AAPL - Apple Inc.

[texual]

Take some comfort on this beautiful Friday afternoon! I'm still enjoying Apple products regularly. I use the phone and tablet and see no current alternative. I've owned Windows Phone 8 and returned it in a week (with restock fee!) to get an iPhone 5. However I don't enjoy the stock or its prospects going forward, at least since 2010. If the stock went back to financial crisis levels, sure I would load up (again). If it was at 2005 levels I would buy again, but if that happened I would have to assume the company really went down like RIM. I dont see that happening.

 

What I DO see happening is a reversion to the mean, like Microsoft in 1999-2002. Peak, fall, stabilizes and stays the course for a long while. Not at least until another grand cycle of products and innovations by a new leader. I don't think Tim Cook is the guy. Hes a CEO, hes not Steve Jobs. I don't see him doing what Jobs did in 1997 and onward, again.

 

I see Apple the same way as Microsoft going from Bill Gates to Steve Ballmer. Hate me all you want, that is what I see happening. Theyll make tons of money, even increase revenue and store counts and all that. It won't translate into stock returns just like Microsoft the past 12 years.

 

Don't quote me on this, I am not one to predict stock charts. I just feel a striking similarity between the two stories.

[constructive]

Theyll make tons of money, even increase revenue and store counts and all that. It won't translate into stock returns just like Microsoft the past 12 years.

 

Microsoft's profits didn't translate into stock returns because it was trading at 70x earnings in 1999. Apple's valuation in 2013 is the complete opposite.

 

http://media.ycharts.com/charts/177035cc0cc76f223389ecacf355e38c.png

 

[Viking]

texual, I appreciate getting different viewpoint... so don't sweat that we may not all see things the same way. Creates a great opportunity to think about things a little more deeply.

 

Regarding a larger screen phone Cook did not say they were not interested in the form factor. He said the technology available in the past would not allow Apple to deliver a product they were happy with. My interpretation is Cook is saying they will be launching a larger screen phone at some point in the future.

 

Regarding AT&T and Verizon, look at their just released results... Apple continues to grow sales. If they are de-emphasizing Apple (by placing models at back of the store) and Apple is still able to grow are you not making the bullish case for Apple (growth must be due to overwhelming strenght of brand)?   

 

Regarding Nokia, BBY, MSFT it increasingly looks to me like they have missed the train (I am talking about the profitable markets). And as Apple moves into the midrange segment it will be more difficult for them to grow profitable sales.

 

Apple has increase R&D spending dramatically over the past two years. The benefits of this spend will be seen years out. Interesting how everyone is giving them no credit for this. Personally, I like that expectations are now so low. It will not take much to make everyone happy. Should they actually deliver another blockbuster product in the next 12-24 months the stock will rocket. Limited downside; lots of upside potential. GREAT investment.

 

Having said all this I think we could have one more leg down coming for the stock. Fiscal Q3 earnings will be weak and if no new products are announced in the next few months fiscal Q4 earnings could be worse. If people are looking for a short term jump in the sharte price they may be disappointed. Over the medium term I think Apple will announce some solid to great things and reward patient investors.

 

Palantir, moving forward I want Apple to offer a full range of products (that are equally as great as their traditional iphone). As the phone market matures it is natural for Apple to increase the range of products available. Moving forward, I expect ecosystem to become more important. By offering a full range of devices (phone, tablet and mp3 player) they will further extend their lock on the most profitable segment of the market. We are still early in the game and Apple is making all the right moves (perhaps a little slower than some would like).

[texual]

Why isn't the PE ratio of Apple higher?

[texual]

The answer you'll tell me is going to be exactly what I expect to hear. After a few days of brainstorming you'll get to the real answer and it will startle you!

[boilermaker75]

Damn mini options. Just before the close I wrote some AAPL 05/03/2013 puts, or at least I thought that was what I was doing. I accidently clicked on AAPL7 5/03/2013 puts instead, which are for only 10 shares.  So imagine my surprise when I checked my trade to log it into EXCEL and saw 1/10 of the cash I expected!

[CorpRaider]

Can't they just slap a chip and telephony software into an ipad mini and decimate whatever ridiculous "phablet" the comps come out with?

[Guest valueInv]

Can't they just slap a chip and telephony software into an ipad mini and decimate whatever ridiculous "phablet" the comps come out with?

 

Then they would be as ridiculous as the competition.

[valueorama]

What I DO see happening is a reversion to the mean, like Microsoft in 1999-2002. Peak, fall, stabilizes and stays the course for a long while. Not at least until another grand cycle of products and innovations by a new leader. I don't think Tim Cook is the guy. Hes a CEO, hes not Steve Jobs. I don't see him doing what Jobs did in 1997 and onward, again.

 

I see Apple the same way as Microsoft going from Bill Gates to Steve Ballmer. Hate me all you want, that is what I see happening. Theyll make tons of money, even increase revenue and store counts and all that. It won't translate into stock returns just like Microsoft the past 12 years.

 

Don't quote me on this, I am not one to predict stock charts. I just feel a striking similarity between the two stories.

 

I dont think it is going to like that for a simple reason. Microsoft was trading at an insane PE when ballmer go the spot(Year 2000). The PE for Microsoft now is 16. Apple is already at PE of 9.5.

 

The big difference probably is that the GM for Apple is going to go down.

[Guest valueInv]

texual, I appreciate getting different viewpoint... so don't sweat that we may not all see things the same way. Creates a great opportunity to think about things a little more deeply.

 

Regarding a larger screen phone Cook did not say they were not interested in the form factor. He said the technology available in the past would not allow Apple to deliver a product they were happy with. My interpretation is Cook is saying they will be launching a larger screen phone at some point in the future.

 

Regarding AT&T and Verizon, look at their just released results... Apple continues to grow sales. If they are de-emphasizing Apple (by placing models at back of the store) and Apple is still able to grow are you not making the bullish case for Apple (growth must be due to overwhelming strenght of brand)?   

 

Regarding Nokia, BBY, MSFT it increasingly looks to me like they have missed the train (I am talking about the profitable markets). And as Apple moves into the midrange segment it will be more difficult for them to grow profitable sales.

 

Apple has increase R&D spending dramatically over the past two years. The benefits of this spend will be seen years out. Interesting how everyone is giving them no credit for this. Personally, I like that expectations are now so low. It will not take much to make everyone happy. Should they actually deliver another blockbuster product in the next 12-24 months the stock will rocket. Limited downside; lots of upside potential. GREAT investment.

 

Having said all this I think we could have one more leg down coming for the stock. Fiscal Q3 earnings will be weak and if no new products are announced in the next few months fiscal Q4 earnings could be worse. If people are looking for a short term jump in the sharte price they may be disappointed. Over the medium term I think Apple will announce some solid to great things and reward patient investors.

 

Palantir, moving forward I want Apple to offer a full range of products (that are equally as great as their traditional iphone). As the phone market matures it is natural for Apple to increase the range of products available. Moving forward, I expect ecosystem to become more important. By offering a full range of devices (phone, tablet and mp3 player) they will further extend their lock on the most profitable segment of the market. We are still early in the game and Apple is making all the right moves (perhaps a little slower than some would like).

 

Here ya go:

 

http://venturebeat.com/2013/04/26/apples-black-hole-ecosystem-will-drive-market-share-past-android-yankee-group-says/

[Guest wellmont]

funny I just read an article on bloomberg saying streaming services were taking share from Itunes, which they described as "dated". :) happy 10th itunes!

[Guest valueInv]

funny I just read an article on bloomberg saying streaming services were taking share from Itunes, which they described as "dated". :) happy 10th itunes!

They're working on their own streaming service. Stay tuned.

 

Funny thing, Apple has operated iTunes on break even for the most part. It's only now that it is beginning to bring in profits due to the App Store. Makes you wonder about those competitors who are trying to use a "commoditize the complement" strategy while also pricing their content lower

[Guest wellmont]

funny I just read an article on bloomberg saying streaming services were taking share from Itunes, which they described as "dated". :) happy 10th itunes!

They're working on their own streaming service. Stay tuned.

 

Funny thing, Apple has operated iTunes on break even for the most part. It's only now that it is beginning to bring in profits due to the App Store. Makes you wonder about those competitors who are trying to use a "commoditize the complement" strategy while also pricing their content lower

 

you say stay tuned a lot. :)

[Guest valueInv]

funny I just read an article on bloomberg saying streaming services were taking share from Itunes, which they described as "dated". :) happy 10th itunes!

They're working on their own streaming service. Stay tuned.

 

Funny thing, Apple has operated iTunes on break even for the most part. It's only now that it is beginning to bring in profits due to the App Store. Makes you wonder about those competitors who are trying to use a "commoditize the complement" strategy while also pricing their content lower

 

you say stay tuned a lot. :)

 

Lets just say, I know how Apple operates. ;)

[jeffmori7]

funny I just read an article on bloomberg saying streaming services were taking share from Itunes, which they described as "dated". :) happy 10th itunes!

They're working on their own streaming service. Stay tuned.

 

Funny thing, Apple has operated iTunes on break even for the most part. It's only now that it is beginning to bring in profits due to the App Store. Makes you wonder about those competitors who are trying to use a "commoditize the complement" strategy while also pricing their content lower

 

you say stay tuned a lot. :)

 

Lets just say, I know how Apple operates. ;)

 

Hey valueInv, I know it has prbably been asked already, but actually, do you work for Apple? :) You can come out of the closet if you want :P

[constructive]

Why isn't the PE ratio of Apple higher?

 

The answer you'll tell me is going to be exactly what I expect to hear. After a few days of brainstorming you'll get to the real answer and it will startle you!

 

My theory is that Mr Market expects revenues and margins to decline, primarily because Samsung is a strong competitor.

 

But since you already know the real answer, why don't you save me a couple of days and tell me?

[Guest valueInv]

funny I just read an article on bloomberg saying streaming services were taking share from Itunes, which they described as "dated". :) happy 10th itunes!

They're working on their own streaming service. Stay tuned.

 

Funny thing, Apple has operated iTunes on break even for the most part. It's only now that it is beginning to bring in profits due to the App Store. Makes you wonder about those competitors who are trying to use a "commoditize the complement" strategy while also pricing their content lower

 

you say stay tuned a lot. :)

 

Lets just say, I know how Apple operates. ;)

 

Hey valueInv, I know it has prbably been asked already, but actually, do you work for Apple? :) You can come out of the closet if you want :P

 

If I did, I wouldn't be able to talk about Apple here.

[texual]

It's because smart people know that apples revenue stream is simply not a permanent or predictable one. Ten years ago nobody could tell you what the growth of apple would be. They have no sustainable or long term income streams ten years ago that today look like sure fire bets. Lift the veil and you'll see a company that only achieved its market defying moves in the ten years since the dot com boom. Based on hit driven consumer products. At Microsoft the truth is they can value their income stream so accurately and with sustainable growth ahead ten or even more years that they rate it AAA. Only an idiot could tell me with a straight face that apple is AAA.

 

They don't have any way to be as profitable in ten years without more hit driven products. They don't supply electricity or build the worlds software for businesses. They aren't IBM or intel. They are apple. And apple has a low P/E ratio because the party can't go on for much longer. Already markets are reacting to the inevitable. Profit margins are going down and no product, not a tv or a watch will replace the events of the iPhone or iPad. Cry or whine all you like, this is a fact: apple cannot get a high P/E ratio because their business depends on hit driven events for consumers not does not have recurring revenue or contracts like Microsoft does. They'll be dependent on either getting ahead of competition which seems less likely or they'll have to invent the next iPhone which also seems unlikely.

[texual]

Another way I look at it is google having a high ratio because they have a permanent source of revenue based on their own whim. Google can experiment with all kinds of stuff but their core business is stable and permanent. You can jack up ratios when a business looks good for ten or fifteen years. Googles business is advertising and they can move the dial and basically make any amount of money they want because they own that market.

[texual]

Amazon as well. High ratio based on a permanent position for over 15 years and most likely for the next fifteen years ahead. They are the de facto online store. The products will come and go. They'll experiment with tablets and all that but the end core business is fantastic. Apple doesn't have that except for one thing: App Store. They own the app market. Lets so though how that ecosystem performs when a lot of big companies and money are chasing after it too. I believe this is apples greatest long term resource and permanent value.

[Palantir]

 

Hey valueInv, I know it has prbably been asked already, but actually, do you work for Apple? :) You can come out of the closet if you want :P

 

I doubt it. You can pay a man to do a job, but you can't pay for passion! This is a full on man-crush.

[Guest valueInv]

 

Hey valueInv, I know it has prbably been asked already, but actually, do you work for Apple? :) You can come out of the closet if you want :P

 

I doubt it. You can pay a man to do a job, but you can't pay for passion! This is a full on man-crush.

 

Dude, I've been holding Apple since 2001. I got paid and then some, Son :)

[Guest valueInv]

Let's address the iPhone first.

On 1 - ASPs have been more or less stable..How do you know that competition is eroding margins? How do you know that it is not costs?

 

Lets say ASPs decrease going forward. Is it because competition is forcing prices down? Is it because Apple is entering lower priced segments as the higher priced segments saturate? How do you know?

 

Apple is "entering lower priced segments" (iPhone product line consists of both high-end iPhone 5s and lower-end iPhones) because of competition, which is taking away iPhone unit sales.  Just take a look at Galaxy sales (as pointed out by VAL) and the "overwhelming demand" for the S4 in order to understand that the high-end of the market is not "saturated."  That's wishful thinking on your part.

 

Note that AAPL is smart to mitigate this loss of market share (and concomitant loss of unit sales) at the high end by continuing to sell the lower-end iPhone models at great margins.  However, what affect does that have on total GM dollars from the iPhone product line when unit sales growth is slowing?

 

Here's what Peter Oppenheimer and Tim Cook said on the CC about iPhone ASPs:

 

The iPhone ASPs were down sequentially about $28 as you noted. And this was driven primarily by mix. The largest factors were an increase in the iPhone 4 mix, which resulted from or making the iPhone 4 more affordable in many markets. And also mix within the iPhone 5 as it was in its second full quarter.

 

And then on iPhone margins:

 

Toni, we don’t provide margins by product or within product line. But I talked about two factors that were impacting gross margin on a sequential basis. The first is leveraging, that’s largest of the two on the lower sequential revenue. But we also expect to see a different product mix and that’s primarily related to iPhone.

 

If fixed costs (not just component costs, but other costs incorporated within COGS) are going up faster than unit sales (and therefore revenue growth), that is loss of leverage.  Note that Tim Cook said that last year costs were historically low.  On top of that, you have a "different product mix" where gross margin dollars per unit is likely smaller.

 

Your man Horace Dediu believes that iPhone margins are crazy large and contribute a huge amount to Apple's overall gross margin dollars total.  If gross margins per iPhone unit are shrinking and iPhone unit sales growth is slowing, then that translates to reduced earnings for the iPhone product line and reduced Apple earnings, as we saw this quarter.

 

If you think iPhone GM dollars will go up substantially more from here, you are likely betting that a new iPhone launch will save the day on ASPs -- and maybe it will, but that's not necessarily a great bet. 

 

Keep the faith, though!

 

Where does Cook mention that he is going to lower priced segments because of competition? Could it be that he is going to those segments because of saturation? Here is a barometer for the entire industry:

 

http://files.shareholder.com/downloads/QCOM/2448202255x0x656390/5f9b86d3-6bad-472f-a8ad-738ad35169db/Q2FY13%20Executive%20Presentation.pdf

 

Take a look at slide 9.

 

Funny you should mention Horace, he seems to agree with me on component costs:

 

http://www.asymco.com/2013/04/25/margin-call-2/

 

[Guest valueInv]

Let's address the iPhone first.

On 1 - ASPs have been more or less stable..How do you know that competition is eroding margins? How do you know that it is not costs?

 

Lets say ASPs decrease going forward. Is it because competition is forcing prices down? Is it because Apple is entering lower priced segments as the higher priced segments saturate? How do you know?

 

Apple is "entering lower priced segments" (iPhone product line consists of both high-end iPhone 5s and lower-end iPhones) because of competition, which is taking away iPhone unit sales.  Just take a look at Galaxy sales (as pointed out by VAL) and the "overwhelming demand" for the S4 in order to understand that the high-end of the market is not "saturated."  That's wishful thinking on your part.

 

Note that AAPL is smart to mitigate this loss of market share (and concomitant loss of unit sales) at the high end by continuing to sell the lower-end iPhone models at great margins.  However, what affect does that have on total GM dollars from the iPhone product line when unit sales growth is slowing?

 

Here's what Peter Oppenheimer and Tim Cook said on the CC about iPhone ASPs:

 

The iPhone ASPs were down sequentially about $28 as you noted. And this was driven primarily by mix. The largest factors were an increase in the iPhone 4 mix, which resulted from or making the iPhone 4 more affordable in many markets. And also mix within the iPhone 5 as it was in its second full quarter.

 

And then on iPhone margins:

 

Toni, we don’t provide margins by product or within product line. But I talked about two factors that were impacting gross margin on a sequential basis. The first is leveraging, that’s largest of the two on the lower sequential revenue. But we also expect to see a different product mix and that’s primarily related to iPhone.

 

If fixed costs (not just component costs, but other costs incorporated within COGS) are going up faster than unit sales (and therefore revenue growth), that is loss of leverage.  Note that Tim Cook said that last year costs were historically low.  On top of that, you have a "different product mix" where gross margin dollars per unit is likely smaller.

 

Your man Horace Dediu believes that iPhone margins are crazy large and contribute a huge amount to Apple's overall gross margin dollars total.  If gross margins per iPhone unit are shrinking and iPhone unit sales growth is slowing, then that translates to reduced earnings for the iPhone product line and reduced Apple earnings, as we saw this quarter.

 

If you think iPhone GM dollars will go up substantially more from here, you are likely betting that a new iPhone launch will save the day on ASPs -- and maybe it will, but that's not necessarily a great bet. 

 

Keep the faith, though!

 

Where does Cook mention that he is going to lower priced segments because of competition? oh wait, thats just your assumption.Could it be that he is going to those segments because of saturation? Here is a barometer for the entire industry:

http://files.shareholder.com/downloads/QCOM/0x0x656391/d99b37a5-1299-4146-ba3a-a0894adfa0c8/Q2FY13%203G-4G%20Devices.pdf

 

Funny you should mention Horace, he seems to agree with me on component costs:

 

http://www.asymco.com/2013/04/25/margin-call-2/

[texual]

Oh I also don't like Tim cook. At all. He's uninspiring, not funny, and also had a big crush on lance Armstrong.