Apple Is Still a Great Investment, Right? Not for Value Investors 53 comments
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Here’s some controversy coming your way. A stock price valuation of Apple (AAPL) by a value investor.
Warning: if you love Apple, I mean really l.o.v.e. AAPL, this may not be what you want to hear.
The Apple Story…
Apple is consistently a Wall Street darling. The company is covered by 35 analysts, its products, services and CEO are constantly in the news. Which is why I don’t believe in the “it is misunderstood” theory by so many investors.
Think of 35 analysts as one full classroom of elite students doing the same project and trying to come up with different views and opinions.
I don’t bother with efficient markets but in this case, I would believe that the market as well as the 35 analysts couldn’t all be missing out on revenue generation and where it will be coming from in the future. I’ll leave that to someone who’s good with the magic 8 ball.
Moving on..
Apple Numbers
There is no doubt in my mind that AAPL is a fantastic business. Its moat is huge, products fantastic, innovation outstanding and execution breathtaking. The same goes for its financial statements.
If you take a look at Apple’s financial statements, it is so healthy you would never notice there was a recession in 2008.
- FCF growth is on steroids
- Gross, operating, net margins constantly increasing
- Management is able to make 20c off every $1 of cash invested. Now that is amazing
- Every $1 of sales is converted to 15c of FCF
- Earnings growth is equally impressive
Check out the financial statements of the past 10 years and 20 quarters for AAPL.
(AAPL 10 Year Financial and 20 Quarterly Financial Statements)
So AAPL is a great investment right? Not for a value investor.
AAPL Intrinsic Value
When I previously calculated the intrinsic value of AAPL during the peak of the bull market, I used two scenarios. One was a realistic growth rate of 14.3% and the other was a euphoric rate, that many people wanted me to use, which was 22%. The intrinsic value came out to approximately $130 and $190 respectively.
Now that things have settled down substantially, the 14.3% FCF growth rate was actually the smart one to use. In this fairly valued market, using a 15% FCF growth rate is still the most realistic figure.
Also, since 2008 was hard for every company, I’ll readjust the FCF of AAPL to balance out the one year recession. With a discount rate of 9% and growth rate of 15% the intrinsic value comes out to $146.22. Fairly valued as the current price is about 13% above my estimate.
Is Apple a Buy?
Buffett has said that it is much better to buy a good company at a fair price rather than a fair company at a good price, but my performance to date and results from screens and tests I’ve performed show that maybe Buffett got it backwards.
AAPL may be a great company, but paying fair value for the business will not produce the out-sized returns that you are probably looking for. For a long term passive portfolio, it will probably work out well, but to compound your money at a better rate, there are still better opportunities than its current price.
From its lows, AAPL is up 111%. The stocks I mentioned on this blog are up just as much, if not further, and have far more upside potential.
As a company AAPL is definitely awesome. As an investment, the price does not have enough of a margin of safety to preserve capital in the case there is an another unexpected disaster.
Disclosure: Previously held AAPL. No positions at time of writing.
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(I am not as happy with the moat as the cheerleaders seem to be.)
On Aug 15 02:25 PM Paul H. M. wrote:
> The Apple Cult gets their panties in a bunch whenever a person DARES
> to not be 100 percent bullish on the stock.
>
> Just because you don't want to buy after a HUGE runup does not mean
> you don't like the company. It's just common sense: buy low, sell
> high.
>
> People who are buying AAPL high are not following the simplest rules
> of successful investing.
that people buy AAPL.
Stop & think for a minute, the stock is more than
70% institutional ownership, I seriously hope emotions
are not part of these holdings, or the market is well
& truly up the proverbial creek, sans paddle.
It is the biggest value investment in tech, if not the
whole market (excepting BIDU), no dividends, no chance
of a reverse split to let smaller investors in ... that's enough for me.
disclosure, do not & never have held AAPL.
I never said anything about P/E. Why assume your investment decisons are more sophisticated than mine? Good luck with GGWPQ. Lots of folks are out on that limb and it may work out fine. In this economy I am more worried about buying companies that will stay out of bankruptcy than I am about making a killing by speculating in companies already in re-organization.
On Aug 17 02:56 PM Jae Jun wrote:
> @Dialectical Materialist,
> As a commentor said, value is in the eye of the beholder.
>
> If your definition of "value" is just buying low PE then yes you
> wouldn't know why I am investing in what I do.
>
> Bankruptcies, distressed companies, spin offs, tenders, mergers<br/>These
> are all considered value in my books while others may view it as
> speculation.
>
> 100-200% on speculation is possible, but 1000% or 500%? Unless you
> have conviction that will never happen.
>
> On Aug 17 01:48 PM Dialectical Materialist wrote:
Sorry but I never said my investments were more complicated.
But it does seems like you have now twice said that all re-orgs are speculations.
Like I said, unless a person has conviction, it's highly unlikely that they will make a killing in anything.
For anyone that bought AAPL when it was in the single digits, now that is a killing.
So again, it comes down to what your definition of value is. It seems like our definitions differ greatly.
On Aug 17 06:10 PM Dialectical Materialist wrote:
> @Jae Jun,
> I never said anything about P/E. Why assume your investment decisons
> are more sophisticated than mine? Good luck with GGWPQ. Lots of
> folks are out on that limb and it may work out fine. In this economy
> I am more worried about buying companies that will stay out of bankruptcy
> than I am about making a killing by speculating in companies already
> in re-organization.
And my question to you was up to what point can AAPL maintain its current FCF growth? At its current rate and by your prediction, AAPL should be a trillion dollar company in around 5-7 years and will continue to get bigger and bigger.
I mentioned that the CROIC was 15% meaning that over the long run, FCF AND growth is likely to decline to the rate it can return money.
It's funny how just last year everyone was saying that AAPL was destined for 25% yoy for the next 5 years but now even the analysts have reduced that number to under 20%.
You misread and misinterpreted the whole "sell" thing. Just said that apple wasn't a buy at its current price but didn't say you should sell if you have it.
If you got in at a good price, it should offer good returns for long term holders.
On Aug 17 04:38 PM Stephen Rosenman wrote:
> You base your argument on FCF. I pointed out earlier that Apple
> has accelerating FCF. Your 15% FCF is fantasy and has no baring
> on Apple's last 4 years. You predicate your argument on faulty data.
> Why write an article that uses invalid numbers to justify a sell
> on Apple?
You are right. Any stock that goes up 500% was a value before it went up! I am not trying to argue that point. I'm really not trying to argue at all, actually. My point about re-orgs is that they seldom are seen as value plays because the value is hard to get a fix on when things are in flux. I know General Growth is an unusual case because it does not have the same cash flow problems that most companies in reorganization have. I'm not trying to be snarky. I do maintain that that is not a typical "value play." The company may have value -- and it may prove to be a great investment. Not what I am saying at all. But the term Value Investor usually implies (as you have said above) a margin of safety in the investment. One that has sunsetted a long time ago with AAPL I think (so we are in agreement about this stock as a "value play.") But when a company is in re-org, it seems hard to be sure you have that margin of safety most value players require (or desire). Yes, you have to be bold to make big returns, and I do not begrudge your bold choices or wish you ill with them. Maybe you could do me the kindness of saying some things about GGWPQ that make you certain it has the value you seek when you invest. Good luck, no foul intended. And incidentally I did buy apple, not in the single digits but when it was like 30. Sold most off before it got anywhere near its peek, but it was a good boost at the time.
On Aug 17 07:46 PM Jae Jun wrote:
> @Dialectical Materialist,
>
> Sorry but I never said my investments were more complicated.
> But it does seems like you have now twice said that all re-orgs are
> speculations.
>
> Like I said, unless a person has conviction, it's highly unlikely
> that they will make a killing in anything.
>
> For anyone that bought AAPL when it was in the single digits, now
> that is a killing.
>
> So again, it comes down to what your definition of value is. It seems
> like our definitions differ greatly.
No offense taken and I meant none as well.
I first bought GGP when it was hovering around $1 before the bankruptcy after going through my own analysis and calculations based on Graham's asset value and balance sheet adjustment calculations. Not on what others were doing or what Todd Sullivan's opinion was, although it did help in some areas.
Kept buying at 50c when I was down 50%. However, to me GGP at 50c was an even bigger bargain and had a ultra huge margin of safety because I see the value at close to $5.
At current prices I would not buy at all because that margin of safety has eroded.
This is the definition of value we both agree upon. So I was lucky to have stumbled on GGP.
So what I was saying in the article from the very beginning was echoing your thoughts that "...a margin of safety in the investment. One that has sunsetted a long time ago with AAPL I think"
You've hit the point of the article which I'm afraid never goes too well with AAPL investors.
I'm not sure where you are going with this quote. If you are saying that AAPL is a 'good company at a fair price', please demonstrate a 'fair company at a good price'. It's quite possible that despite your misgivings about AAPL, it may out-perform 'fair companies' even at today's lofty valuations.
BTW, I am short AAPL. I think this is a good company at a lofty price.
Bet you AAPL shorts are loving life also. LOL
JW.USC
LoL
In August AAPL was at $165. Today it's at $203 for a 23% gain.
Since August check out what my portfolio has been doing.
www.covestor.com/mbr/j...
Total portfolio is up more than 110% since August. YTD I am up 190%.
Not just on a single position as well. That's how I feel.
Since I didn't lose money how could I have been "wrong"? I guess making money is wrong?? lol
Also just read the type of comments you post and not a single constructive comment. You're just a troll. Waste of time.
You are "right" just like a broken clock is right twice a day.
On Nov 12 09:05 PM Jae Jun wrote:
>Waste of time.
Looks like your clock is no better.
On Nov 13 12:04 PM JW.USC wrote:
> You just described your financial "advice" on this site perfectly.
>
>
> You are "right" just like a broken clock is right twice a day.<br/>
And for someone who you claim is a "troll" and a "waste of time" you certainly don't seem capable of ignoring me. What does that tell you? I'm obviously hitting a nerve.
On Nov 13 12:36 PM Jae Jun wrote:
> LoL
> Looks like your clock is no better.
Besides Im just replying to comments on my own article.
It's etiquette after all and I now realize why you do it all over the place. It's fun lol
I should get my monkey to throw darts at biotechs and get the same data and results.
Come back when you can prove what you say in writing and with analysis. Go look at DDRX.
Make sure your online account tucks you in nicely as well.
lol continue gambling away and being the greater fool. I'll give that award to you while I stick to my analysis.
I hope you're 2 commas give you a good nights kiss
Don't feel too bad that anyone can do it. Are you sure you aint your own girlfriend kiddo?