AAPL - Apple Inc.

[Guest valueInv]

True. Didn't see discussion about how bad the margin compression can be

Will we go to $30 per share , or $20 per share , or even $10 ?

 

I don't quite get the margin compression thesis. It seems to me that in Apple's case, margins are more of an independent variable and revenues are more of a dependent variable. Especially for products that are supply constrained.

I don't either. What happens if Apple introduces cheaper products but sells twice as many of them?

[DCG]

True. Didn't see discussion about how bad the margin compression can be

Will we go to $30 per share , or $20 per share , or even $10 ?

 

I don't quite get the margin compression thesis. It seems to me that in Apple's case, margins are more of an independent variable and revenues are more of a dependent variable. Especially for products that are supply constrained.

I don't either. What happens if Apple introduces cheaper products but sells twice as many of them?

 

yup. I don't really care what the margins are as long as the earnings are there.

[Parsad]

 

Welcome to herd behavior.

 

Herd behavior would have been buying it then, and selling it now.  Cheers!

 

I think he means contra-herd behavior (i.e., the herd behavior on this board).  It is interesting to watch, especially when the market goes up and everyone starts talking about selling or how much cash they have, even when there are still some "deals" around.  That example may of course be the correct behavior (though I'm still 100% in), but this phenomenon seems particularly extreme on Apple.

 

Absolutely. What still surprises me is that even now, when value investors are actually buying, there is little analysis of Apple's business being discussed. Isn't " investment is its best when its businesslike" a corner of value investing? People look at Apple as a black box stock just as they did with financials. The herd moved into financials when there was enough social proof from Berkowitz, Buffet and others.

 

Actually, several of us were into BAC before Buffett was and this was when Berkowitz was being touted as the next Bill Miller...blowing up his fund with risky investments in financials.  There was no herd-like behavior on this board or any where else, because hardly anyone had done the analysis.  All you have to do is go back and read the posts, and you'll find that you're incorrect about this.  This was actually the same thing around Dell just a few months ago.  No one, including the investing giants, wanted to touch the stock. 

 

If you also go back to 2009, you'll find that several people were buying GE at $7 and WFC at $9, shortly before Buffett came out and announced he was buying both...GE through preferreds and WFC equity.  I think the majority of posters on here have actually done a pretty good job of analyzing investments, and have not needed any sort of social proof.  The MBIA thread (and I do not own any) is another thread that pretty much makes most professional analysts look incompetent, as boardmembers on here tore apart the legal infrastructure that could or could not lead to insolvency at MBIA.  It's quite an impressive thread! 

 

I think in general, posters on this board have shown a very businesslike attitude when it comes to investing...trusting their own analysis, their own instincts, as well as research...their own and others.  Cheers! 

[constructive]

Well I think there is some herd behavior and social proof on display here.  Is DELL really a 15x better investment idea than DTV or GNW (46 pages of comments versus 3 pages)?

 

When I joined, it surprised me how universally owned BAC and AIG seem to be. Some people crunch the numbers, others tag along for the ride.

[Guest wellmont]

 

Absolutely. What still surprises me is that even now, when value investors are actually buying, there is little analysis of Apple's business being discussed. Isn't " investment is its best when its businesslike" a corner of value investing? People look at Apple as a black box stock just as they did with financials. The herd moved into financials when there was enough social proof from Berkowitz, Buffet and others.

 

they also see a management that sees the cash as "theirs" and not the shareholders; and gets sued by them for unfriendly shareholder tactics. that has to account for a lot of why the multiple of this technology giant is on par with that of  a water utility.

[Palantir]

^ let it go man.

[Mephistopheles]

True. Didn't see discussion about how bad the margin compression can be

Will we go to $30 per share , or $20 per share , or even $10 ?

 

I don't quite get the margin compression thesis. It seems to me that in Apple's case, margins are more of an independent variable and revenues are more of a dependent variable. Especially for products that are supply constrained.

I don't either. What happens if Apple introduces cheaper products but sells twice as many of them?

 

Exactly my thinking. Margin compression (if there is any) will be made up for by volume increases. They would still be able to produce superb returns on equity.

[Guest wellmont]

v let it go man.

apple gets sued by shareholder and Loses.

http://www.bizjournals.com/sanjose/news/2013/02/22/apple-david-einhorn-preferred-shares.html

 

have some "iprefs"

http://dealbook.nytimes.com/2013/02/21/in-apple-fight-einhorn-unveils-iprefs/

[Mephistopheles]

Writing an at-the-money 2015 put and using the proceeds to purchase calls would give you 1.22x leverage.

 

Or you could buy the common and get no leverage, same downside risk.

 

 

 

But what about the dividend? I think as of yesterday's close the put was selling for $80 and the call for $65, so a difference of $15. By 01/15, AAPL will have paid at least $20 worth of dividends, so wouldn't going long the common be a better investment? I guess if you have a margin account, using options would still be worth it because it can free up the amount of collateral you have to hold.

 

Correct me if I'm wrong, as I'm just a beginner with options.

[Parsad]

Well I think there is some herd behavior and social proof on display here.  Is DELL really a 15x better investment idea than DTV or GNW (46 pages of comments versus 3 pages)?

 

When I joined, it surprised me how universally owned BAC and AIG seem to be. Some people crunch the numbers, others tag along for the ride.

 

No one said that DELL was a better investment idea...only that it was cheaper. 

 

There's herd behavior in virtually aspect of life...be it the general populace or value investing.  You joined this board after others have been on it for years.  Does that suggest that you are participating in herd behavior in any manner?  Of course not. 

 

Ask yourself, could it be that more people owned BAC and AIG because the subject matter (large-cap stock with a ton of publicity) made it easier for people to investigate the business?  Just because alot of people own something, makes it neither herd behavior or a good/bad investment.  Cheers! 

[constructive]

Well I think there is some herd behavior and social proof on display here.  Is DELL really a 15x better investment idea than DTV or GNW (46 pages of comments versus 3 pages)?

 

When I joined, it surprised me how universally owned BAC and AIG seem to be. Some people crunch the numbers, others tag along for the ride.

 

No one said that DELL was a better investment idea...only that it was cheaper. 

 

There's herd behavior in virtually aspect of life...be it the general populace or value investing.  You joined this board after others have been on it for years.  Does that suggest that you are participating in herd behavior in any manner?  Of course not. 

 

Ask yourself, could it be that more people owned BAC and AIG because the subject matter (large-cap stock with a ton of publicity) made it easier for people to investigate the business?  Just because alot of people own something, makes it neither herd behavior or a good/bad investment.  Cheers!

 

Fair points. To be clear, I'm not using "herd behavior" pejoratively. Owning AIG and BAC in 2012 was a great call, whether the decision was arrived at individually or in a community of like-minded people.

 

The original focus on BRK and FFH probably lends to the exponential concentration of posts in the most popular investment ideas. Most of the time concentration is good, occasionally not.

[ERICOPOLY]

Writing an at-the-money 2015 put and using the proceeds to purchase calls would give you 1.22x leverage.

 

Or you could buy the common and get no leverage, same downside risk.

 

 

 

But what about the dividend? I think as of yesterday's close the put was selling for $80 and the call for $65, so a difference of $15. By 01/15, AAPL will have paid at least $20 worth of dividends, so wouldn't going long the common be a better investment? I guess if you have a margin account, using options would still be worth it because it can free up the amount of collateral you have to hold.

 

Correct me if I'm wrong, as I'm just a beginner with options.

 

Well, if the stock is at $800 at settlement then the extra leverage from my approach would be worth $100.

 

Normally puts/calls are at parity -- even with dividend payers.  Here, they are out of whack.

 

You can also invest the cash while you wait for settlement, although CD yields and T-Bill yields are so low this is sort of a weak argument.

 

[Junto]

Ok, I get what you are saying. But how is AAPL (or SD) classic Ben Graham? If anything, it's classic Buffett, buying future growth in CF. No?

 

AAPL is trading for less than 7 times earnings after cash...doesn't matter whether those earnings grow or not in the next 7 years.  I get my money back.  If they grow, that's icing on the cake.  The assumption is that AAPL is not a quality business at a fair price, but a business that is in tough competition, selling at a cheap price. 

 

 

At this level, AAPL is a classic value play. ~7 times earnings net of cash, above 10 year treasury yield on stock, and no apparent value for brand.  Locked up cash requires some discount but this is no falling knife. I went long at $422 yesterday. Target $500 but it could easily go higher with momentum. Not my typical sector (I like the regulated environments - financials/telecom/real estate etc), but the stock has over corrected and trading at a fair discount for long-term value holders.

[Guest valueInv]

 

Welcome to herd behavior.

 

Herd behavior would have been buying it then, and selling it now.  Cheers!

 

I think he means contra-herd behavior (i.e., the herd behavior on this board).  It is interesting to watch, especially when the market goes up and everyone starts talking about selling or how much cash they have, even when there are still some "deals" around.  That example may of course be the correct behavior (though I'm still 100% in), but this phenomenon seems particularly extreme on Apple.

 

Absolutely. What still surprises me is that even now, when value investors are actually buying, there is little analysis of Apple's business being discussed. Isn't " investment is its best when its businesslike" a corner of value investing? People look at Apple as a black box stock just as they did with financials. The herd moved into financials when there was enough social proof from Berkowitz, Buffet and others.

 

Actually, several of us were into BAC before Buffett was and this was when Berkowitz was being touted as the next Bill Miller...blowing up his fund with risky investments in financials.  There was no herd-like behavior on this board or any where else, because hardly anyone had done the analysis.  All you have to do is go back and read the posts, and you'll find that you're incorrect about this.  This was actually the same thing around Dell just a few months ago.  No one, including the investing giants, wanted to touch the stock. 

 

If you also go back to 2009, you'll find that several people were buying GE at $7 and WFC at $9, shortly before Buffett came out and announced he was buying both...GE through preferreds and WFC equity.  I think the majority of posters on here have actually done a pretty good job of analyzing investments, and have not needed any sort of social proof.  The MBIA thread (and I do not own any) is another thread that pretty much makes most professional analysts look incompetent, as boardmembers on here tore apart the legal infrastructure that could or could not lead to insolvency at MBIA.  It's quite an impressive thread! 

 

I think in general, posters on this board have shown a very businesslike attitude when it comes to investing...trusting their own analysis, their own instincts, as well as research...their own and others.  Cheers!

Take a look at this thread. Other than from a hand full of people, the analysis goes as deep as "what goes up must come down". Take a look at the RIMM thread and see the comments from people saying that they own it because Prem Watsa is not a fool. Take a look at the FTP thread and see what happened whenever someone bought up Chinese counterparty risk.

 

Yes, there is good analysis being done also. The BAC thread, for example. But that does't mean it is the majority. People buying BAC before Berkowitz does not mean that the herd did not form after him and other started singing its praises. The herd is formed when you see people echoing each other's behavior without applying logic.

[Ross812]

Take a look at this thread. Other than from a hand full of people, the analysis goes as deep as "what goes up must come down". Take a look at the RIMM thread and see the comments from people saying that they own it because Prem Watsa is not a fool. Take a look at the FTP thread and see what happened whenever someone bought up Chinese counterparty risk.

 

Yes, there is good analysis being done also. The BAC thread, for example. But that does't mean it is the majority. People buying BAC before Berkowitz does not mean that the herd did not form after him and other started singing its praises. The herd is formed when you see people echoing each other's behavior without applying logic.

 

I think you are right. There are a lot of posts in the Apple thread that aren't really based on analysis. I think you are going to get a lot of opinions on a company that has had an influence on so many people including those posting on this board. Look at the Coke thread. There are a lot of non analytical posts because people 'feel' like the know Coke; everyone has a 'feeling' toward Apple. I agree that a 'feeling' is the wrong way to invest; however, given the nature of the company, what facts and hard numbers can be given about Apple's future?

 

http://www.comscore.com/Insights/Press_Releases/2013/2/comScore_Reports_December_2012_U.S._Smartphone_Subscriber_Market_Share

 

With 126 million smartphone owners in the U.S. with an addressable total market of 230 million cellphone users (http://marketingland.com/pew-56-percent-of-all-mobile-users-access-the-internet-27205). I will say of the remaining people, 85% of them will get a smartphone in the next 3 upgrade cycles (6 years). So the addressable market is roughly 196 million meaning 70 million people do not yet have a smartphone. So Apple can grow the iPhone another 55% in the U.S. assuming they don't gain or lose their current market share (about 36%). Apple clearly has some growth potential when looking at the addressable market in the U.S. These customers are going to come more slowly and there is a ceiling coming. I realize this is only the U.S.

 

The problem comes when you consider that Apple now has competition from Android, Windows, and to a lesser extent Blackberry; along with the tendency of electronics to get cheaper and cheaper as time passes. Can Apple grow worldwide market share? Clearly, but at what cost? Cutting margins by 10% (still 11% higher than Samsung) and coming out with a 50% cheaper iPhone (phones will get cheaper, just as everything electronic has) means units sold has to increase by 275% to maintain earnings where they are at right now. Can they do it? well that's only an 11% increase in units sold annualized over the next 10 years so absolutely. This is only to maintain earnings though.

 

So what we are considering is a great company with a product that can be looked at as a commodity that is declining in value at a rate of 6.7% a year. In addition, margins should be conservatively modeled to come down 1% per year for the next decade. This all assumes apple does not innovate a brand new product that sells like the iPad which they very well could do.

 

At 10x earnings there seems to be a big margin of safety, and I think there is in the near term. I don't think prices are going to come down for several years but I would bet 10 years from now smartphones will sell at a inflation adjusted 50% of what they sell for today. Taking a long term view of Apple means you have to discount the first 11% of their growth in the near term to account for revenue loss from lower prices in the future. I look at 20% growth rate today as 9% real long term growth with call options galore when considering chances at future innovation. The company has not proven innovation without Jobs nor has it proven to be shareholder friendly with how they allocate cash. What is their growth rate going to be the next year or two? Analysts say 19% which I adjust to 8% long term growth. Take out some discounted cash for their foreign held accounts and what is it worth at a cash adjusted PE? x10? x12? So 540 to 620? What is your margin of safety on it? Buffett says to buy quality for 80 cents on the dollar so $430?

 

I think typing this all out may make me take a harder look at this. Thanks valueInv.

 

 

[Palantir]

Apple products are a commodity? So are Mercedes cars a commodity because everybody also makes cars?

 

You missed out on switching costs, potential for new products, the fact that Apple doesn't target a huge market share, and serious growth in software businesses. It is pretty much the market's default analysis. Not trying to criticise you here, it is not a bad analysis, but a decent baseline mental model about Apple.

[Ross812]

They are a product that will experience price declines like all electronics. Smartphones as a whole are a commodity. If smartphones as a whole drift down in price to 50% their current cost apple will have to follow. The nexus 4 is $300 right now. The iPhone cost an average around $640. If in ten years the nexus 4 is $150 how much is the iPhone worth? mid $300 something?

[Guest valueInv]

v let it go man.

apple gets sued by shareholder and Loses.

http://www.bizjournals.com/sanjose/news/2013/02/22/apple-david-einhorn-preferred-shares.html

 

have some "iprefs"

http://dealbook.nytimes.com/2013/02/21/in-apple-fight-einhorn-unveils-iprefs/

 

You should read Buffets advice to Cook.

[compoundinglife]

Apple products are a commodity? So are Mercedes cars a commodity because everybody also makes cars?

 

Does Walmart sell refurbished MBs?

 

[Guest wellmont]

You should read Buffets advice to Cook.

 

you should read buffett's advice to jobs. if only he had taken it...

[Palantir]

I think Jobs did fine without listening to WEB.

[Guest valueInv]

You should read Buffets advice to Cook.

 

you should read buffett's advice to jobs. if only he had taken it...

 

You're big into this "divert attention away" thing aren't you?

[tooskinneejs]

In reading this thread, the evolution of views on Apple stands out.  A couple of years ago, Apple's business position was largely viewed as infallible (i.e., no one can stop them).  I notice that much of the discussion is now focused on downside risk, as it should be with a technology-based products company.

 

I remember getting push back in 2010 when I compared Apple's dominance to that of the Sony Walkman in the 80's/early 90's (http://tinyurl.com/asll7vh).  Many responses were essentially the classic "yeah, but this time it's different."  Now, I'm seeing lots of mentions of phones becoming a commodity, which I think is the case.

 

There is no longer judgment cast upon those using non-Apple phones.  And there are plenty of phones equal to or better than the iPhone.  So, in my opinion, it's only a matter of time until Apple's pricing advantage erodes.  And eventually, no one will think of the iPhone as being superior to any of the other products by Samsung, HTC, Blackberry, etc.

 

That has negative consequences for their future earnings, but at a certain stock price there is always value.

 

Now if only we could start to see some erosion in the pricing power of the two big U.S. wireless networks...

[Ross812]

In reading this thread, the evolution of views on Apple stands out.  A couple of years ago, Apple's business position was largely viewed as infallible (i.e., no one can stop them).  I notice that much of the discussion is now focused on downside risk, as it should be with a technology-based products company.

 

I remember getting push back in 2010 when I compared Apple's dominance to that of the Sony Walkman in the 80's/early 90's (http://tinyurl.com/asll7vh).  Many responses were essentially the classic "yeah, but this time it's different."  Now, I'm seeing lots of mentions of phones becoming a commodity, which I think is the case.

 

There is no longer judgment cast upon those using non-Apple phones.  And there are plenty of phones equal to or better than the iPhone.  So, in my opinion, it's only a matter of time until Apple's pricing advantage erodes.  And eventually, no one will think of the iPhone as being superior to any of the other products by Samsung, HTC, Blackberry, etc.

 

That has negative consequences for their future earnings, but at a certain stock price there is always value.

 

Now if only we could start to see some erosion in the pricing power of the two big U.S. wireless networks...

 

I disagree that Apple's pricing advantage will erode. I think the same thing that can be seen in laptops and ultrabooks will happen with smartphones. Innovation in laptops has come to the point where Apple's mid range $1000 mac book is sufficient for nearly any ones daily computing needs. Consumers can buy a Windows laptop with identical or better specs and much of the same materials used for $650. A mac laptop of this build quality was $2000 in 2004; the Windows equivalent was $1500. That was only nine years ago! It's funny how fast tech moves. Now everyone wants tablets and laptop sales are declining.

 

To sum it up. I think smartphones are an electronics commodity where the price is going the same direction as flat screen TVs, hard drives, laptops, SSDs, RAM, GPS units, cameras, and MP3 players. Apple will have a premium product priced at 2x the price of the similar like quality product (I used the LG Nexus 4 in my last example). They will probably start further differentiating iPhones just like they did with iPads, iPods, and macBooks. The iPhone 6lite will sell for considerably less than the iPhone6 and will cannibalize some of the sales. After several years the Nexus 4-II will be $150, the iPhone6lite will be $150 but be a nicely designed phone with cheaper hardwear and the iPhone6 will be $300. Apples future growth will hinge on how well the iPhone6lite will sell in countries where the cost of the phone is not subsidized in the plan and/or the consumer does not have as much spending money.

[Guest valueInv]

Exactly how have people reached the conclusion that smartphones are a commodity? In fact, where to see evidence that non-chip tech markets tend towards commoditization? Why is the commoditization mental model even the right one to apply here?