Here's an Unconventional Idea: Sell Apple 33 comments
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Apple (AAPL) is a tech darling of Wall Street. It has also been one of the best investments this decade. Investors think that Apple will always be there for them to stabilize their portfolio.
These should be warning signals. Apple was once loved like this twenty years ago, too. The company was slow to react to the evolution of the personal computer in terms of size and price. Microsoft’s (MSFT) Windows OS also made the personal computer the easiest it had ever been, up until that point, to use and Apple’s OS was treated like the plague. Many thought Apple would be left behind.
Then Steve Jobs came back and reinvented the company. The content, distribution, and way we listen to music were changed forever with the iPod. Apple’s Mac line got renewed interest because of the IiPod and the laptop became a popular school supply. In this economy, however, with 9.5% unemployment and a rising sense that frugality is good I wonder who is going to buy a luxury PC for a couple of thousand when one can get a different brand of laptop or a PC, printer, and monitor package between $800-$1200? The iPhone was the second new hit product of the decade. It introduced touch technology in a device that was music player, cell phone, and internet access all in one.
Here is the problem. The goal is too lofty for growth, in my opinion. The iPhone, especially now with a $99 price tag, will eventually start to cannibalize iPod sales. A $99 iPhone will also reduce Apple’s margins per sale on the device. Finally the rate of iPhone sales will likely decrease as it has been a hot product for the last couple of years. Soon everyone that wants one will have one and the market for it will have become mature.
Of course, this thesis goes out the window if Apple comes up with the next new big thing, like it has done twice this decade. But this is the other problem. Apple’s big idea over the last couple of years has been tweaks to and price reduction of the iPhone. That, in the long-run, is not a way to increase future growth. And it only erodes margins.
Here are two models formulating target prices. One is a residual earnings model. The other is a free cash flow to equity model. Consensus earnings estimates were taken from information provided by TDAmeritrade up until 2011.
click to enlarge images
The top calculation for each is just consensus estimates. The middle calculation is 5% above consensus estimates. The bottom is 5% below consensus estimates.
Based on the earnings model, Apple is overpriced, even at the 5% above consensus estimates. But we see that the market is valuing Apple based on free cash flow in this case. According to this model, Apple is optimally priced - unless you believe that Apple will beat consensus estimates by at least 5%; then there is potentially $20 more of upside in the stock.
Based on the fact that I believe the iPhone will cannibalize the iPod, reduced margins, and fewer Mac sales, meeting and beating Wall Street consensus will be hard to come by. Without a new product to excite consumers, and anything right now will have to really excite consumers for them to part with their money, Apple will be on the road to maturation and a dividend company, but stock price appreciation will be non-existent.
Disclosure: No positions in any company mentioned in this article
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This article has 33 comments:
I'm thankful we have free speech, but boy, does it show up some freaky views!
Hint 1: Recession.
Hint 2: Apple outperforms everyone IN the recession, so what will it do when we come OUT of recession? Any clue?
Misleading probably. Nobody is dumb enough not to know that the 99 dollar iphone is actually a 500 dollar iphone (subsidies). The margins on the iphone are like 68 percent.
Apple is more than happy to have the cannibalization happen.
WS wants to mitigate the rise of apple's PPS. At all costs. The masters are freaking out.
How about a budget PC from Apple, say the Apple ][-ion.
Cheers and good article, you have a new follower.
Long MSFT, PALM (but glad to have Apple back in the tech game)
Secondly, no growth in the iPhone market? Are you serious? Canibalizing iPods? I can't believe you WS types are STILL claiming that the iPod is 'over' etc...
Finally, your cost comparisons for product are straight from la-la land. Over 2 grand? You are kidding, right? Any Apple over 2 grand is going to cost you MORE if you configurred it as a generic box, incapable of running OS X or actually participating in the iPod iPhone environment fully.
ps. WIndows 7 a problem for Apple? Would you like to explain how? Good enough? By Windows standard? That's not going to cut it.
The $99 iPhone eating into iPod sales? Sure – if the would-be iPod buyer wants a phone and AT&T contract to go with his iPod. And if he does, who wins? Apple again!
Strange.
In the CAPM evaluation, he thinks the company would be worth around $60? Yet they have over $30/share in cash. This is obviously a ridiculous assumption.
In the FCF model, the author puts cash at $11B, not the correct figure around $30B - this means the valuation is off by over $20 on each, meaning the low end of the target range is around $147/share and the high end is almost $190/share.
The author should correct these issues, and in doing so, his opinion may change. I didn't even look deeper, but these inconsistencies are enough to conclude the entire article is questionable.
Of further interest, in an Apple article I'm writing right now:
1. The new $99 iPhone pricepoint is ingenious, a deep-pockets company lowering the lid on the price ceiling for all its competitors at one stroke. Every new competing smartphone launch price from now on must now face the consumer's automatic comparison to a $99 3G iPhone, and in a deepening recession to boot. Also brilliant.
2. What no one is discussing is all those existing used 2G and 3G iPhones in circulation whose owners have upgraded to the new 3GS, which will soon be in the millions. Even with the ATT service switched to the newer iPhone, those units still work perfectly on wifi anywhere--applications, email, music, video, camera, everything in fact except voice phone and texting. What happens to these millions of Apple units? Some will go to eBay, but most I predict will be kept to use, as above, as backup iPod/iTouch units. I'm keeping mine and expect to get years more use out of it. Others will be handed down to offspring, nieces, nephews, Grandma--all of them spreading the Apple brand and interface and expanding the Apple ownership. And again, brilliant. There is an eventual saturation point, but that's a long way off and by then there will be new Apple game-changing products to aspire to. Just brilliant product-cycle management.
3. iPhone's major problem in the USA is ATT. In an odd example of wag-the-dog, this antiquated, poorly run telecom vendor is arguably hampering the planet's most successful tech innovator. That can't continue indefinitely, and ATT needs Apple now far more than Apple needs ATT. Apple could easily afford to buy ATT, but why bother? The shifting balance of power here will soon be evident as ATT is forced to grasp that it's now no longer the dog, more the tail. That will get interesting, and soon.
4. The new iPhone Apps ability to sell and upsell directly within applications themselves, not just at initial download of the app itself through the iTunes store, is a major change. Watch for more and more apps trying to migrate from one-time-purchase-for-... to monthly/yearly recurring 'subscriptions'. Because that's such poor value for the consumer, watch for pushback there. But because Apple gets a percentage of everything, even minor incremental growth goes immediately to Apple's bottom line.
More in my Apple article to come. Follow me if you like at 'HomeGamer' for more thoughts on Apple, the markets and the future.
Hello, McFly? Have you ever paid attention to monthly charges one must pay in order to enjoy that $99 iPhone? Over a two year contract it is at least $850, if you count a $5 a month TXT messaging charge and tax.
So you really think that a device that costs someone an extra $35 a month (on top of the normal phone plan) to use it is going to cannibalize sales of a device that I pay for once? Unless the iPhone monthly pricing structure changes, the iPod will always be a winner.
(I'm actually buying the $250 iPod Classic this week... Love the 120 GB of space)
I am glad that Apple took the "Vow" factor out of the iPhone, but they absolutely did not take the "Wow" factor out no matter how much the entry price (subsidized) is. The secret sauce is the software that is updated periodically to enhance the experience and add functionality.
If the iPhone becomes the most successful smartphone platform out there, the stock wiull grow plenty.
On Jul 06 11:40 AM rajsekar wrote:
> Just look at the standard response from Apple fans (Brewer et al).
> These guys cannot comprehend a fact that Apple stock has limitations
> for growth. Instead of doing a constructive analysis of Ryan's numbers,
> they jump to trash anyone who writes negative about Apple's growth.
> If all analysts are Gene Munster, then Apple should be trading for
> $400 by now. I have been commenting all along that Apple has taken
> the Vow factor out of iPhone. All Apple products are in premium category
> and the company derives its profit margin from this price range.
> Now all of a sudden, $99 iPhone has watered down this long held premium
> position. The result will be that market will be flooded to an extent
> with iPhones. So where is the uniqueness and Vow factor for iPhone?
> Any Tom, Dick and Harry will have an iPhone and majority of consumers
> don't like that, especially people who consider cell phone as a
> fashion item. For the coming holiday season, we can expect buy one
> $99 iPhone and get one free plan (or) $49 iPhone with 3 year AT&T
> contract.
@ rajsekar: Don't put words in my mouth, I never said there weren't limits to growth. Reread what I did say about how incredibly off the mark this entire article is. I would be much more inclined to argue that Apple is ANYTHING but a 'darling' of wall street. If it got half the respect of most of the rest of the nasdaq, it'd be worth $300 a share already. Look at the markets they already own, MSFT going down in flames (if you can't see it yet, you really shouldn't be investing in technology at all), and tell me again how it's all going to come out.
Try to come to grips with the fact that it's not the unemployed that are buying the best tech products in the first place. The marginally employed have always bought PCs. Sure, we have about twice as many unemployed, but still the vast majority of us are still employed (much to your chagrin, I'm sure).
Try looking at the facts--Apple has far outstripped the sales of all the PC manufacturers in the recession. They are selling MacBook Pros starting at $1,099, and tossing in a FREE iPod touch to go with it, and you still think it's overpriced. All I can say is 'Vow'.
Brewer,
It doesn't make any difference if its a Mac or a PC, The growing unemployment is going to affect sales of all non-essential items. You try to project this as some sort of game, a competition between rival computer companies, well its not. Its a matter of basic economics, if you loose your job, or just don't have the confidence that your job will be there your not going to spend the money on things you don't need.
On Jul 06 02:19 PM brewer wrote:
> Techtrader:
>
> Try to come to grips with the fact that it's not the unemployed that
> are buying the best tech products in the first place. The marginally
> employed have always bought PCs. Sure, we have about twice as many
> unemployed, but still the vast majority of us are still employed
> (much to your chagrin, I'm sure).
>
> Try looking at the facts--Apple has far outstripped the sales of
> all the PC manufacturers in the recession. They are selling MacBook
> Pros starting at $1,099, and tossing in a FREE iPod touch to go with
> it, and you still think it's overpriced. All I can say is 'Vow'.
On the consensus that this guy is an idiot, I don't think so, but he will sure look like one in a few months.
It amazes me that anyone actually thinks a computer is non essential. Also, again you are ignoring the fact that Apples sales are not down in the recession. Sales of apple gear have more to do with product cycle than any recession.
PC sales have tanked, however. People are now completely associating quality with apple and lack therof in anything else. If you can't see that, you are either a tech geek so fully into pathetic PC (windows) delusion or you are a recluse.
Mac sales are doing great. Your insistence that ther is no difference between Mac and PC is as ridiculous as the authors assertion that Windows made computers easy to use. Get a grip.
Windows is no longer an OS on Mac, it's just another application. One that is growing increasing irrelevant. The general public is on to this, Mac sales (as well as many other revenue streams) are doing extremely well, and they will dramatically accelerate in the next few years, just as we have been seeing for a few years now.
PC hardware companies are all hurting, Apple is doing far better than any of them, by a long shot.
If you want to use Apple products then you have to accept their tight control. I for one would rather have the freedom to choose what do with the products I buy not to have to jailbreak them to actually get the use I want.
As long as Apple continues to execute then setting price targets misses the point - if you are in for the long term then I would be more interested in their main personnel than any financial calculation as it's their employees that make the figures.
The sentiment that we should all prefer third rate products to somehow ensure "choice" is fantastical. One, because it isn't true that Apple is 'closed'. It does more in open source, like Webkit, which is now now adopted by Google, Nokia, Motorola et al., than anyone realises. And second, what's with no choice when for example, you can even run Windows on your Apple computer?
Why can't more people champion excellence?
Or is it OK to live with mediocrity from the likes of Microsoft?
Anyway, it's too late, the cat is out the bag, and Microsoft and all the ridiculous Apple haters can't put it back in again.
You mean Apple’s Open Source license? Their own version of Open source.
What is championing excellence? What you forget is that there are many people who do not buy Apple but are happy with their purchases. It seems that Apple fanboys like yourself cannot understand that people can come to conclusions different than the Appel group think.
Why should all apps have to go through Apple vetting process to be added to the App store? You have to jailbreak it to add non Apple certified apps.
Bearing in mind that 95% of Apple users like myself have extensive experience of Windows over the years, what do you think would happen if 95% of Windows users were given experience of OSX?
Yes. They would see the difference between mediocrity and excellence.
I'm perfectly happy for people to reach their own conclusions about which is better. I just do not like vested interests suppressing any and all Apple good news stories - which has been going on since forever.
And as for the App store, why are there 50,000 apps available on the App store? You make it sound as if Apple accepts 1% rather than visa versa.
And yes, Apple has contributed loads to Webkit.
"Idiot" and "stupid" are the two most overused words in every comment on every stock on this site (can we have a filter moderators?). These words do not give useful information, they indicate a limited vocabulary; they do not encourage dialog but result in testoterone-fueled bullying that changes no-one's mind.
On Jul 06 05:24 PM MikeSX wrote:
Come to think of it I hope
> he succeeds at least for the short term.
>
> On the consensus that this guy is an idiot, I don't think so, but
> he will sure look like one in a few months.
1) The IPhone cannibalization of IPod sales would not be as big a deal to me if Apple was planning to phase out the IPod. With all these new phones having a music player as a standard I do not think there is the need for an IPod anymore. And with cheaper phone prices the IPod would eventually become a wasted expense to produce it. As far as I know IPods will still be produced and in my view will be in competition with its sister product.
2) As far as an $11 billion number for cash + equivalents. That is a correct number at the end of Apple's 2008 fiscal year. The free cash flow model only counts the most liquid of current assets. If you include all current assets then yes you get a $30 billion number, but that model doesn't count all current assets because for the most part there is no liquidity in receivables, inventories, and short-term investments (which have a maturity date of 1 year or less). In fact with cash and equivalents I was generous to Apple taking the last fiscal year's number and not last quarter because cash + equivalents last quarter went down to $4 billion. Obvioulsy due to Apple investing it back into the company. In the end you can come up with any model you want. If everyone had the same model and inputs all analysts would have the same price target. We know this to not be the case.
3) Speaking of the models you normally get much different price targets becasue they look at different things such as earnings, cash flow, even dividends (which would be useless in valuing Apple). Here the market chooses to value Apple on free cash flow, but most companies are valued on earnings.
4) When you write your thoughts/views you should be prepared to be called an idiot or stupid. If it bothers the author then you shouldn't be an author. So I don't take it personally.
5) AT&T's contract as service provider runs out in 2010. They will get better terms if they renew. That means margins will decrease for Apple. If Verizon or other service providers enter the fray it may sustain sales longer than I expect due to new customer base being able to buy, but again margin per sale will go down with each new contract Apple negotiates. These providers will not want to subsidize an IPhone and get to break even in 7 months on the plan in this economic environment, which is a whole other concern in itself.
6) Finally, anyone can tell you to buy Apple. Look at the comments and discussion about the contrarian idea! I wish I could get this response to all articles!
Happy investing
In about 10 seconds I can see the APPL 10-Q for 3/31/09 where cash and equivalent is $25 billion.
Nobody ever in history suggested that inventories or receivables were categorised as cash.
There are vested interests that sing praises of Apple - so that argument cuts both ways. Do you own Apple stock? I don't so I have no vested interest either way.
Your point - what would happen if Windows users were given OSX - is moot - when OSX is available at price points comparable to Windows PC then we can let individuals decide.
If OSX was so superior to Windows (as you contend) and that its value proposition was you pay more but you get more then why are rational consumers not jumping into Apple and propelling it to having the largest OS market share?
Before you ask - no I don't own MS shares.
Please read the full 10-Q for yourself, link below. In particular the paragraphs that define short and long term investments.
As you will see, there are - IN ADDITION to the $25 billion - $3.8 billion in long-term marketable securities... Long-term defined as over 12 months.
You seem intent on reinforcing the opinion in the first comment of the thread.
phx.corporate-ir.net/E...
@Econymyst, the answer is that people ARE jumping into OSX. Which is why in 3 years its share in the US has gone from 3% to over 10%...
No idea what point you make about the pricing of OSX and Windows.
I also think that the quarter that was just reported by the company flies in the face of many of your points. In this economy, to put up those numbers is flat out impressive. Update the models, use accurate numbers, and you can see the company sells for about 12x FCF. Forget EPS, it is meaningless, follow the cash.
On Jul 08 01:30 PM Ryan Pollack wrote:
> Does not look like $25 billion in cash + equivalents to me. phx.corporate-ir.net/E...;t=1.
> I get the same numbers form Yahoo and Google finance. Do not add
> short-term investments to cash and equivalents as they may not be
> that liquid. Short-term is a year or less. If waiting a year that
> is not liquid to me.