Apple: Great Products = Great Investment? 25 comments
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Dividend investors keep looking for free cash flow to figure out whether a company can pay dividends. Apple Inc. (AAPL), a technology and consumer company, has loads of cash on its books. However, it does not pay dividends. What is more interesting is that with USD 25+ billion cash and billions in cash flow every year, it does not show any inclination for sharing it with common shareholders. Not even a token amount. So why is it that Apple does not pay dividends? At this point, I am not even asking about growing dividends.
Apple has been in existence since the technology revolution began in the late 70s and early 80s. Apple products had been termed as elitist with its high cost computer hardware and operating system. It remained closed to the outside world and Apple did not team up with other companies. Since 2000 this aspect has changed. Apple now allows independent developers to use its platform for further application development. Opening up has allowed Apple to grow.
One of the hallmarks of all Apple products has been the ease of use and simplicity of its user interface. Each and every product that it has introduced has this unique characteristic. There have been umpteen reports analyzing Apple products and almost every report shows that, technologically, the hardware system does not seem to be unique one. When I say not unique, I mean the technology existed; Apple did not have to do bottom up innovation to come up with these products. Many have cited the iPhone’s touch screen as revolutionary. Well, again, Apple did not invent it; touch screen existed. Apple applied that hardware technology in an innovative way.
In the last ten years, Apple entered the existing music player market (iPod) and existing phone market (iPhone). In both cases, it entered with a product that completely changed how consumers view and use these products. It did not enter the market with a so-called replica or to be one of them. It focused on being unique and it focused its energy on how to change the market. It focused on innovation using industrial product design.
Apple not only gave the hardware, it provided a supporting environment like iTunes. It was an innovation of business model.
With all of these great products and business models, there is one problem. Once these products are out, the question is what's next? Once these products mature, the market saturates, and competition catches up, where will the next growth come from? There is a lack of visibility about future sustainability. There is a lack of visibility about future direction. There is a lack of understanding about future cash flow. Can it keep its innovation engine going on forever?
I am one of those millions of aficionados who love Apple products. Unfortunately, I cannot say the same when it comes to investing. Questions like these make me wary of investing in Apple.
At this point in time, Apple is the only company that can challenge Microsoft (MSFT) with its operating system. I believe it already has the product, but is Apple willing to go that route? If it does happen, may be I will rethink my views of investing in Apple; until then, it remains a puzzle to me.
Full Disclosure: No position.
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This article has 25 comments:
There is a lack of visibility in this article about taking cues from a company's past behaviour to predict its future. Apple innovates. Its in its DNA. The iPod? Written off as a failure. The Apple Stores? Written off as a retail "lights will be out in two years failure." The iPhone? Written off as an overpriced toy which would only ever enjoy a niche product status. The iTunes store? Oh "it doesn't make a profit so what's the point." The App Store? "Oh it'll never be a big deal - discount it, its meaningless."
The cost of a share of AAPL right now? $137
The value of innovation? Priceless
The price to Apple of its relentless refusal to please writers and analysts by giving them what they think their readers want instead of what their customers really want? Boneheaded analysis and a share price 50% too low.
On Jul 09 09:45 AM Julian Ivan-Alexander wrote:
> "There is a lack of visibility about future sustainability. There
> is a lack of visibility about future direction. There is a lack of
> understanding about future cash flow. Can it keep its innovation
> engine going on forever?"
>
> There is a lack of visibility in this article about taking cues from
> a company's past behaviour to predict its future. Apple innovates.
> Its in its DNA. The iPod? Written off as a failure. The Apple Stores?
> Written off as a retail "lights will be out in two years failure."
> The iPhone? Written off as an overpriced toy which would only ever
> enjoy a niche product status. The iTunes store? Oh "it doesn't make
> a profit so what's the point." The App Store? "Oh it'll never be
> a big deal - discount it, its meaningless."
>
> The cost of a share of AAPL right now? $137
>
> The value of innovation? Priceless
>
> The price to Apple of its relentless refusal to please writers and
> analysts by giving them what they think their readers want instead
> of what their customers really want? Boneheaded analysis and a share
> price 50% too low.
There are companies out there that have great coverage, but do not last the course because they do not necessarily have the product to back it up.
Apple's marketing strategy is to:
- NOT necessarily promote the geek factor. Look at their iPhone, for ages they kept the specs under wraps.. they were not looking for direct comparisons with the Pre, but insteaded pushed the soft advantages.. such as the app store and the GUI.
- when geeks were comparing CPUs of say the Mac Pro and the Psystar, one of the comparisons was the major differene in price when they had the same i7 CPU. Upon closer inspection it was idenitifed that although these were both i7s running at the same clockspeed, they have different throughputs on their bus. the spread between the two CPUs was basically the difference betweem the two computers.
If this is your understanding of Apple's recent corporate history you have no business whatsoever commenting on the stock. It's so factually wrong it's not even funny.
There are very real reasons why Apple has done well recently -- "being open" is not one of the reasons. Apple has always had 3rd party applications/developers on it's platforms. Always.
(Actually the two most visible turning points were in 1998 with the iMac, a Mac that was basically in-line with mainstream PC pricing, and 2001 with the introduction of the iPod, which made it okay to buy something from Apple again and then showed people the quality and usability Apple brings to it's products -- but there were many factors including computing usage patterns changing, with a greater emphasis on consuming web and media which are not platform-specific, people are free to choose the computer platform they prefer, not have to settle for the one that's dominant).
Funny thing innovation. You don't always know where it's going to take you. But Apple has consistently innovated, and consistently created very profitable new spaces to grow in. If you want to use visibly sustainable direction as a guide to investing, you're going to end up investing in companies like Sony, Dell, Nokia -- all of which Apple is beating in the marketplace with their innovative products, and trouncing in the stock market with their new revenue streams.
Remember, in 1901 buggy whip makers though they had "visibility about future sustainability". A track record for inventing new markets will always trump milking a "sure thing". In the long-term there's no such thing as a sure thing.
The comment about only allowing outside developers since 2000 is incredibly stupid, however - the first spreadsheed app, Visicalc was developed for the Apple II. And Microsoft Excel was a Mac application first in 1985-1986. Adobe got its start as a Mac developement house as well.
go invest in pepsi if you want to see cash coming in (and stock price dropping as soon as its paid ) if you want a dividend from apple. sell a few shares
This is so wrong, I can't believe how wrong it is. As a very longtime developer of software and other products for Microsoft and Apple computers since the Apple II+ and the old MS/DOS systems, I will state that the move to a version of BSD did open up a lot of tools to the developer but it was never ever a closed system for development.
Like all commercial operating systems it does have some closed hardware and interface APIs, but that is just to keep the reliability and stability of the system where Apple demands it to be and it benefits the developer and consumer. Apple's Human Interface Guidelines for software development has been great for developers of Apple OS based software and ultimately the consumer. This is why there is so few really bad software packages for the Mac that you see tons of for MS/OS based computers.
A lot of the problems in the Microsoft operating systems are holdovers from old issues that were left open by MS to try to keep compatibility for other company's old software. MS today is no different than Apple when it comes to the openness of their APIs to workarounds and hacking. They learned their lesson and are trying to close up those old hidden sink holes in their OS. If the developer uses an undocumented hack today they will have to rewrite their software when MS closes that hole. They aren't going to put in a hack just so your software will run without you fixing it. They already have thousands and thousands lines of code in their OS software that isn't there for their benefit or the consumer but there to cover up the mess that some lazy third party developer created.
One word on the products all being the same. No you are wrong. The one basic fact that everyone always overlooks about Apple products is that they aren't totally run by accountants like many of the other companies.
Where company A puts in a 20% resistor because it is good enough. Apple puts in a 10% or even a 1% resistor because they don't want the failure of that tenth, hundredth, or thousandth of a cent savings on that part to reflect badly on their product. Normally you don't see that extra cost, but when the cheap part fails in Company A's laptop you really don't have a happy consumer.
Sure they both may have a Intel core 2 dual processor but the supporting parts suck in Company A's product because some accountant over-rode the choice of the engineer to save those pennies here and there. That's why the American auto manufacturers lost out to the Japanese manufacturers. They were being run by a bunch accountants and Wall Street short term profit whores not engineers and product developers with pride in their product.
Not everything is about the current year bottom line. Companies that really last look to the long term not this quarter's margin. As Tim Cook and Steve Jobs have both said in the past, they just can't see how they can produce a netbook product at that price range that lives up to Apple's standards of quality and make a profit. So why ruin Apple's image over it and make bad product.
So continue to be a short term profit whore and look for your quick payoff with a dividend or quick trade. Just know your ultimately doing the wrong thing. You should be investing in strong companies with strong management that are in it for the long term and not for someone dividend or bonus this quarter or this year and the hell with the long term investor and long term welfare of the company.
Maybe you were late to the party -- trying to cash in on a hot stock.
If you bought AAPL at the launch of the iPod, not that many years ago, you would have paid something like $7 (taking into account splits).
If you bought it last year, keep it maybe another 6 months and you'll be back up to $200. What other stock can you say that about in this economic climate?
People need to start thinking longer-term.
What a bunch of crap. Have you heard of Microsoft Word, Microsoft Excel, Adobe Illustrator, ...?
What do you expect? You want Apple to Hand over blueprints for future products to the competition?
You want visibility, go invest in Microsoft. I am sure with all the stuff they announce (that never materialize) or products that they promote (Zune, Surface, Bing) you can be sure there are no surprises left for the investor.
On Jul 09 09:29 AM tizod wrote:
> challenging MS on the OS platform, but doing it by it's own rules,
> via defined, incremental hits. Gorilla warfare.
You guys have kids writing your Apple hit pieces now? LOL
Look for markets ripe for disruption similar to the digital music market, or smart phone markets. Markets where Apple's innovation innovation will redefine the entire market. Hint: Apple is not competing in the phone market(s), rather, they are in the process of redefining the mobile computing market (and disrupting the smartphone market in the process.)
Longer term, ask your self why Apple calls the Apple TV a "hobby" when any "mature" company would call it a respectably profitable product?
Anyone who can't see where Apple's future sustainability is going to come from is just too lazy to look.
On Jul 09 10:51 AM Techtrader10 wrote:
> The writer of the article has got it right, the declaration of a
> dividend is also a declaration that the company is no longer a growth
> company, but a mature ongoing entity. The problem with that is the
> companies stock price will no longer reflect a growth company P/E
> ratio. Since the company can no longer effectively use the "piles
> of cash", it is becoming a mature company and should share that cash
> with the shareholders that have stuck with them to get to this point.
The title of a book on the awe inspiring early history of Apple is the very phrase Steve Jobs used to refer to his company long ago.. "Insanely Great".
Since this article was no 100 percent bullish on the stock, the AAPL cult was in full force, ripping apart the writer.
Fact is, the writer has a great point. Investing in AAPL at this price is a risky proposition, since it's not a company that makes profits no matter what. One decade it's on top, the next, it falls to the bottom. That's how it is when your business model relies on constantly coming up with the "new cool thing".
AAPL is a momentum play, so the rewards may be great, but so are the falls.
Thank you for the moment.
On Jul 09 11:47 AM disposableidentity wrote:
> "There is a lack of visibility about future sustainability. There
> is a lack of visibility about future direction. There is a lack of
> understanding about future cash flow."
>
> Funny thing innovation. You don't always know where it's going to
> take you. But Apple has consistently innovated, and consistently
> created very profitable new spaces to grow in. If you want to use
> visibly sustainable direction as a guide to investing, you're going
> to end up investing in companies like Sony, Dell, Nokia -- all of
> which Apple is beating in the marketplace with their innovative products,
> and trouncing in the stock market with their new revenue streams.
>
>
> Remember, in 1901 buggy whip makers though they had "visibility about
> future sustainability". A track record for inventing new markets
> will always trump milking a "sure thing". In the long-term there's
> no such thing as a sure thing.
Realistically, the risk question with AAPL is not "where will the next decade's revenues come from" but "can this management team pull off yet another coup?"
And I'm not sure you can fairly call AAPL a momentum play, unless your investment outlook is measured in days or weeks?
On Jul 11 02:10 PM Paul H. M. wrote:
> Fact is, the writer has a great point. Investing in AAPL at this
> price is a risky proposition, since it's not a company that makes
> profits no matter what. One decade it's on top, the next, it falls
> to the bottom. That's how it is when your business model relies on
> constantly coming up with the "new cool thing".
>
> AAPL is a momentum play, so the rewards may be great, but so are
> the falls.