Maybe Apple's The Next Berkshire!

[Tim Eriksen]

Apple designs very good products, and sells them for twice the price of similar hardware offerings. At some point their polished iOS software is not going to outshine android enough to justify the price of their inferior hardware and margins are going to contract. They may have the same market cap as XOM but their revenue is only 25% of XOM’s. Being first to the market allowed Apple to sell their products at a 24% profit margin, but it cannot last. Mathematics is working against them; for instance, in order to maintain their current profit level at a 15% profit margin (still a huge premium to their peers), they have to increase revenue by 60%. 

 

I think you are being overly simplistic.  If Apple is selling products for the twice the price of similar offerings why do they only have 40% gross margins.  It is mathematically impossible.  They must be selling something better.  The XOM comparison is really irrelevant - totally different industry with different economics.

 

Sure their margins are better than a Dell of HP but they are not as high as Microsoft. 

[Parsad]

Apple designs very good products, and sells them for twice the price of similar hardware offerings. At some point their polished iOS software is not going to outshine android enough to justify the price of their inferior hardware and margins are going to contract. They may have the same market cap as XOM but their revenue is only 25% of XOMs. Being first to the market allowed Apple to sell their products at a 24% profit margin, but it cannot last. Mathematics is working against them; for instance, in order to maintain their current profit level at a 15% profit margin (still a huge premium to their peers), they have to increase revenue by 60%. 

 

I think you are being overly simplistic.  If Apple is selling products for the twice the price of similar offerings why do they only have 40% gross margins.  It is mathematically impossible.  They must be selling something better.  The XOM comparison is really irrelevant - totally different industry with different economics.

 

Sure their margins are better than a Dell of HP but they are not as high as Microsoft. 

 

Apple's laptops are very overpriced.  You can get computers that do far more for half the price...it was all marketing...not unlike a Louis Vuitton suitcase, or a Ferrari!  With the iPhone and iPad it's completely different.  The user interface they use, and the software running the phone, is superior to the competition...so far!  That won't last. 

 

When the iPhone first came out, I tried this thing and couldn't believe someone actually made something like this back then.  It was light years ahead of the competition.  That gap has slowly contracted while Steve Jobs was around, and now it will accelerate without him there.  Take a look at what the competition's phones can do today, compared to the iPhone four years ago.  That technological gap is shrinking.  You've already got Acer laptops that now have instant on.  Touch screens on other phones are as good.  Cameras, screen quality, etc all markedly better and comparable to Apple. 

 

The only thing that still isn't quite there, and will take some more time is getting the user interface to be more intuitive and useable like Apple's.  But Apple's competition over the next five years will catch up quite a bit.  Cheers! 

[Guest valueInv]

 

So what would you say is the upside on the stock?  GE peaked in late 1999 thereabouts at 600 b and was exceedingly overvalued.  I will give you an ultimate upside somewhere between 500-600 b

That's around a 25-30% upside from today.  Not much of an investment return at this point.  With present cash they could retire 25% of the float.  So you could push reasonably predictable return up to maybe 40% - eliminating the cash load via buybacks wont do much for the share price since it's few times book at least right now.  I am a sorry but I just cant see it.

 

How did you get the 500-600b number?

 

 

The largest market cap of all time for a publicly listed company was 600 b as I said above.  I dont see how Apple can exceed that number.  In fact I will go as far as too suggest that it is very close to a peak, and that is what Mr. Market is telling us.  As others have mentioned competition will come on fiercer than ever.  It is simply the way of things.  Revenues will get squeezed from here on out, and the effect will be a stable stock price, if your lucky, such as WMT, or a drop in price such as GE. 

 

One Q this year they will start to report a squeeze in their profit margins and poof,  there goes the stock price.

 

Their margins have actually been increasing - from about 35% last year to 44% this year. As they grow bigger, they have more economies of scale, improving margins.

 

Here are some questions to determine how big Apple can grow. The numbers are only ballpark numbers, but they'll give you an idea. The question is - what will those numbers be in 5-7 years?

 

Mobile phones : Apple owns only about 5-6% of global mobile phone sales. How much will they own in the future? Would 15%-20% be reasonable?

Laptops and PCs : They own less that 10% but dominate the fastest growing categories - ultrabooks and all-in-one dekstops. Would say 15% be a reasonable future marketshare for them ?

Tablets : They probably have about 75% share but tablets are still in their infancy. Tablets will replace laptops and PCs in the future. Imagine how big that market will be.

Living Room : They probably have less than 1% share through AppleTV(their hobby). It is a given that they will launch a full offering this year or next year. How much do you think they will win in this market? 10%? Will they enter the game console market?

Cloud Computing : They just launched it 6 months ago and it produces negligible revenue. But given that this is where things are moving to in the future and the proliferation of idevices, how big can this business be?

Content Sales : Apple is now selling music, movies, books (and textbooks) and magazines. The revenues are relatively small but as they introduce new offerings and consumption per device increases, will the revenues still stay small? If iDevices dominate, will they be able to negotiate a bigger cut of search revenues?

Siri: Siri is not be monetized now. The original business model (of the startup that Apple bought) was referral fees. So for example, if you book a table at a restaurant through Siri, it get a fee. Siri will increase its capabilities like booking travel, movie tickets, etc What if Apple monetizes that?

Payments : It is clear that the phone will be your wallet/credit card. Apple's current marketshare here is 0. It is likely that they will enter that market. How big a business can that be?

The Wildcards: The above businesses are foreseeable, they are close to Apple current businesses, making it likely that Apple will enter them. But Apple had entered businesses that no one predicts (iPods, iPhones, tablets). What other markets will they enter? Will they introduce something to replace your in-car gps/control system? Will they introduce something like Microsoft's Surface (They filed a no of patents in this area) How big will those businesses be?

Retail: It is clear that Apple's retail stores supercharge sales. Their current footprint is very small - only 5 in China, less than that in India and Brazil. They still have a long ways to go before they have satisfactory coverage over the world.

 

It is unlikely that all of the above will come to fruition. But given Apple's track record of execution, is it reasonable to expect them succeed in at least 40% of them? Most of the above points assume 20% or less marketshare. What will their valuation be then?

 

[Guest valueInv]

Apple designs very good products, and sells them for twice the price of similar hardware offerings. At some point their polished iOS software is not going to outshine android enough to justify the price of their inferior hardware and margins are going to contract. They may have the same market cap as XOM but their revenue is only 25% of XOM’s. Being first to the market allowed Apple to sell their products at a 24% profit margin, but it cannot last. Mathematics is working against them; for instance, in order to maintain their current profit level at a 15% profit margin (still a huge premium to their peers), they have to increase revenue by 60%. 

 

I think you are being overly simplistic.  If Apple is selling products for the twice the price of similar offerings why do they only have 40% gross margins.  It is mathematically impossible.  They must be selling something better.  The XOM comparison is really irrelevant - totally different industry with different economics.

 

Sure their margins are better than a Dell of HP but they are not as high as Microsoft. 

 

Apple's laptops are very overpriced.  You can get computers that do far more for half the price...it was all marketing...not unlike a Louis Vuitton suitcase, or a Ferrari!  With the iPhone and iPad it's completely different.  The user interface they use, and the software running the phone, is superior to the competition...so far!  That won't last. 

 

When the iPhone first came out, I tried this thing and couldn't believe someone actually made something like this back then.  It was light years ahead of the competition.  That gap has slowly contracted while Steve Jobs was around, and now it will accelerate without him there.  Take a look at what the competition's phones can do today, compared to the iPhone four years ago.  That technological gap is shrinking.  You've already got Acer laptops that now have instant on.  Touch screens on other phones are as good.  Cameras, screen quality, etc all markedly better and comparable to Apple. 

 

The only thing that still isn't quite there, and will take some more time is getting the user interface to be more intuitive and useable like Apple's.  But Apple's competition over the next five years will catch up quite a bit.  Cheers!

 

So while the competitors are catching up, will Apple be sitting still? Its  not like their designers and engineers have packed their bags and gone home, While Android has been improving its user interface Apple has been adding on top of its OS:

Siri

iMessage

Newstand

iBooks(textbooks)

iTunesU

iCloud

Gamecenter

 

If you notice, they've been working in the layer above the OS.

[Ross812]

A quick look on newegg and I found the laptop examples below. Identical specs but the Apple laptop costs 33% more.

 

Apple:

http://www.newegg.com/Product/Product.aspx?Item=N82E16834100205

 

PC:

http://www.newegg.com/Product/Product.aspx?Item=N82E16834230168

 

For $660 you can get a superior laptop that weighs only 1.6 pounds more. Screen is an inch larger, 1 hour better battery life (Asus is honest with their battery life) , new generation i3 Sandybridge processor, and the Nvidia GT 520  graphics will run circles around Intel’s 3000 integrated graphics. 

http://www.amazon.com/U31SD-DH31-13-3-Inch-Light-Laptop-Black/dp/tech-data/B005PAIQG0/ref=de_a_smtd/184-7488816-6580764.

 

That is just in their laptops. Don’t even get me started comparing the hardware of the Tegra 2 tablets at $350 to the $500 iPad. The iPad shouldn’t even be compared to the new Tegra 3 tablets.

 

[Uccmal]

Valueinv, All of your projections are product projections.  In reality the growth you are talking about has never happened before.  Consumers, suppliers, and business people are fickle.  I could go on, and on.  All of your assumptions presuppose that Apple will out market, out innovate, and somehow thwart basic consumer fickleness, Q after Q, year, after year.  I think they stumble sometime later is year.  The thread will still be here.  I will check back then.

[AZ_Value]

To me as a young investor whose sole focus is to compound my money at a fast clip, I think AAPL unfortunately is limited by the laws of nature.

 

No matter how much people want to dismiss it when talking about their favorite stocks, to which they have complete devotion, trees don't grow to the sky, they never did, and they never will!

 

If I'm looking at my money to turn into a 10 bagger over time, AAPL would have to go from a $400B market cap to $4 trillion. I don't know how that happens. Even our beloved Berkshire at $200B cannot and will not reproduce past results.

 

Now, this is not to say that they can never be bought, there are things like significant share buybacks or Fall 2008 - Spring 2009 that can throw some of these companies back at you at super low prices that will give you decent compounding potential.

[Guest valueInv]

Valueinv, All of your projections are product projections.  In reality the growth you are talking about has never happened before.  Consumers, suppliers, and business people are fickle.  I could go on, and on.  All of your assumptions presuppose that Apple will out market, out innovate, and somehow thwart basic consumer fickleness, Q after Q, year, after year.  I think they stumble sometime later is year.  The thread will still be here.  I will check back then.

Actually, they're questions and not projections. You can assume what you want for each of those businesses. The point was to actually understand Apple's businesses before trying to answer the question of how big can they potentially grow.

 

They don't presuppose that Apple will out market, out innovate,etc. Thats why the number are 20% or less marketshare and then also assume that they will fail in 60% of the markets they will enter. That assumes a lot of failure for a company with a track record of repeated success.

 

If you believe they will out perform consumer fickleness, competitors, etc assume 60% marketshare in each category. That's when they actually win a category.

[Guest Hester]

No, but I have been hearing about why Apple had peaked for some reason or the other for that time, about why they cannot keep producing hit after hit <insert your reason here>, etc

 

I understand, you are saying that people have been saying Apple will peak for the last 10 years and they have been wrong, so they are wrong now too. If we extend your logic out, you are saying that because people have said Apple will peak for a long time and have been wrong, Apple will never peak.

 

I say they are at least 2-3 years from a peak, and I gave mainly one reason why they would peak and it is a reason that has only existed for a few months, the death of Steve Jobs. I find it hard to believe that Tim Cook can eventually create new products that are more popular than the Ipad, Ipod, and Iphone have been. That is what they will eventually have to do if they want to have higher revenue and earnings in 10 years.

 

[Guest Hester]

yes, they are projections. They don't presuppose that Apple will out market, out innovate,etc. Thats why they assume 20% or less marketshare and then assume that they will fail in 60% of the markets they will enter. That assume a lot of failure for a company with a track record of repeated success.

 

 

Their track record can almost completely be attributed to a dead guy.

[Tim Eriksen]

To me as a young investor whose sole focus is to compound my money at a fast clip, I think AAPL unfortunately is limited by the laws of nature.

 

No matter how much people want to dismiss it when talking about their favorite stocks, to which they have complete devotion, trees don't grow to the sky, they never did, and they never will!

 

If I'm looking at my money to turn into a 10 bagger over time, AAPL would have to go from a $400B market cap to $4 trillion. I don't know how that happens. Even our beloved Berkshire at $200B cannot and will not reproduce past results.

 

Now, this is not to say that they can never be bought, there are things like significant share buybacks or Fall 2008 - Spring 2009 that can throw some of these companies back at you at super low prices that will give you decent compounding potential.

 

We all want ten baggers, but they do not require the market cap to grow ten fold.  For example, if AAPL were to maintain its earnings stream and repurchase shares at 10x earnings they could generate excellent returns without a substantial increase in market cap.  When done properly share repurchases are an excellent way to increase shareholder returns.  Of course one could argue that AAPL has missed the easy part by not repurchasing shares over the last few years. 

 

 

I will admit that I have not read Jobs' biography, but am I the only one who finds attribution of their success solely to him ridiculous?  I'll bet a year from now when Apple is doing well we will have plenty of stories of how their success runs deep.  Of course many will probably still attribute that to Jobs as well. 

[oldye]

I bought my first apple products (2 ipods) a year ago and after loading it up with apps etc I was totally hooked.  About a month after purchase I stupidly broke the screen by dropping it between the wheels of an elliptical machine. As you can imagine I was totally pissed and decided to take it to the apple store to have it fixed.  After waiting for about 15 minutes the apple genius came out and gave me a brand new one for free.  My takeaway is that this company does a fantastic job building their moat(A friend had a similar story with a macbook!) 

[ERICOPOLY]

I bought my first apple products (2 ipods) a year ago and after loading it up with apps etc I was totally hooked.  About a month after purchase I stupidly broke the screen by dropping it between the wheels of an elliptical machine. As you can imagine I was totally pissed and decided to take it to the apple store to have it fixed.  After waiting for about 15 minutes the apple genius came out and gave me a brand new one for free.  My takeaway is that this company does a fantastic job building their moat(A friend had a similar story with a macbook!)

 

Try an Apple TV if you want a change of pace -- I have to reboot it (unplug the power) time and again to fix it when it stops responding.

[Uccmal]

I bought my first apple products (2 ipods) a year ago and after loading it up with apps etc I was totally hooked.  About a month after purchase I stupidly broke the screen by dropping it between the wheels of an elliptical machine. As you can imagine I was totally pissed and decided to take it to the apple store to have it fixed.  After waiting for about 15 minutes the apple genius came out and gave me a brand new one for free.  My takeaway is that this company does a fantastic job building their moat(A friend had a similar story with a macbook!)

 

Try an Apple TV if you want a change of pace -- I have to reboot it (unplug the power) time and again to fix it when it stops responding.

 

Thats priceless.  You both gave me good laugh.  :P

 

Good to know about the Ipad though Oldye.  I am an addict as well.  Not to say I couldn't be properly detoxed with a cheaper better device, say one that folded up, or you could stuff in your pocket and unravel as needed.

[ExpectedValue]

Valueinv, All of your projections are product projections.  In reality the growth you are talking about has never happened before.  Consumers, suppliers, and business people are fickle.  I could go on, and on.  All of your assumptions presuppose that Apple will out market, out innovate, and somehow thwart basic consumer fickleness, Q after Q, year, after year.  I think they stumble sometime later is year.  The thread will still be here.  I will check back then.

 

I don't know Al, when you back out cash from Apple isn't trading at the multiple of a growth stock. You talk a lot about growth, but you don't really seem to mention the company's price relative to earnings.

[Uccmal]

Valueinv, All of your projections are product projections.  In reality the growth you are talking about has never happened before.  Consumers, suppliers, and business people are fickle.  I could go on, and on.  All of your assumptions presuppose that Apple will out market, out innovate, and somehow thwart basic consumer fickleness, Q after Q, year, after year.  I think they stumble sometime later is year.  The thread will still be here.  I will check back then.

 

I don't know Al, when you back out cash from Apple isn't trading at the multiple of a growth stock. You talk a lot about growth, but you don't really seem to mention the company's price relative to earnings.

 

 

No argument on that point Tariq.  What if earnings get crushed going forward due to any number of factors that eventually slow down large companies:

1) bureaucratic infighting

2) supplier revolts

3) an innovation gap

4) a botch up in marketing

5) overconfidence/arrogance

6) competition coming out of nowhere in an area Apple has misjudged. - exactly as happened to MSFT, RIM, yahoo, dell, Sun, netscape, aol, Ibm, nokia, sony, atari, commodore

7) gov't interference - eventually competitors and gov'ts want their piece of flesh as well - this is a big one

8) the big one for me is the consumer fickleness aspect.  Sometimes people change products simply because one has lost its cool aspect - it is very difficult, if not impossible to keep this going.  This is the advantage that exxon has over apple - opinion is not real relevant in selling oil. 

9) the law of big numbers - stock prices go up because earnings are rising - if earnings stall, or worse, drop, then watch out below

 

Time will tell with this.  I just happen to think that a downtrend is more likely than any upside.  And certainly, for those of us interested in doubling our money in 3 or 4 years Apple stock isn't going to cut it.  Nuff said.  Others disagree and thats fine.

[ERICOPOLY]

6) competition coming out of nowhere in an area Apple has misjudged. - exactly as happened to MSFT, RIM, yahoo, dell, Sun, netscape, aol, Ibm, nokia, sony, atari, commodore

 

Add Apple to that list too (the first post-Jobs era back in the 1990s).

[Ross812]

I bought my first apple products (2 ipods) a year ago and after loading it up with apps etc I was totally hooked.  About a month after purchase I stupidly broke the screen by dropping it between the wheels of an elliptical machine. As you can imagine I was totally pissed and decided to take it to the apple store to have it fixed.  After waiting for about 15 minutes the apple genius came out and gave me a brand new one for free.  My takeaway is that this company does a fantastic job building their moat(A friend had a similar story with a macbook!)

 

Try an Apple TV if you want a change of pace -- I have to reboot it (unplug the power) time and again to fix it when it stops responding.

 

Ericopoly,

 

Try holding the menu and pause button at the same time for 7 to reset the Apple TV. It may save you a trip from your couch! Also, check out the an installation guide for xbmc on your Apple TV. It works really well and makes it much more flexible!

[rmitz]

I bought my first apple products (2 ipods) a year ago and after loading it up with apps etc I was totally hooked.  About a month after purchase I stupidly broke the screen by dropping it between the wheels of an elliptical machine. As you can imagine I was totally pissed and decided to take it to the apple store to have it fixed.  After waiting for about 15 minutes the apple genius came out and gave me a brand new one for free.  My takeaway is that this company does a fantastic job building their moat(A friend had a similar story with a macbook!)

 

Try an Apple TV if you want a change of pace -- I have to reboot it (unplug the power) time and again to fix it when it stops responding.

 

You should take that one back.  You have a lemon.

[ERICOPOLY]

It might be a lemon, but in my house there is a hatch of flies buzzing around this fruit.

 

My MacBook Pro crashed (full system crash) twice in the first few months (though not again in the past year).  My IPhone constantly "forgets" my WiFi password (frequently after I walk out of range of the network).  I have to keep typing it in again (happens a few times a month or so).  The ITunes app on my PC will hang when I try to sync to it.  My wife's IPod needs to be reformatted sometimes after she syncs with ITunes (that was the only solution I found on the net as there are plenty of people complaining of this).

 

When the Apple TV stops "working" (my wife's words) I just walk in there and pull the power -- that usually fixes it.  Otherwise, the problem is that her IMac on her desk (wireless) needs to have the "Airport" turned off and then turned back on again -- it just drops off the network and doesn't rejoin unless you refresh the Airport.  And that happens also on my MacBook Pro (same issue with the airport).  But it never happens on my Windows Vista laptop!

 

"Stink" Different -- that's my impression.

[Kraven]

My IPhone constantly "forgets" my WiFi password (frequently after I walk out of range of the network).  I have to keep typing it in again (happens a few times a month or so). 

 

I wondered if this happened to anyone else.  It happens to me fairly frequently.  Often I can't just type it in, but have to reboot the network before it will accept the password again.  Drives me crazy.

[rmitz]

It might be a lemon, but in my house there is a hatch of flies buzzing around this fruit.

 

My MacBook Pro crashed (full system crash) twice in the first few months (though not again in the past year).  My IPhone constantly "forgets" my WiFi password (frequently after I walk out of range of the network).  I have to keep typing it in again (happens a few times a month or so).  The ITunes app on my PC will hang when I try to sync to it.  My wife's IPod needs to be reformatted sometimes after she syncs with ITunes (that was the only solution I found on the net as there are plenty of people complaining of this).

 

When the Apple TV stops "working" (my wife's words) I just walk in there and pull the power -- that usually fixes it.  Otherwise, the problem is that her IMac on her desk (wireless) needs to have the "Airport" turned off and then turned back on again -- it just drops off the network and doesn't rejoin unless you refresh the Airport.  And that happens also on my MacBook Pro (same issue with the airport).  But it never happens on my Windows Vista laptop!

 

"Stink" Different -- that's my impression.

 

I think maybe it knows you used to work for MS. :)  Honestly that level of difficulty is highly unusual in my experience; here at work they're all far more reliable than the Dells. (On the OSX side, though, you haven't actually done OS upgrades, have you?  I've found not doing a totally clean install does lead to issues... also, sometimes it's an incompatibility with the particular router that doesn't show up with the MS code.)

[ERICOPOLY]

also, sometimes it's an incompatibility with the particular router that doesn't show up with the MS code.)

 

I have a Motorola SurfBoard.  It's certainly Apple's issue to fix.  They either need to figure out how to work with Motorola's bug (a workaround) or fix their own.

[KFRCanuk]

When the Apple TV stops "working" (my wife's words) I just walk in there and pull the power -- that usually fixes it.  Otherwise, the problem is that her IMac on her desk (wireless) needs to have the "Airport" turned off and then turned back on again -- it just drops off the network and doesn't rejoin unless you refresh the Airport.  And that happens also on my MacBook Pro (same issue with the airport).

 

I have an appletv2 with the latest firmware on it. It's solid and have not had any wifi or freezing issues. In fact it's jailbroken with http://www.firecore.com

 

Before getting the appletv I upgraded my home wifi router. My house is 1600 sqft 2 story. I had an Asus 802.11G router (with dd-wrt firmware) that was starting to flake out. My router is in the basement and with the Asus I had poor service on the 2nd floor. Upgraded to a Netgear WNDR3700. I couldn't justify spending $100 for an airport. The netgear is a dual band router (operates on 2.4 GHz and 5 GHz). I now get wireless all over my house.

 

I'm guessing that the surfboard modem is provided by your particular internet provider. It might be worth while getting another router and connecting it to the surfboard and using that instead.

 

Are you using cordless phones? Those can interfere since they operate on the same frequencies as wireless.

[Guest valueInv]

also, sometimes it's an incompatibility with the particular router that doesn't show up with the MS code.)

 

I have a Motorola SurfBoard.  It's certainly Apple's issue to fix.  They either need to figure out how to work with Motorola's bug (a workaround) or fix their own.

Apple recommends that you buy their Airport Wifi Hub. ;) ;)