screen is $40 and sony is not exactly considered a low end brand.  Who do you think has higher margins?  Who is selling more?  This is not new technology, in fact it's ancient and there are tons of companies who have tried to make MP3 players but ipod's are still huge.  I truly believe people buy the apple version because of the brand and as long as the price difference is reasonable they will continue to do so.

 

Even though I have worked in some aspect of the technology field for almost 40 years, I am always late in acquiring new technology. I am finally purchasing an iPod. I am not even thinking of looking at what comparable products are out there.

 

I am also thinking of writing some 400-strike puts because I think that would be an excellent entry point in AAPL.

[Guest valueInv]

We're finally seeing some analysis on the Apple thread. Color me surprised.

[Ross812]

We're finally seeing some analysis on the Apple thread. Color me surprised.

 

After a 36% haircut, value investors are starting to get intetested. I don't think we are there yet. I'm going to wait and see what happens with a possible iPhone mini. Maybe they should produce it for China exclusively...

[txlaw]

One thing I would caution people on is comparing valuations across AMZN, GOOG, FB, MSFT on a consolidated basis.  These companies have very different business lines, and it doesn't make sense to just compare company profits across the board. 

 

If you're going to compare AAPL to MSFT, for example, you have to take the Windows division OI and try to figure out what iOS/OSX OI would be if there wasn't hardware revenue tied to Apple's OS revenue (essentially, people who buy Apple products are paying an upfront license that is baked into the price of the device).  That's not an easy task. 

 

You can't just compare these companies by slapping multiples on them and saying that one company is overvalued and another is not.

[Guest valueInv]

One thing I would caution people on is comparing valuations across AMZN, GOOG, FB, MSFT on a consolidated basis.  These companies have very different business lines, and it doesn't make sense to just compare company profits across the board. 

 

If you're going to compare AAPL to MSFT, for example, you have to take the Windows division OI and try to figure out what iOS/OSX OI would be if there wasn't hardware revenue tied to Apple's OS revenue (essentially, people who buy Apple products are paying an upfront license that is baked into the price of the device).  That's not an easy task. 

 

You can't just compare these companies by slapping multiples on them and saying that one company is overvalued and another is not.

 

Some of the things I have learned from this board:

- People tend to oversimplify things. Thats where most investment mistakes happen because you gloss over important factors. Emotion simply add momentum to the pendulum and the mistake (or luck on the positive side)

- People mostly makes decisions based on stories in the investment community. Today, Apple can't innovate since Steve Jobs is gone is the prevailing story. Other stories included the China hard landing story, the "Europe is gonna crumble" story, etc . Value investors as a group behave similar as a group as growth investors. They just tell each other  different stories. Stories are a shortcut, you don't have to do the analysis.

 

Funny thing, I was reading Phil Fisher for the first time this break and I was struck by how much Apple fit into the models he was describing.

Even the present Apple situation is addressed in his book. Shows you how first principles stay the same.

 

[Parsad]

One thing I would caution people on is comparing valuations across AMZN, GOOG, FB, MSFT on a consolidated basis.  These companies have very different business lines, and it doesn't make sense to just compare company profits across the board. 

 

If you're going to compare AAPL to MSFT, for example, you have to take the Windows division OI and try to figure out what iOS/OSX OI would be if there wasn't hardware revenue tied to Apple's OS revenue (essentially, people who buy Apple products are paying an upfront license that is baked into the price of the device).  That's not an easy task. 

 

You can't just compare these companies by slapping multiples on them and saying that one company is overvalued and another is not.

 

Hi Tx, have to disagree with you here.  You should compare them as apples to apples, regardless of the other lines of business.  Otherwise it would be like comparing EBITDA to net profit.  At the end of the day, whether you are in hardware or software, the intrinsic value of the business is decided by the cash you take out.  Cheers!

[Parsad]

We're finally seeing some analysis on the Apple thread. Color me surprised.

 

I told you a couple of weeks ago that if the stock continued to fall, at some point it may start to pique my interest.  If it falls further, you will start to get even more interest, as I'm usually early to the party.  Cheers!

[PlanMaestro]

At the end of the day, whether you are in hardware or software, the intrinsic value of the business is decided by the cash you take out.  Cheers!

 

Over several years.

 

ROIC is important.  Growth is important. Runway is important. Predictability is important. Moat is important. Not all earnings are created the same.

 

You know all this Sanjeev: quality is important and you have good taste. Apple is cheap so no need to get carried away.

[txlaw]

One thing I would caution people on is comparing valuations across AMZN, GOOG, FB, MSFT on a consolidated basis.  These companies have very different business lines, and it doesn't make sense to just compare company profits across the board. 

 

If you're going to compare AAPL to MSFT, for example, you have to take the Windows division OI and try to figure out what iOS/OSX OI would be if there wasn't hardware revenue tied to Apple's OS revenue (essentially, people who buy Apple products are paying an upfront license that is baked into the price of the device).  That's not an easy task. 

 

You can't just compare these companies by slapping multiples on them and saying that one company is overvalued and another is not.

 

Hi Tx, have to disagree with you here.  You should compare them as apples to apples, regardless of the other lines of business.  Otherwise it would be like comparing EBITDA to net profit.  At the end of the day, whether you are in hardware or software, the intrinsic value of the business is decided by the cash you take out.  Cheers!

 

I agree with you on what IV is, though  I also agree with Martin Whitman about the "resource conversion" aspect of IV as well.

 

But, again, I think that with any company, to assess the going concern valuation of the business depends on the nature of the biz.  If your business is to derive profits off of hydration, such as KO, and you are dominant enough to always have a percentage of hydration going into your pockets, that might be worth a 6% earnings yield in the context of the current interest rate environment.  If your business is to own a bunch of real estate across the country and derive income from rents, then maybe that can valued at an 8% cap rate.  If you own a sound TBTF bank, maybe a 10% earnings yield.  If you own an O&G biz, it's all about the present value of the cash (after expenses and taxes) that can be generated through the monetization of depleting assets, which can expand due to exploration.  If you own a cigar butt biz like coming up with World Book encyclopedias, it's worth the PV of the cash that can be derived therefrom, not an amount based on an earnings multiple.

 

All of the above is to say that all earnings are not the same.

 

With all of these tech companies, they have a bunch of business lines, which I don't think can be compared apples to apples, and some of which obscure profitability of their other business lines because they are in startup phase. 

 

With AMZN, they are more equivalent to a Costco or Walmart for their physical retail business.  They are becoming one of the dominant low cost retailers in the world.  The AWS business, on the other hand, would be valued more like a low cost utility biz if you could figure out what the profits actually are.  The Kindle/digital media distribution business is harder to value and could actually be considered an expense rather than a business, as it is intended to keep AMZN revenue from media stable or growing as we shift more and more from physical media.

 

With GOOG, you have Search/AR/Big Data, which is a highly profitable business that monetizes its services through advertisement.  But you also have a major video content website and distribution platform (YouTube), cloud infrastructure services (Google App Engine and Compute), and operating systems.  So much harder to compare GOOG to AAPL based on P/E.  I tend to think GOOG has better business lines than AAPL, which is why you see MSFT getting into GOOG's territory with respect to online services and Big Data.

 

Or take a DELL.  I consider it to really be two businesses.  One is a "good business" that is growing and that deserves to trade at a certain earnings yield, like a bond, because it is sort of like a mid-market IBM.  The other, EUC, is a "bad business" that is simply being optimized for cash flow.  Whether you put a multiple on the consolidated P&L (and what multiple should be) should depend, I think, on how the cash from the bad business gets reinvested into the good business.

 

To sum it up, let's say you could calculate what the average earnings yield will be for AMZN, GOOG, AAPL. and MSFT for the next 10 to 20 years.  If all were trading at a 10% earnings yield (leaving aside excess cash and other assets), we would still have opinions on what would be the proper IV based on "quality of earnings."

[dcollon]

Courtesy of the investment banks.

 

http://online.wsj.com/article/SB10001424127887323854904578263941939124314.html

 

[tooskinneejs]

From the WSJ: "Has Apple Lost Its Cool to Samsung?"

 

http://online.wsj.com/article/SB10001424127887323854904578264090074879024.html?mod=WSJ_hp_LEFTWhatsNewsCollection

[boilermaker75]

Is AAPL the new MSFT?

 

http://finance.yahoo.com/blogs/breakout/apple-microsoft-182333686.html;_ylt=AhcAuOPwhkokS2km7_dW5iKiuYdG;_ylu=X3oDMTN1azhtZ3ZiBG1pdANGaW5hbmNlIEZQIE1lZ2F0cm9uIDIEcGtnA2M2M2M1OGVhLWI4MTgtMzdkZS05ZGUzLTk3ZjRhNjc3ZTU0MQRwb3MDMQRzZWMDbWVnYXRyb24EdmVyA2U4NTQ4MzMzLTY3NTUtMTFlMi1iYWZmLTZmNzMyZWEwMWIwYg--;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

[kevin4u2]

Why are you using gross margins?  Use net operating margins and net profit margins...that's a heck of a lot more accurate:

 

Operating Margins:

 

MSFT - 24% to 41% over the last ten years - presently around 28-29%

GOOG - 20%-42% over the last ten years - presently around 27-28%

AMZN - 1% to 6% over the last ten years - presently around 1-1.5%

FB - 12% to 52% over the last three years - presently around 12-13%

 

AAPL - 0% to 35% over the last ten years - presently around 28-30%

 

 

Net Profit Margins:

 

MSFT - 21% to 33% over the last ten years - presently around 21-22%

GOOG - 7%-29% over the last ten years - presently around 22-23%

AMZN - 0% to 4% over the last ten years - presently around 0.5-1%

FB - 4% to 19% over the last three years - presently around 4-5%

 

AAPL - 1% to 27% over the last ten years - presently around 24-25%

 

Now how does Apple's moat compare?  How does its valuation compare to Google, Microsoft and Apple?  Cheers!

 

Wow taking a smackdown from the master.  I respectfully disagree and believe you don't paint a very complete picture with your numbers.   

 

Attached is a graph of the margins (Gross, operating, and net profit) for both MSFT and AAPL.  MSFTs have been relatively the same for the past two decades.  Look at AAPL's margins the are at their recent peak, and as of the most recent conference call they fall 6% in the busiest quarter of the year.  Now what this says it that apples products have only recently become popular.  Second, something happened last quarter because gross margins fell hard in the busiest selling season.  Third, the moat is not nearly as strong as you think.  Youare buying a company that only recently achieved that margins you are discussing and we will see if they stand the test of time.   

 

Don't you find it dangerous that this company, a market darling that could do no harm, is facing it's first test.  Competition is coming and it's coming strong and fast. 

 

You could put up graphs of other consumer electronics companies like RIM and Nokia and it would paint a similar picture to where apple is today (then they fell from grace).  You can think Apple has a strong moat but it has never been tested.  The recent quarterly results suggests there may be some holes in the armour. 

 

The video I posted of Prof. Greenwald also discussed this same fact.  Consumer's are fickle, and consumer trends are hard to predict.  Why is Apple going to have a different outcome than every other consumer electronics company that has gone before it?  The four most dangerous words in investing, "This time is different."

 

Don't get me wrong apple isn't going anywhere soon but trees don't grow to the sky.  IMO Apple's stock will go nowhere over the next 5 years.   

 

Cheers and thanks for the smackdown!  Interested in your thoughts on the above.