AAPL - Apple Inc.

[Guest valueInv]

Let Google, Amazon and others battle it out at the bottom rung. Apple knows better. That is what 20 years after the introduction of the PC, they make more than the other top 5 vendors put together.

 

The PC was invented in 1977.  So let's compare the profits of Apple to just one of the top vendors (per Apple FY1997 10-K and the Dell 1997 annual report):

 

Apple: -$1,045M

Dell: $518M

 

Try it today.

 

Sorry, I misunderstood.  I thought when you said twenty years, you meant roughly 20 years, rather than almost twice that.  My mistake.

 

Oh, so when you said that their PC strategy was working, you really meant that their strategy was to sink to 5% market share in PCs, lose money hand over fist so that they were laying off piles of people, and (as I recall) were trading at a valuation less than cash, or close anyway.  And this was all part of a long-term strategy to become the #2 provider of smart phones.

 

I guess that makes sense. 

 

That said, if Microsoft manages to turn Xbox into the primary hub for all home electronics, I reserve the right to say that was the strategy all along when they implemented Basic on the Altair, OK?  (If they don't, then I also reserve the right to have no recollection of this conversation.)

 

Their profits and their losses have been because of their execution, not commoditization. Were PCs commoditized in 1997 and somehow became "uncommoditized" today that Apple was losing money then and making it now? 

[texual]

I think I and some board members understand Apple better than you do.

 

With that being said, YOU could also be right! Thats the fun part of investing. The hard part is accepting that being 'right' or 'wrong' still doesn't preclude being successful in investing! While valueInv could be absolutely correct, I still don't believe Apples stock price will be a good investment over the long term. Or I could be right and think Apple just gets harder to break away from competitors and yet the stock soars. Its all about making a profit on what you put in. If you put in a small dollar cost average like I did many years ago in Apple, any hiccups here today seem like peanuts. Tell that to someone who invested in 'the worlds most successful, biggest market cap' stock when it was nearly 700 a share. Their viewpoint isnt so great, even though they bought into the best company at the time. I don't know if theyll be made whole again. Its easy to say you understand a business more than anyone else but that may or may not translate into success with stocks.

 

Just a heads up bro.

 

I sold stock in Apple and took that money over the past year and continued to build a significant position in Microsoft. My family members call me stupid. Time will tell.

[txlaw]

txlaw, I share your concern regarding Apple's ability to maintain total profit on the iphone line with the current line up of phones; I do think as they broaden their product offering (lower priced phone; 5 inch screen phone) and increase distribution (China Mobile and DoCoMo distribution deals) they should be able to grow total phone profits.

 

I watched the recent Samsung launch with some concern. Samsung had built a lot of momentum and consensus opinion was they had caught Apple in terms of being a truly leading, innovative company. However, watching the launch and reading the reviews I believe Samsung missed a great opportunity to show they are in Apple's league (I am talking about being first with the next big thing). It looks to me that Samsung is work class at fast adapting the best innovation (a very profitable business).

 

The ball is clearly back in Apple's court.

 

Viking, it's certainly a possibility that Apple maintains profit on the iPhone line through introduction of lower end iPhones or new models.  However, I can't see that happening with any degree of certainty at the moment, and the price will need to be lower (or the fog will need to be lifted) before I can get comfortable with putting a good amount of money into Apple at current prices.

 

I personally don't think Samsung will be able to maintain these high ASPs on their new devices either.  If Google, Amazon, Facebook and their hardware partners (LG, Lenovo, HTC, etc.) release devices that are very competitive as well, then I believe ASPs will have to come down across the board. 

 

But we can agree to disagree on this.

[txlaw]

 

 

Hmm . . . and what is the market share of Rolex in the total watch market?  Market share of Porsche?  Market share of Bang & Olufsen?

 

Why don't you marinate on that for a while and then come back to me with some answers -- or some more snide comments instead, if you wish.  ;D

 

Aha, now were getting somewhere. Now you know why they don't have high marketshare, that businesses have other successful strategies than simply pursuing marketshare. I don't want Apple to have the highest marketshare if it means going down a slippery slope. If BMW tries to enter the low end market and compete with Corolla, they will fail miserably because the company is not built for that. The same way, Apple, if they continue to act sensibly will not do that. They have high marketshare in the beginning when there are no competitors. The competitors copy, fight price battles, lose money and eventually most die. Apple chugs along with discipline. Take a look at the PC industry, how many companies survive today? Remember Gateway, eMachines?

 

Tim Cook has said repeatedly that he will not introduce a cheap iPhone - read that as "we may enter the mid range market but not the the low end". Marketshare is a goal but it is not at the top of the list.

 

This is what I mean by understanding Apple - they are not run to maximize marketshare. I think this should be pretty obvious.

 

It is obvious, and I have said as much in my posts.  Please read them before responding in this manner.

 

The problem is that if iPhone market share decreases to the level of a luxury goods provider, profits from that line very likely could decrease.  Because, right now, Apple is making money by selling a ton of devices (still at a high market share for Apple) at Porsche-like margins per unit. 

 

If gross margins per unit decrease as well, that's a double whammy for AAPL.

 

And what's the market share of OSX, pray tell? 

 

What about iOS? 

 

As a shareholder, I am very happy with the wealth they have created for me without optimizing for marketshare. And I have said this before - all Apple needs to do is make sure that their share does not fall below a certain threshold due to platform effects.

 

Yes, but can they do this in the face of competition, which is causing commoditization?  That's the hundred billion dollar question.

 

Christensen is like Graham for the Silicon Valley. You read about it, we live it in the trenches everyday. In fact, go back on this thread and it was me who said that his model is the appropriate one. But since you mention it and seem to have read it, here are some questions for you:

 

1, What is the difference between commoditization and disruption?

2, What condition is necessary for disruption to occur?

3, What are the two kinds of disruption? Does Apple have anything to do with the second kind?

 

BTW, did you know that it aws Jobs' favorite technology book and that he distributed it to all his executives? Trust me, Apple management is well aware of disruption and they have handled it very well in the past.

 

Sorry, but you don't appear to have gotten that the Christensen book I am referring to is the follow up to the Innovator's Dilemma.  It's call the Innovator's Solution.  In that book, Christensen talks about modularity and commoditization.  Here's what he said in an interview with your man Horace Dediu:

 

“The transition from proprietary architecture to open modular architecture just happens over and over again. It happened in the personal computer. Although it didn’t kill Apple’s computer business, it relegated Apple to the status of a minor player. The iPod is a proprietary integrated product, although that is becoming quite modular. You can download your music from Amazon as easily as you can from iTunes. You also see modularity organized around the Android operating system that is growing much faster than the iPhone. So I worry that modularity will do its work on Apple.”

 

http://www.forbes.com/sites/stevedenning/2012/05/07/why-clayton-christensen-worries-about-apple/

 

Further, in those posts I made about Clayton Christensen a couple pages back, see http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/aapl-apple-inc/msg112832/#msg112832 , Christensen said that when commoditization occurs because of modularity (in this case, commoditization of the OS), the pieces of the stack above (hardware and apps/services) are where the money is made.

 

The Ben Graham of Silicon Valley is telling you to be skeptical that Apple can maintain profit through selling embedded OS licenses.  You're just not listening to him because you've got blinders on and can't stand the fact that a lawyer, God forbid, is daring to express his opinion on matters of high technology.

[txlaw]

Most people in tech laughed at Apple including the "geniuses" from RIM and Ballmer. Take a look at examples from my signature.

 

That's not true at all.  I guarantee you there was a lot of effusive press about the iPhone as well, but I'm not going to spend the time to collect it all for you. 

 

As for you, you still don't understand what Apple is trying to do, I seriously doubt you id 6 years ago.

 

Wow, so much for an improved tone in the conversation. 

 

I understand quite well what Apple is trying to do.  You're just incensed because I dare to express the opinion that they are in a position where it very unlikely for them to succeed because of market forces.  Don't take it personally that a lawyer disagrees with you despite your being a Silicon Valley warrior who is "in the trenches."

[ItsAValueTrap]

Alright guys, here's how you put somebody on your ignore list:

 

Profile --> Modify Profile --> (dropdown) Buddies / Ignore List --> Edit Ignore List --> Add To Ignore List

 

You need to enable Javascript too if you are using the NoScript Firefox plug-in.

 

Now we can go back to having productive discussions...

[Guest valueInv]

 

 

Hmm . . . and what is the market share of Rolex in the total watch market?  Market share of Porsche?  Market share of Bang & Olufsen?

 

Why don't you marinate on that for a while and then come back to me with some answers -- or some more snide comments instead, if you wish.  ;D

 

Aha, now were getting somewhere. Now you know why they don't have high marketshare, that businesses have other successful strategies than simply pursuing marketshare. I don't want Apple to have the highest marketshare if it means going down a slippery slope. If BMW tries to enter the low end market and compete with Corolla, they will fail miserably because the company is not built for that. The same way, Apple, if they continue to act sensibly will not do that. They have high marketshare in the beginning when there are no competitors. The competitors copy, fight price battles, lose money and eventually most die. Apple chugs along with discipline. Take a look at the PC industry, how many companies survive today? Remember Gateway, eMachines?

 

Tim Cook has said repeatedly that he will not introduce a cheap iPhone - read that as "we may enter the mid range market but not the the low end". Marketshare is a goal but it is not at the top of the list.

 

This is what I mean by understanding Apple - they are not run to maximize marketshare. I think this should be pretty obvious.

 

It is obvious, and I have said as much in my posts.  Please read them before responding in this manner.

 

The problem is that if iPhone market share decreases to the level of a luxury goods provider, profits from that line very likely could decrease.  Because, right now, Apple is making money by selling a ton of devices (still at a high market share for Apple) at Porsche-like margins per unit. 

 

If gross margins per unit decrease as well, that's a double whammy for AAPL.

 

And what's the market share of OSX, pray tell? 

 

What about iOS? 

 

As a shareholder, I am very happy with the wealth they have created for me without optimizing for marketshare. And I have said this before - all Apple needs to do is make sure that their share does not fall below a certain threshold due to platform effects.

 

Yes, but can they do this in the face of competition, which is causing commoditization?  That's the hundred billion dollar question.

 

Christensen is like Graham for the Silicon Valley. You read about it, we live it in the trenches everyday. In fact, go back on this thread and it was me who said that his model is the appropriate one. But since you mention it and seem to have read it, here are some questions for you:

 

1, What is the difference between commoditization and disruption?

2, What condition is necessary for disruption to occur?

3, What are the two kinds of disruption? Does Apple have anything to do with the second kind?

 

BTW, did you know that it aws Jobs' favorite technology book and that he distributed it to all his executives? Trust me, Apple management is well aware of disruption and they have handled it very well in the past.

 

Sorry, but you don't appear to have gotten that the Christensen book I am referring to is the follow up to the Innovator's Dilemma.  It's call the Innovator's Solution.  In that book, Christensen talks about modularity and commoditization.  Here's what he said in an interview with your man Horace Dediu:

 

“The transition from proprietary architecture to open modular architecture just happens over and over again. It happened in the personal computer. Although it didn’t kill Apple’s computer business, it relegated Apple to the status of a minor player. The iPod is a proprietary integrated product, although that is becoming quite modular. You can download your music from Amazon as easily as you can from iTunes. You also see modularity organized around the Android operating system that is growing much faster than the iPhone. So I worry that modularity will do its work on Apple.”

 

http://www.forbes.com/sites/stevedenning/2012/05/07/why-clayton-christensen-worries-about-apple/

 

Further, in those posts I made about Clayton Christensen a couple pages back, see http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/aapl-apple-inc/msg112832/#msg112832 , Christensen said that when commoditization occurs because of modularity (in this case, commoditization of the OS), the pieces of the stack above (hardware and apps/services) are where the money is made.

 

The Ben Graham of Silicon Valley is telling you to be skeptical that Apple can maintain profit through selling embedded OS licenses.  You're just not listening to him because you've got blinders on and can't stand the fact that a lawyer, God forbid, is daring to express his opinion on matters of high technology.

 

You haven't answered my questions.

[constructive]

The hard part is accepting that being 'right' or 'wrong' still doesn't preclude being successful in investing! While valueInv could be absolutely correct, I still don't believe Apples stock price will be a good investment over the long term.

 

They're trading around 7x trailing earnings (ex-cash). So the likelihood of earnings increasing and the share price declining is low. In fact the opposite is more likely.

 

There is a margin of safety on the valuation side, that makes up for the lack of it on the operational side.

[txlaw]

Alright guys, here's how you put somebody on your ignore list:

 

Profile --> Modify Profile --> (dropdown) Buddies / Ignore List --> Edit Ignore List --> Add To Ignore List

 

You need to enable Javascript too if you are using the NoScript Firefox plug-in.

 

Now we can go back to having productive discussions...

 

Haha, I think I fell into a "Someone is wrong on the Internet!" time warp over the last few days.  ;D 

 

I'll take a break. 

 

And, btw, I do use NoScript -- I love that extension!

[Guest valueInv]

Alright guys, here's how you put somebody on your ignore list:

 

Profile --> Modify Profile --> (dropdown) Buddies / Ignore List --> Edit Ignore List --> Add To Ignore List

 

You need to enable Javascript too if you are using the NoScript Firefox plug-in.

 

Now we can go back to having productive discussions...

 

Haha, I think I fell into a "Someone is wrong on the Internet!" time warp over the last few days.  ;D 

 

I'll take a break. 

 

And, btw, I do use NoScript -- I love that extension!

 

Do answer my questions before you do ;)

[Parsad]

Guys, focus on the company instead of riding each other...otherwise I start deleting posts!  Cheers!

[SwedishValue]

If it is possible that Apple becomes the first hardware/consumer electronic company to my knowledge that retains in excess of 50% gross margins on its products and keeps selling them to the masses, then Apple is one of the cheapest great companies I ever saw.

 

I do not believe Apple will be immune to commodization, and think that it is very unlikely that they retain present margins if they do not significantly decrease their market share and sales. I do not believe that Apple "owns" innovation within the tech-field, or that consumers are entranched to the Apple brand in a similar way they are to the Coca Cola or Disney brand.

 

I'm really not suggesting that Apple is a bad company. Not at all. I think that there is an interesting dynamic with an increasingly swelling cash chest and a likely scenario of decreasing revenues and margins. At some point, Apple is to cheap to ignore. At what point? I do not feel confident yet.

 

However, I consider the recent bond offerings to be very value creating for Apple shareholders. Bearing in mind Apple's problems of the past when it has failed to adopt to changing technology and have been close to bankruptcy twice during the past 20 years, it seems really absurd for me that a company reliant on re-innovation can issue 30 years bonds 100 basis points above the government rate. If Apple can continue to do this they will have money at a very low cost basis for a very long time - the possibilities of using this money opportunistically can potentially be very value enhancing.

[ItsAValueTrap]

If Apple can continue to do this they will have money at a very low cost basis for a very long time - the possibilities of using this money opportunistically can potentially be very value enhancing.

 

Well if you try to invert... it seems that most large companies have access to crazy cheap debt.  But all these tech companies still have a problem.  They can't reinvest all of their earnings at high rates of return.  Apple, Google, and Microsoft all generate huge amounts of cash flow.  Blackberry, another smartphone competitor, is one company that doesn't have access to lots of cheap capital.

[SwedishValue]

Yes, that is a good point obviously. Many of these tech companies that you are implying can and have invested within their own business at satisfactory rates by buying back their own shares, especially when you compare the rate of return on such an investment to that of the very cheap credit. To the extent that these franchises/companies have protected business lines that can continue to realize a significant part of the high intrinsic earnings power, you will have a very significant effect on the underlying growth of intrinsic value per share.

 

It was at least 5 years ago I read the books by Peter Lynch,  but I'm thinking of his example of Philip Morris from Beating the Streat (I think it was).... Declining business can still work wonderfully for shareholders under certain circumstances. If Apple or any other tech company can borrow incremental sums of capital at rates very close to the treasury rate and invest, it will have a huge impact on per share intrinsic value growth if the underlying business yields much higher than the cost of money. In essence you will also make a bet on inflation since the underlying intrinsic earnings power in nominal terms is likely to increase significantly under an inflationary environment. It doesn't protect you in real terms of purchasing power, but under inflationary environments my thinking is that equity holders of not-so-capital intensive businesses will be pocketing real PP from bond holders.

 

I think it's insanely hard to understand these tech companies though. But I feel that I should make an effort now more than ever previously.

[Guest wellmont]

there is no such thing as a declining tech business. managements don't see it that way. if they see their core business go into decline they will try to start new businesses or buy other businesses so they don't end up managing a declining business. very few tech managers think about shareholders before thinking about what's good for managers. very few tech CEOs are capital allocaters. they grow sales. Kyrie Irving gets buckets. Tech managements grow sales.

[Guest valueInv]

there is no such thing as a declining tech business. managements don't see it that way. if they see their core business go into decline they will try to start new businesses or buy other businesses so they don't end up managing a declining business. very few tech managers think about shareholders before thinking about what's good for managers. very few tech CEOs are capital allocaters. they grow sales. Kyrie Irving gets buckets. Tech managements grow sales.

 

+100. The whole decline story rests on the assumption that Apple won't/can't do anything about their position in the market.

[SwedishValue]

Of course they can, but so can other companies within the IT sector. Both companies that we allready know the name of and companies that have not been founded as of today. Are you suggesting any of the following or both;

 

 

1. That Apple has superior intrinsic and captive innovation ability compared with that of other incumbents and new players?

 

2. That the tech industry has changed its nature of extremely short and hard to predict product life cycles?

 

I have a very hard time seeing in what way Apple is different to other previously dominant players within the tech industry such as Dell, Motorola (after introduction of Razor) or Nokia. I aldo have a hard time understanding what could possibly take a company from a seemingly permanent competitive disadvantage to a very substainable and hard to duplicate moat/franchise within less than 10 years. Especially considering that Apple almost filed for bankruptcy (twice) as a result of failure to innovate succsessfully during the last 20 years.

 

Why is this company different from its past and its peers?

[Guest valueInv]

Of course they can, but so can other companies within the IT sector. Both companies that we allready know the name of and companies that have not been founded as of today. Are you suggesting any of the following or both;

 

 

1. That Apple has superior intrinsic and captive innovation ability compared with that of other incumbents and new players?

 

2. That the tech industry has changed its nature of extremely short and hard to predict product life cycles?

 

I have a very hard time seeing in what way Apple is different to other previously dominant players within the tech industry such as Dell, Motorola (after introduction of Razor) or Nokia. I aldo have a hard time understanding what could possibly take a company from a seemingly permanent competitive disadvantage to a very substainable and hard to duplicate moat/franchise within less than 10 years. Especially considering that Apple almost filed for bankruptcy (twice) as a result of failure to innovate succsessfully during the last 20 years.

 

Why is this company different from its past and its peers?

 

It's people.

[SwedishValue]

It's people.

 

So Apple has a captive ability of keeping and also introducing superior people to its workforce, compared with other companies?

[Palantir]

Looks like Apple is up, appears to have hit resistance at about 400.

[Guest valueInv]

It's people.

 

So Apple has a captive ability of keeping and also introducing superior people to its workforce, compared with other companies?

 

It is the only company that hires a breed of people that help it innovate like no other.

It's culture and management structure are like no other.

[bennycx]

What? Its culture allows its people to be more creative and innovative and superior?

 

It's people.

 

So Apple has a captive ability of keeping and also introducing superior people to its workforce, compared with other companies?

 

It is the only company that hires a breed of people that help it innovate like no other.

It's culture and management structure are like no other.

[Viking]

I am not sure if Apple realizes that its business is doomed. Read any number of articles that have been published over the past 6 months and you would be left with the understanding that Apple's sales are tanking and the Android/Samsung machine has supplanted it as chief innovator and sales leader. The smartphone and tablet market HAS BECOME commoditized and Apple's business model is crashing to the earth....

 

And then we get the facts... Apple's business is actually chugging along:

- Apple's U.S. Smartphone Usage Share Approaches 40%: http://www.macrumors.com/2013/05/03/apples-u-s-smartphone-usage-share-approaches-40/

 

Regarding international markets, Apple never has been the leading smartphone seller in international markets (with the highest share); however, their sales have continued to grow over the years. And with most of the sales growth in the smartphone category in the very low end it is not surprising for Apple to have their percent marketshare fall. 

 

Apple's business results are LUMPY (quarter to quarter and now year over year). This is because Apple does not feel compelled to hit the quarerly or annual number; instead, it is running its business for the long term. I think there is a lot of similarity to how Buffett runs Berkshire Hathaway and how Apple is run (I am talking chiefly about focus on long run and not chasing quick profits).

 

Looking at the past 8 years, Apple has easily been the most innovative company on the planet. What is the best predictor of future performance? Those who manage people know the answer to this queston... it is past performance.

 

It is pretty much impossible to know EXACTLY what Apple will be doing in the coming years. The company is too secretive (and correctly so). Because people do not know with certainly what Apple will be doing in the future they are TODAY assuming that no new innovation is coming.

 

Apple has historically launched break through innovation every 3 to 4 years (mp3 player, smartphone, tablet). We have just passed the three year launch of the ipad and investors want comfort knowing EXACTLY what the next big item is and when it will be launched. Not possible.

 

I do expect Apple's results to continue to slow until we get some clarity regarding distribution deals (China Telecom, etc), line extensions (mid priced iphone, 5 inch screen iphone etc), improvements to services and breakthrough innovation (TV, watch etc). Looking at the past, my guess is great things are coming. Because I do not know the timing does not mean I then assume nothing is coming.

[Palantir]

Yep, we haven't even gotten into the fact that Apple can launch more products, in things outside of smartphones and tablets....there's so much room for expansion and new products, and the bears keep ignoring that. Sounds like a lot of groupthink to me.

[VAL9000]

Yep, we haven't even gotten into the fact that Apple can launch more products, in things outside of smartphones and tablets....there's so much room for expansion and new products, and the bears keep ignoring that. Sounds like a lot of groupthink to me.

 

It has been acknowledged and accounted for as a free option.  I can't think of a better way to value the earnings potential of an unreleased product in an unnamed market with an unknown value proposition.

 

What I am concerned about is the idea that Apple will get a four-peat. Main reason is that the guy who everyone in the world recognizes as a product genius is no longer running the company.  Jobs not leading Apple might be similar to the Bulls without Michael Jordan.  Still a good team with a strong fan base, but the mania has long worn off.