AAPL - Apple Inc.

[Palantir]

Indeed, I was just stating the "conventional wisdom" about the three firms. I don't believe Apple has lost its innovation edge either, and as long as the current management team is there, I think they'll do fine. The issue though is, that this is almost like a drug company, they need to have a "hit" drug that they milk for a few years until they come up with another "hit", making predicting their performance very "lumpy".

 

That being said, they look like they're taking steps to stabilizing that by emphasizing iCloud, keeping in mind Cook's pronouncement that "We Are Not A Hardware Company", and now that they have built out an ecosystem, there are some serious switching costs in place.

 

Very difficult to think about.

[CorpRaider]

Yeah, AAPL has a pretty deep moat for a tech company imop; when you stack their brand loyalty on top of the installed based, switching costs and sunk costs consumers have in their media.  It is tough to grow market share when your competition is giving away their operating system for free, but it seems they're still doing it. 

[Viking]

Palantir, yes, I also agree that results in the future will be much more lumpy. I think lack of predictability in Apple's innovation timeline moving forward will contunue to drive analysts crazy (just look at all the articles trying to predict when Apple will be doing what). I see the stock making crazy big moves both up and down as fear and greed alternate. However, over time, I think they will continue to increase the size of their moat (and earnings).

[Palantir]

How and When Apple May Return More Cash to Shareholders

 

http://blogs.wsj.com/moneybeat/2013/04/16/how-and-when-apple-may-return-more-cash-to-shareholders/?Mod=WSJ_blogs_mostpop_read

 

Is the idea basically that they issue debt and just use the debt proceeds to return cash? How exactly would that benefit shareholders though...it just sounds like moving money around...

[Guest wellmont]

How and When Apple May Return More Cash to Shareholders

 

this just sounds like moving money around...

 

that's how mitt romney came to have a car elevator.

[blainehodder]

How and When Apple May Return More Cash to Shareholders

 

http://blogs.wsj.com/moneybeat/2013/04/16/how-and-when-apple-may-return-more-cash-to-shareholders/?Mod=WSJ_blogs_mostpop_read

 

Is the idea basically that they issue debt and just use the debt proceeds to return cash? How exactly would that benefit shareholders though...it just sounds like moving money around...

 

That is precisely the idea.  Better tax optimization while shuffling cash.

 

The big thing is, by issuing domestic debt against foreign cash, they are effectively transferring cash from abroad to the US without incurring the repatriation taxation, leaving more for dividends or buybacks, and less for the government. 

 

Additionally, shareholders will benefit from reduced cost of capital as they will be able to write off interest payments. 

 

Currently Apple operates with negative leverage if you want to think of cash that way.  By levering up against foreign debt, they can neutralize the negative leverage as it expands, ideally keeping them at least 10-15% net levered.  The interest reductions would certainly decrease the cost of capital, and increase the valuation.  Meanwhile, they can take the cash generated from issuing leverage to buyback stock or issue dividends.  Finally, if they needed to, they could repatriate cash slowly to pay the tiny interest on the AAA debt, thus delaying the tax payments on the majority of the sum... Present value of cash etc. dictates this would be better than getting creamed on the entire sum up front.

 

Apple's capital structure seems far from optimal.  While many argue "they should focus on innovation"... is it too much to ask for the best paid executives of the world's largest public corporation to focus on BOTH innovation and capital structure?  Surely the CFO isn't the one tasked with dreaming up the 3d i-printer, and associated 3d itunes print your own iaccesories strategy?  This is a jab at the 24/7 financial media, not you Palantir.

 

Of course, all of this assumes Apple doesn't want the negative leverage to build.  Perhaps they want the backstop in case they go years without a hit product.  Or, perhaps they are getting ready for an acquisition.  If they choose to cast the cash into the fiery depths of mount doom (tech acquisition), I'd stay clear.  Note that even in the case of an extremely large acquisition, they would be better off levering up domestically (assuming a domestic purchase) to raise the cash, instead of repatriating, from a cost of capital standpoint.

 

Professor Damadoran has discussed Apple, the cash, and the cost of capital on his blog if you want to hear it from the expert.

 

 

[Palantir]

Great explanation, thanks.

 

I side with the "focus on innovation" crowd, but I will be happy if Apple modifies its capital structure (now that I own some :) ), but I think even most of us "innovation" folks agree that Apple should increase its dividend and buyback over the long term, "we" just think David Einhorn is annoying. ;)

[Guest valueInv]

My ongoing argument against investing in Apple has been that the economics of handset manufacturing (broadly consumer electronics) are garbage, primarily due to the commoditization of said handsets.  Exxon only achieves margins that are half of Apple's today.  This is Apple's future.

 

Again, if handsets are not being commoditized, then show me a significant smartphone feature that is not widely replicated on all other smartphones.  Commodities are marked by their lack of differentiation.  The closer matched handsets are, the more price competition becomes a leading factor in a purchase decision.

 

Here's what a "commoditized" market looks like ;):

 

http://www.asymco.com/2013/04/16/escaping-pcs/

[plato1976]

Yacktman on AAPL; he thinks apple should proactively lower price or create low price segment to keep shares and therefore keep the barrier high for others to make a profit. Reasonable to me...

 

"

Forbes: Do you feel Apple made a mistake in going for the high price instead of making sure it’s going to be very hard for Samsung to get its nose under the tent, because the margins are so low?

 

Yacktman: I personally do, if you want to be the big market share leader in a business. A lot of work has been done by that decades ago, by the Boston Consulting Group, and probably others with pricing down your cost curve. Because when you double the number of units you manufacture, you cut your costs, by about 30% in real terms

 

 

 

"

 

 

My ongoing argument against investing in Apple has been that the economics of handset manufacturing (broadly consumer electronics) are garbage, primarily due to the commoditization of said handsets.  Exxon only achieves margins that are half of Apple's today.  This is Apple's future.

 

Again, if handsets are not being commoditized, then show me a significant smartphone feature that is not widely replicated on all other smartphones.  Commodities are marked by their lack of differentiation.  The closer matched handsets are, the more price competition becomes a leading factor in a purchase decision.

 

Here's what a "commoditized" market looks like ;):

 

http://www.asymco.com/2013/04/16/escaping-pcs/

[jeffmori7]

New low..will we see 400$

[texual]

In the realm of smartphones after the golden age - Nokia wins. They flood the markets that grow faster with ever cheaper devices that just owns anything apple can do. Samsung to an extent does this but they've got a higher price point. Just watch how many phones Nokia makes that target the sub 300 and sub 200 price point in countries like India. Apple could make a lower cost phone but it simply would cost too much even for developing nations who want millions of phones for the poor who can afford Nokia and local companies but not apple.

 

Bloomberg did a great article last week about the explosive growth of home brew cellular phone manufacturers in India.

 

Cheaper wins.

[plato1976]

I don't quite understand why apple has a higher cost

presumably it has the adv of the scale and enjoys lower cost if apple is willing to release a low-end phone targeting such markets

 

In the realm of smartphones after the golden age - Nokia wins. They flood the markets that grow faster with ever cheaper devices that just owns anything apple can do. Samsung to an extent does this but they've got a higher price point. Just watch how many phones Nokia makes that target the sub 300 and sub 200 price point in countries like India. Apple could make a lower cost phone but it simply would cost too much even for developing nations who want millions of phones for the poor who can afford Nokia and local companies but not apple.

 

Bloomberg did a great article last week about the explosive growth of home brew cellular phone manufacturers in India.

 

Cheaper wins.

[VAL9000]

My ongoing argument against investing in Apple has been that the economics of handset manufacturing (broadly consumer electronics) are garbage, primarily due to the commoditization of said handsets.  Exxon only achieves margins that are half of Apple's today.  This is Apple's future.

 

Again, if handsets are not being commoditized, then show me a significant smartphone feature that is not widely replicated on all other smartphones.  Commodities are marked by their lack of differentiation.  The closer matched handsets are, the more price competition becomes a leading factor in a purchase decision.

 

Here's what a "commoditized" market looks like ;):

 

http://www.asymco.com/2013/04/16/escaping-pcs/

 

That's actually a market in decline after commoditization had already set in.  Maybe you can explain to us how the smartphone industry structure is any different than the PC industry structure?  Ie what makes the PC market so different from the smartphone market that one can be commoditized and another can escape this completely?

[Smazz]

New low..will we see 400$

We just did.

Apple better get back to copying stuff.

[claphands22]

Maybe I am just stating the obvious here but iPhones are a semi-commodity, whereas Android phones are a full commodity. Look at profit margins of PCs during the bottom of Apple (before Jobs) and Macs. Macs had higher margins because they didn't commoditize themselves the way Windows PCs did.

 

iPhones might be a smaller portion of the smart phone market in the future but that is ok. I rather own the Mercedes business than the Honda business. I rather own Apple's phone biz than Samsung's phone biz.

 

[Palantir]

Apple just has to drop 6% the day after I buy it. [/rant]

[plato1976]

agree rather apple than samsung

 

but the question is still how to figure out how low the profit margin will go in APPLE

it's really looking cheap and I cannot resist, but before figuring out this and convince myself I still don't dare to set up a huge position

 

Maybe I am just stating the obvious here but iPhones are a semi-commodity, whereas Android phones are a full commodity. Look at profit margins of PCs during the bottom of Apple (before Jobs) and Macs. Macs had higher margins because they didn't commoditize themselves the way Windows PCs did.

 

iPhones might be a smaller portion of the smart phone market in the future but that is ok. I rather own the Mercedes business than the Honda business. I rather own Apple's phone biz than Samsung's phone biz.

[VAL9000]

Maybe I am just stating the obvious here but iPhones are a semi-commodity, whereas Android phones are a full commodity. Look at profit margins of PCs during the bottom of Apple (before Jobs) and Macs. Macs had higher margins because they didn't commoditize themselves the way Windows PCs did.

 

iPhones might be a smaller portion of the smart phone market in the future but that is ok. I rather own the Mercedes business than the Honda business. I rather own Apple's phone biz than Samsung's phone biz.

 

True but Mac pricing was still dictated by the PC market. If Android phones keep pushing cost down then they will set the upper limit on pricing for iPhones.  That is, they can't charge $800 if the competition is charging $300.  I think Apples earned premium per device is about $100 and it's shrinking. But that's just my opinion.  The question is what are Apples earnings if iPhones retail for $400?  That's what the true P/E for AAPL should be based on.  Assume that as your base case and set your expectations accordingly. Anything beating that is gravy.

 

Why would you want to own any auto manufacturer? ;). I kid, I own some Tesla.

 

[txlaw]

Bought some AAPL today at $399.99.  Had bought some stock for tracking purposes earlier but sold to deploy elsewhere.

 

Looking forward to seeing their next quarter.  They need to demonstrate on the CC that they're thinking about ASP and GM decline and a shift to software/services for monetizing their position in the OS layer.

[VAL9000]

Waiting for 350 - hoping to see it after the earnings release.

[Guest valueInv]

My ongoing argument against investing in Apple has been that the economics of handset manufacturing (broadly consumer electronics) are garbage, primarily due to the commoditization of said handsets.  Exxon only achieves margins that are half of Apple's today.  This is Apple's future.

 

Again, if handsets are not being commoditized, then show me a significant smartphone feature that is not widely replicated on all other smartphones.  Commodities are marked by their lack of differentiation.  The closer matched handsets are, the more price competition becomes a leading factor in a purchase decision.

 

Here's what a "commoditized" market looks like ;):

 

http://www.asymco.com/2013/04/16/escaping-pcs/

 

That's actually a market in decline after commoditization had already set in.  Maybe you can explain to us how the smartphone industry structure is any different than the PC industry structure?  Ie what makes the PC market so different from the smartphone market that one can be commoditized and another can escape this completely?

 

Have you read the book I recommended yet? ;)

[Guest valueInv]

Waiting for 350 - hoping to see it after the earnings release.

 

Don't worry, you'll probably get your wish.

[VAL9000]

Have you read the book I recommended yet? ;)

 

I looked.  It's out of print.

 

How do the lessons in that book apply differently to the PC industry vs. the smartphone industry?  They are both high tech after all.

 

[txlaw]

Here are some interesting thoughts from Clayton Christensen:

 

CLAYTON:  Boy, it’s a wonderful issue.  And it plays it out in scary ways.  So as a general rule, when a new industry takes root, and the first products emerge in a wave, almost always the architecture of the product will be proprietary and interdependent in character.  The reason why that those are most successful have proprietary architectures is the product isn’t good enough in the beginning for what people need.  If you try to start out with an open architecture, the modularization of the architecture takes so many degrees of freedom from the engineers that they have to make a product that’s not as good as the best, and when the best is not good enough, you can’t win that game.  That’s why we lost Palm.  They went open too early.  So you see RIM is the most dependent proprietary architecture and the iPhone is not as closed, but still very proprietary.  And then what always happens is the product becomes more than good enough for what mainstream people need.  Then coming from below, it becomes more open and modular in character.  And when that happens, then the people who have the proprietary architecture are just kind of pushed to the ceiling and the volume goes to the open players.  So in smartphones, the Android operating system and the consummate modularity now allows hundreds of companies in China and Vietnam to now assemble these things.  So it pulls in global competitiveness that isn’t nearly as intense when proprietary architectures are the norm.  Just one other thing about it:  Just like I pray for Harvard Business School. I pray for Apple.  They always have won with the proprietary architecture.  And because of their advantage, you ask them, what’s the core of the company?  They say it’s the design and the interaction with the customer.  It’s right there, where they have the advantage.  Manufacturing isn’t really our core competence.  So you just give that to the Chinese.  But then what happens to them is, as the dominant architecture becomes open and modular, the value of their proprietary design becomes commoditized itself.  Because now this is just open and it may not be as good, but almost good enough.  Then what happens in manufacturing is – one of my colleagues visited a plant in China where they formulate logic circuitry in an iPhone.  This thing is 37 layers thick.  Each layer 80 microns in diameter.  Vias, the holes that go up and down, are two microns in diameter. And the precision has to be, when you’re doing a via down from the top and it’s got to go to level number 17 instead of 18, this is very precision work.  And the machine that makes this costs $120 million.  And it drills over two million holes per hour.  This is sophistication.  And there is nobody in America that could make this anymore.  So what we face is commoditization of the design through modularity, and then where the money is made is in sophisticated manufacturing.  And it really is quite scary.

 

. . . .

 

CLAYTON:  Yes, yes.  So, if in fact it is intrinsically a modular element in the stack, then modularity drives commoditization which drives profit out.  So if this is going to happen, just sy it’s going to happen and make it happen.  But as a general rule, when that happens, the pieces of the stack above and below it initiate a proprietary decommoditization layer in the stack.  So when it becomes free, the whole industry doesn’t go to pot, but where the money is made very often flips above and below it.  And so when that happens, rather than fighting the “freeness” you say “Holy Cow.  There’s something happening above and below.”

 

Excerpted from http://techcrunch.com/2013/04/06/clayton-christensen-talks-venture-capital-crowd-funding-and-how-to-measure-your-life/

 

Sounds like that could be Samsung with manufacturing and Google with its software and services.  How will Apple respond?

 

Also see Chapter 6 of The Innovator's Solution.

[Guest valueInv]

Have you read the book I recommended yet? ;)

 

I looked.  It's out of print.

 

Available on iBook Store ;)