AAPL - Apple Inc.

[Guest valueInv]

Anecdotal remark on Apple, and precisely about the iPad : Here in Montreal, the main newspaper just a launch a brand new electronic version, which is only available on iPad. It is entirely free, offers all the content available in the paper version, and even more interactive display, videos, and new ad formats for announcers. They choose to make it available through the most recent iPad (iOs 6) only, using the newsstand application as they believe it is the best available tablet, and the most widely used. And there is no announcement for a futur Android version so far.

 

So it tells me that the iPad is still perceived as the dominant player in the tablet area, and that is probably worth something. I like it when other companies help Apple selling more iPad by offering exclusive contents!

 

For those interested, it is in French : http://www.lapresse.ca/actualites/201304/17/01-4642042-la-presse-est-lancee.php

 

They took 3 years to develop the software, 3 years ago the only descent tablet was iPad. This is the kind of project where the team would focus on the first platform and then go to the next one (get the thing started, start getting revenues ASAP, and make increase client base with Android later)

 

BeerBaron

 

Good observation. But still an advantage in the short term for Apple as a first mover in this area.

 

Most studies still show that while Android has more users Apple has more usage. The problem with going for the lower end market is that people don't spend money on software and content

[Guest wellmont]

 

Most studies still show that while Android has more users Apple has more usage. The problem with going for the lower end market is that people don't spend money on software and content

 

all those studies are backwards looking. of course people who buy low end phones use less data. that's self evident. I would wager that users who have high end Android and Windows phones eat up as much data as Iphone users. maybe more. I would guess that Phablet users consume way more data than Iphone users. btw, will we see Apple copy Samsung and release a Phablet sometime this year?

[Guest valueInv]

 

Most studies still show that while Android has more users Apple has more usage. The problem with going for the lower end market is that people don't spend money on software and content

 

all those studies are backwards looking. of course people who buy low end phones use less data. that's self evident. I would wager that users who have high end Android and Windows phones eat up as much data as Iphone users. maybe more. I would guess that Phablet users consume way more data than Iphone users. btw, will we see Apple copy Samsung and release a Phablet sometime this year?

 

I'm not talking about data consumption:

 

http://www.forbes.com/sites/chuckjones/2013/04/18/apples-ios-mobile-ad-metrics-dominates-android/

 

http://techcrunch.com/2013/04/18/wheres-twitter-music-for-android-why-todays-tech-companies-are-still-going-ios-first/

[Guest valueInv]

The interesting thing about the stock drop is that the Cirrus Logic report came a few days after a report about a massive hiring

ramp up at Foxconn  for the next iPhone. Sooooo......they're not buying components but hiring people to put them together?

 

They're not buying older products--it shouldn't impact the newer product line.  Here is the quote from Cirrus:

 

The company also announced that it will record a total net inventory reserve of $23.3 million of which approximately $20.7 million is due to a decreased forecast for a high volume product as the customer migrates to one of Cirrus Logic's newer components.

 

So why is that being interpreted as a demand collapse by the market?

 

That's what they always do, seems like.  Most of the analysts/stock reactions to Cirrus news make absolutely no sense.

 

It comes at a time when Verizon is hitting a 10 year high:

 

http://www.thestreet.com/story/11898823/1/verizon-sells-4-million-apple-iphones-beats-earnings.html

[Guest valueInv]

refresh ipad and mini, slightly larger and smaller size variations for iphone (just like we saw with ipod) and keep selling the crap out of stable (relatively) secure OS songs and movies and apps etc. and lets put a 15 multiple on ttm earnings and at $660 with a smartdisplay coming down the pike.

 

I'd say about that. But intrinsic value concept  is less useful in a company like Apple where the business is undergoing big, fast changes.

Are the bears right and iPhone sales have collapsed?

How do you value the new products and services they are currently working on but not released?

How useful would it have been if you valued Apple based on the iPod and Mac business in 2007?

 

You need a deep understanding of the business to invest in Apple (and other tech companies). This is not a Buffet type company.

[hardincap]

cirrus is a more reliable datapoint than a single US based carrier. US carriers were a poor predictor of last quarters results.

 

The interesting thing about the stock drop is that the Cirrus Logic report came a few days after a report about a massive hiring

ramp up at Foxconn  for the next iPhone. Sooooo......they're not buying components but hiring people to put them together?

 

They're not buying older products--it shouldn't impact the newer product line.  Here is the quote from Cirrus:

 

The company also announced that it will record a total net inventory reserve of $23.3 million of which approximately $20.7 million is due to a decreased forecast for a high volume product as the customer migrates to one of Cirrus Logic's newer components.

 

So why is that being interpreted as a demand collapse by the market?

 

That's what they always do, seems like.  Most of the analysts/stock reactions to Cirrus news make absolutely no sense.

 

It comes at a time when Verizon is hitting a 10 year high:

 

http://www.thestreet.com/story/11898823/1/verizon-sells-4-million-apple-iphones-beats-earnings.html

[CorpRaider]

I'm sure it is not central or even relevant to anyone's investment thesis, but I believe Barron's is only available on the ipad as well.  Could AAPL could slap their trademark on a high end samsung tv/display, paint it white and spiff up the aesthetics of the casing, tie in their stores, brand reputation, software and services and double the margin on the same product?  Hmm.

[PlanMaestro]

http://online.wsj.com/article/SB10001424127887324763404578430862297835192.html

[ItsAValueTrap]

What do you guys think about the LEAPs?

 

Apple right now looks insanely cheap if you back out the cash.  The P/E ratio is insane and Apple's growth is insane (very very few small caps have grown faster).  The LEAPs are reasonably priced and look like a safer way to play this.  Usually technology companies grow really quickly or die really quickly.  This should mean that the options should be a little more expensive than what historical volatility might suggest.  (Or I could be wrong.)

[bennycx]

Hmm what is the P/E after backing out the cash?

[txlaw]

What do you guys think about the LEAPs?

 

Apple right now looks insanely cheap if you back out the cash.  The P/E ratio is insane and Apple's growth is insane (very very few small caps have grown faster).  The LEAPs are reasonably priced and look like a safer way to play this.  Usually technology companies grow really quickly or die really quickly.  This should mean that the options should be a little more expensive than what historical volatility might suggest.  (Or I could be wrong.)

 

Interesting.  I had the opposite thought -- that LEAPS would be a little dangerous. 

 

I suppose that's because I've modeled very, very conservatively, with ASP and GM decline every year, pretty good slow down in unit growth for iPad and iPhone, declining Mac unit sales, modest software/services growth, and giving no value to potential new products such as a watch or TV.  And then taking a haircut on the cash position, of course, both for taxes and possible acquisitions/partnerships that will be necessary for a transition to more software/services revenue.

 

That puts me at a declining EPS, which is something the market won't like one bit.  Granted, I'm being pretty conservative, but this is a tech company after all. 

 

Just a thought on whether to go with LEAPS versus common. 

[compoundinglife]

What do you guys think about the LEAPs?

 

Apple right now looks insanely cheap if you back out the cash.  The LEAPs are reasonably priced and look like a safer way to play this.  Usually technology companies grow really quickly or die really quickly.  This should mean that the options should be a little more expensive than what historical volatility might suggest.  (Or I could be wrong.)

 

I bought the 2015 $500 LEAPs in my pa about 10 days ago, taking some gas on them ATM :) Bought the common this week in account I manage for a family member which I specifically do not use any leverage in. I have a hard time in imagining that *if* the stock moves back up that it does not happen between now and 2015. 

Obviously anything can happen and the AAPL bears could be right. I think we will see how this plays out before January 2015 good or bad.

 

WRT volatility according to the options calculator at my broker $584 is 1 SD on the upside and 875 2 SD on the upside.

[compoundinglife]

Hmm what is the P/E after backing out the cash?

 

TTM is 44 per share, cash per share is 145 current price around 390. If you discount the cash %30, lets call $100 per share. 290 / 44 = 6.5

 

Cash # will likely be updated to a higher number next week.

[plato1976]

One risk to leap (if they increase div a LOT)

one time big div is not a risk - usually it's deducted from the strike price

 

What do you guys think about the LEAPs?

 

Apple right now looks insanely cheap if you back out the cash.  The P/E ratio is insane and Apple's growth is insane (very very few small caps have grown faster).  The LEAPs are reasonably priced and look like a safer way to play this.  Usually technology companies grow really quickly or die really quickly.  This should mean that the options should be a little more expensive than what historical volatility might suggest.  (Or I could be wrong.)

[ItsAValueTrap]

Interesting.  I had the opposite thought -- that LEAPS would be a little dangerous.

If the LEAPs were crazy cheap, then buying the LEAPs would actually be *safer* than the common.  You're looking at the cost of the "insurance" / volatility drain... versus... maximum downside risk.

 

(I don't think that the LEAPs are crazy cheap.)

 

I suppose that's because I've modeled very, very conservatively, with ASP and GM decline every year, pretty good slow down in unit growth for iPad and iPhone, declining Mac unit sales, modest software/services growth, and giving no value to potential new products such as a watch or TV. 

I think when valuing the options you should look at the range of outcomes.

 

A: Sales continue to grow like crazy.  This is not an unreasonable situation since it's been happening for several years now...

B: Sales fall like crazy.  Not unreasonable in the tech world.  Look at Blackberry, Palm, etc.

C: Sales go sideways.  This could also happen.

 

In scenarios A and C the options are better the common.  Usually it's the case than the share price doesn't go crazy enough.  In those cases, you are probably better off with the common stock since there are higher transaction costs to the options (or the options are just overpriced).  If the stock doesn't go crazy, you paid for "insurance" that you didn't need.

 

On a fundamental level, I think that scenarios A and C are very likely for Apple.  And maybe the share price will correlate with sales... so the chance of the share price going crazy is pretty high.

 

2- I've written the following on valuing options:

http://glennchan.wordpress.com/2012/12/18/valuing-stock-options/

 

For Canadian investors, the tax characteristics of options on dividend stocks may be helpful (though you need to watch the dividend dates).

 

3- I actually think that Android will likely win the smartphone+tablet wars, which will hurt Apple's main source of profits.  So I have no position in Apple currently (I used to be long a call option and some stock).

[txlaw]

Interesting.  I had the opposite thought -- that LEAPS would be a little dangerous.

If the LEAPs were crazy cheap, then buying the LEAPs would actually be *safer* than the common.  You're looking at the cost of the "insurance" / volatility drain... versus... maximum downside risk.

 

(I don't think that the LEAPs are crazy cheap.)

 

I suppose that's because I've modeled very, very conservatively, with ASP and GM decline every year, pretty good slow down in unit growth for iPad and iPhone, declining Mac unit sales, modest software/services growth, and giving no value to potential new products such as a watch or TV. 

I think when valuing the options you should look at the range of outcomes.

 

A: Sales continue to grow like crazy.  This is not an unreasonable situation since it's been happening for several years now...

B: Sales fall like crazy.  Not unreasonable in the tech world.  Look at Blackberry, Palm, etc.

C: Sales go sideways.  This could also happen.

 

In scenarios A and C the options are better the common.  Usually it's the case than the share price doesn't go crazy enough.  In those cases, you are probably better off with the common stock since there are higher transaction costs to the options (or the options are just overpriced).  If the stock doesn't go crazy, you paid for "insurance" that you didn't need.

 

On a fundamental level, I think that scenarios A and C are very likely for Apple.  And maybe the share price will correlate with sales... so the chance of the share price going crazy is pretty high.

 

2- I've written the following on valuing options:

http://glennchan.wordpress.com/2012/12/18/valuing-stock-options/

 

For Canadian investors, the tax characteristics of options on dividend stocks may be helpful (though you need to watch the dividend dates).

 

3- I actually think that Android will likely win the smartphone+tablet wars, which will hurt Apple's main source of profits.  So I have no position in Apple currently (I used to be long a call option and some stock).

 

Oh, I think I understand what you're saying.  You're talking same notional amount with the options versus common.  Is that right?

 

I am no options guru like an Ericopoly, so I will have to think about this a bit, especially with regards to potential dividend increases.

 

I'm just worried that even if AAPL is a bargain at this price, which I think it probably is, it will just go lower and stay at the same price for a couple of years if you start to see EPS either stagnate or go down, which could very well happen.  I'm happy to collect the dividend and add to my position in such an instance, but again I have to think about the LEAPS here.  Probably should go read the BAC leverage thread.

[ItsAValueTrap]

Oh, I think I understand what you're saying.  You're talking same notional amount with the options versus common.  Is that right?

Yeah if they had the same notional amount they'd be easier to compare.

 

I am no options guru like an Ericopoly, so I will have to think about this a bit, especially with regards to potential dividend increases.

Yeah, dividends will affect the price of an option.

 

Unfortunately, forecasting dividends is pretty difficult...

[compoundinglife]

What do you guys think about the LEAPs?

 

Apple right now looks insanely cheap if you back out the cash.  The P/E ratio is insane and Apple's growth is insane (very very few small caps have grown faster).  The LEAPs are reasonably priced and look like a safer way to play this.  Usually technology companies grow really quickly or die really quickly.  This should mean that the options should be a little more expensive than what historical volatility might suggest.  (Or I could be wrong.)

 

Interesting.  I had the opposite thought -- that LEAPS would be a little dangerous. 

 

I suppose that's because I've modeled very, very conservatively, with ASP and GM decline every year, pretty good slow down in unit growth for iPad and iPhone, declining Mac unit sales, modest software/services growth, and giving no value to potential new products such as a watch or TV.  And then taking a haircut on the cash position, of course, both for taxes and possible acquisitions/partnerships that will be necessary for a transition to more software/services revenue.

 

That puts me at a declining EPS, which is something the market won't like one bit.  Granted, I'm being pretty conservative, but this is a tech company after all. 

 

Just a thought on whether to go with LEAPS versus common.

 

The way I am thinking about it is 100 shares of AAPL costs your $39,000 today. A 2015 $400 LEAP costs you $5600. Instead of buying of the common, buy the LEAP and take the remaining $33,400 and put it in a compounding machine that you want to hold. Let's say you put that $33,400 in FFH. In the case that your LEAP goes to zero and FFH is able to compound over time at %15 per anum the first %15 almost covers your cost of the LEAP.

 

Value Line estimates 44.50 for 2013 and 52 for 2014 earnings, a PE of 12 on 44.50 is 534. Let's call it $500. So if at expiration (Jan. 15) AAPL is $500 and you at some point get your %15 growth per anum on FFH you wind up  $48,410 vs 100 AAPL common at 500 which would be $50,000.

 

Of course the simplest explanation is you invest $5600 and if AAPL is below $456 at expiration you lose it all.

 

But for whatever reason in the context of buying the common vs spending the same $$ and buying the LEAP plus FFH the second seems like a better option to me. Maybe I am just over thinking it.

[ItsAValueTrap]

Umm... I think options are a little complicated and difficult to grasp.

 

I would try to understand the basics of options first.  e.g. put-call parity

Then try to understand the Black-Scholes model.  This is a little unintuitive at first, but the direction of the stock mostly doesn't matter if delta hedging works.

Then try to understand areas where the Black-Scholes model should be modified.

Then you will understand why many options traders use BS by fudging the volatility parameter in it.  Pricing options is an art, not an exact science.

 

Taleb's book was helpful for me.

[ItsAValueTrap]

Or maybe take a step back and look at it like this.

 

The options market is a zero-sum game.

Suppose for a second that there were no transaction costs.  And suppose that taxes don't matter.

In a frictionless world... then there would be some "correct" price for every option.

 

If the call (or put) option is too cheap, then I would have to say that it's less risky than the common.  A put option is like insurance.  (And because of put-call parity, you can usually turn calls into puts and vice versa.)  If you get paid to own insurance, then that's awesome and not very risky.  If the put/call options are too cheap, then it's like you are getting paid to own insurance.

 

2- The options markets give you access to a lot of leverage.  Increasing leverage increases your risk.

 

BUT, you don't have to increase your leverage.  You can buy 1 option contract instead of 100 shares.

 

3- In practice:

a- There are transaction costs, sometimes the options market is slightly stacked against investors, there are taxes, etc.

b- Options are complicated.

c- It's really hard to value options.  (So, you know... look for a margin of safety.  Otherwise, nobody is forcing you to swing at any pitch.)

 

[compoundinglife]

Or maybe take a step back and look at it like this.

 

The options market is a zero-sum game.

Suppose for a second that there were no transaction costs.  And suppose that taxes don't matter.

In a frictionless world... then there would be some "correct" price for every option.

 

If the call (or put) option is too cheap, then I would have to say that it's less risky than the common.  A put option is like insurance.  (And because of put-call parity, you can usually turn calls into puts and vice versa.)  If you get paid to own insurance, then that's awesome and not very risky.  If the put/call options are too cheap, then it's like you are getting paid to own insurance.

 

2- The options markets give you access to a lot of leverage.  Increasing leverage increases your risk.

 

BUT, you don't have to increase your leverage.  You can buy 1 option contract instead of 100 shares.

 

3- In practice:

a- There are transaction costs, sometimes the options market is slightly stacked against investors, there are taxes, etc.

b- Options are complicated.

c- It's really hard to value options.  (So, you know... look for a margin of safety.  Otherwise, nobody is forcing you to swing at any pitch.)

 

I copy and pasted this discussion to a thread in the Investment Strategies section so we don't derail the AAPL folks: http://www.cornerofberkshireandfairfax.ca/forum/strategies/how-to-think-about-options/

[Guest wellmont]

Hmm what is the P/E after backing out the cash?

 

TTM is 44 per share, cash per share is 145 current price around 390. If you discount the cash %30, lets call $100 per share. 290 / 44 = 6.5

 

Cash # will likely be updated to a higher number next week.

 

markets disount the future. the problem many a rimm value investor had was putting a multiple on trailing twelve month earnings. the price of apple right now is telling you that earnings are going to be lower prospectively. pay attention to market prices. especially in a stock where everybody and their brother has an earnings estimates. Not saying aapl is not attractive here. just saying don't look backwards.

[compoundinglife]

Hmm what is the P/E after backing out the cash?

 

TTM is 44 per share, cash per share is 145 current price around 390. If you discount the cash %30, lets call $100 per share. 290 / 44 = 6.5

 

Cash # will likely be updated to a higher number next week.

 

markets disount the future. the problem many a rimm value investor had was putting a multiple on trailing twelve month earnings. the price of apple right now is telling you that earnings are going to be lower prospectively. pay attention to market prices. especially in a stock where everybody and their brother has an earnings estimates. Not saying aapl is not attractive here. just saying don't look backwards.

 

Agreed that TTM is backward looking and we are or should be concerned with the future cash flows. With regards to the market discounting the future that applies to any beaten down stock. The market says or implies the earnings are going to be lower and by taking a position you are of the belief that they have discounted it too much and in the longer term the future cash flows will be worth more than what you are paying for them today. That is the game isn't it?

 

I may be a little over confident in this case because I felt I saw the RIM decline coming long in advance and felt it was going to crush them. In this case I feel like its road bumps. I could be very wrong. Time to wait and see.

 

Anyways, a reality check that the past does not indicate the future is always good.

[Liberty]

http://brooklyninvestor.blogspot.ca/2013/04/newtons-apple.html

[ItsAValueTrap]

Regarding Apple's margins, Apple's 10-K flat out states that their margins are going to drop:

 

In general, gross margins and margins on individual products will remain under downward pressure due to a variety of factors, including continued industry wide global product pricing pressures, increased competition, compressed product life cycles, product transitions and potential increases in the cost of components, as well as potential increases in the costs of outside manufacturing services and a potential shift in the Company’s sales mix towards products with lower gross margins. In response to competitive pressures, the Company expects it will continue to take product pricing actions, which would adversely affect gross margins. Gross margins could also be affected by the Company’s ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products.

 

It's unclear to me whether or not this is a good or bad thing.  If Apple drops its prices then you might expect their volume to go up.  On the other hand, a lower price could hurt Apple's status as a premium brand product.  So it's even possible that their volumes go down.  (In other words I don't know.)