Buying Apple Today: Like Buying Microsoft in 1998?

It's rare that I venture into the world of megacap companies. I'd rather find underpriced small cap companies, particularly ones in volatile industries. Yet, it occurred to me that in the past year, I have never once looked at Apple's (AAPL) financials. There were reasons for that:

1. It's a megacap company and large companies typically have less room to grow.
2. It's too heavily followed to create much in the way of huge pricing inefficiencies on the downside; plus, it's been a trendy stock for years, which drives up its price further.
3. I've never felt comfortable analyzing companies with their hands in too many jars.
4. The consumer electronics industry is constantly in flux and most investors tend to value these companies based on overly optimistic long-term assumptions that rarely hold true.

All the same, given AAPL's market dominance over the past few years, you'd think I might have looked into it once before just so I'd know what was up with it.

Well, today was the day! I glanced at Apple's financials and while I realize I could be missing some growth catalysts in the pipeline or that I could be underestimating Apple's growth in the smartphone market, I'm left with one major takeaway:

Apple's stock has VERY HIGH EXPECTATIONS priced in!

To be sure, Apple has a great balance sheet, strong cash flows, and a very bright near-term future, but it would have to have one phenomenal performance over the next decade to justify the current stock price.

The Valuation Dilemma

As a value investor, the first thing I look at when analyzing any company is their balance sheet. I want to see if the company is in sound financial shape and how much their underlying net assets are truly worth. In Apple's case, their balance sheet is very sound and their Net Tangible Assets are worth roughly $28.50 per share. Of course, if you're buying Apple, you're not too terribly interested in the assets. You're interested in the earnings, cash flows, and future growth.

Apple's earnings and cash flows are spectacular --- but are they $170-per-share-spectacular?! It's reasonable enough to assume that AAPL earns $6 per share for the current fiscal year. When you consider all the cash flows they are raking in (tucked away on the cash flow statement as "deferred revenue"), it might not even be a stretch to say they have truly earned over $10 per share this year. If you assume that $9 - $10 per share is a reasonable approximation of their "real profitability", then you could argue that AAPL is worth somewhere between $150 - $200.

But should that be the end of our analysis? Should we simply assume that Apple will meet these expectations?

The Problem with Apple

Of course, given Apple's dominance in the smartphone market, it doesn't seem unreasonable to claim that they will continue bringing in mega cash flows over the next few years. But the funny thing about stocks - you don't really make much money by buying companies that merely live up to expectations.

Apple may have earnings upwards of $6 per share and free cash flows upwards of $10 per share for their current fiscal year when all is said and done, but just two years ago, earnings were around $2.30 per share and free cash flows were around $1.80 per share. From this, we can tell Apple has experienced phenomenal growth over the past three years, but how long will it last?

Should we simply assume that Apple continues to grow free cash flows over the next decade? Will its earnings and cash flows stay flat? Or will their earnings begin to "normalize"?

There is a concept in business called "abnormal earnings." The basic premise is that a company can gain a huge competitive advantage for a limited amount of time and earn these "abnormal profits", but eventually, the rest of the market will catch up.

Whether or not Apple's cash flows begin to erode depends upon a number of factors. Can competitors such as Research In Motion (RIMM), Palm (PALM), Nokia (NOK), and T-Mobile (DT) [partnering with Google (GOOG)] undermine AAPL's market dominance at some point? Will the huge margins that the iPhone brings in begin to dwindle sometime over the next few years as smartphones become the norm and the market continues to become more competitive?

Maybe the most pertinent question is whether Apple is a "fad." Apple set itself up as the anti-Microsoft (MSFT) over the past several years, but at this point, it might be safe to say that Apple is the more dominant gorilla. In fact, Apple's $153 million market cap is closing in on Microsoft's monstrous $220 million market cap! How can Apple claim to be the little guy when it may very well overtake Microsoft in size at some point in the near future? Could we see an Apple backlash or Apple fatigue develop sometime soon? For that matter, could we simply find that consumers are less willing to pay high premiums for Apple products at some point?

My real point here is that a lot can happen in the next decade and Apple's stock already has very high expectations priced in. Maybe they meet them. Maybe they don't. But what are the odds that they significantly exceed those high expectations? The odds are low in my estimation.

Apple in 2009 Is Microsoft in 1998?

Which brings us to the question I posed in the title of the article:

Is buying AAPL today like buying MSFT in 1998?

To be sure, there are distinct differences and AAPL has had a much better record of finding growth catalysts than MSFT, but people thought MSFT was invincible at the end of the '90s, as well. In September '98, MSFT traded at around $27. In September '09, it now trades around $24 - $25. In other words, if you bought into MSFT 11 years ago and held all the way till today, you basically had a "lost decade" on your investment.

It wasn't that MSFT collapsed. It wasn't that MSFT's dominance was dramatically weakened. In fact, MSFT has held up through this recession and the early '00s recession much better than 90%+ of the companies traded on the American markets. However, MSFT was priced with very high expectations in 1998 and one can say that it has done little more than meet them. While the stock did have moments where it traded upwards of $30, as a long-term investment, it has been a dud.

Of course, naysayers might point out that MSFT traded upwards of $60 in 1999 and 2000 during the tech bubble. This is quite true. Maybe AAPL jumps up to $300, as well. However, betting on a speculative bubble isn't particularly wise. It might have worked out in 1998 (if you were wise enough to sell within the next year or two), but it's normally quite a poor investment strategy.

Apple is a great company. They will probably continue to rake in cash flows from the iPhone and maybe even gain more market share. But it's going to be very difficult for them to grow their earnings and cash flows much more over the next 10 years.

The way I see it, the risk that their profits fall is greater than the chance that they manage to increase cash flows to even greater levels. Great company or not, it simply doesn't look attractive over $170.

Maybe I'm wrong; after all, my specialty is finding underpriced small cap and microcap companies; not analyzing large consumer electronics firms. All the same, I see buying AAPL right now sort of like buying MSFT in 1998. How much more upside can there really be at this point?

If you bought in at $80 earlier this year, congratulations. If you're buying in now at $170 ... I don't think risk-reward is on your side. And if it creeps above $200, keep far away!

Disclosure: No position in any companies mentioned in this article.

Comments

[Timeline St...:]

I think you're wrong, and here's why.

In 1998, Microsoft had established a massively dominant operating system and business suite (Office) business, as well as leading market shares in database, server, and other enterprise. There was little that it did in which it did not lead. Thus, its growth outlook was capped. It's ironic that Microsoft's current dominance in operating systems (93.06% for Microsoft vs. 4.87% for Mac via one measurement) is often used as the defense of investing in MSFT or against investing in AAPL. Such dominance is more risk than opportunity, for the company and for the shareholder.

Contrasted, there is no space in which Apple competes, other than music players (which have now declined to 18% of its revenue) where it holds more that 10% market share. Not desktop or laptop computers, and despite the success of iPhone, not mobile handsets.

Here's an open question for you. How can you financially value a business that is:

1. Already massive (200 million units sold worldwide for at least $400 per unit, or $80 billion)
2. Growing massively (20% year over year)
3. Technologically up for grabs
4. The next consumer-driven revolution
5. Led by hardware but followed by software

This, of course, is the smartphone market, and Apple's swiftly-growing position here on the technical side is somewhat muted by the manner in which it recognizes revenue via the 2-year subscription model. I am admittedly biased in favor of (long) Apple, but I believe that they are building an unassailable position in handsets and applications that go with them. Simply put, the competition is confused and scrambling, consumers are flocking, and Apple got 95% of the ecosystem right at exactly the point that the terrain was unclaimed.

One practical example - there is currently a 5-8 week wait time for iPhone 3GS at various T-Mobile locations in the Netherlands and at other carriers throughout Europe. At those same locations, you can obtain practically any other handset the same day, but Apple can't make theirs fast enough. What's next? China, of course, and perhaps that's even the reason why these handsets are in short supply currently.

And here's one point that should not be overlooked - Apple has 100 million credit card-registered iTunes users who have access to one-touch purchasing. This will swell, conservatively, by 4-6 million customer per quarter as iPhone and iPod touch devices require syncing and loading. No company on earth will have what Apple has within 2 years, and that's key to the software portion of the business.

Practically speaking, AAPL sees $7.50 earnings in 2010, which at a P/E of 30 yields a share price of $225.

So, in summary, Apple's potential rests upon this area in which they snuck in. Once there, they quickly established something simultaneously untouchable by competition and very appealing to consumers, and that's the appeal.

By the way, I think that you forget the 'not' in this sentence:

"Of course, if you're buying Apple, you're too terribly interested in the assets."

Sep 11 06:34 AM

[Roger Knights:]

"in the past year, I have never once looked at Apple's (AAPL) financials."

You should have reviewed some of the articles and comments on Apple before weighing in on it. If you had, you'd have gotten an education. The comment above by Timeline is a start. Other factors to consider are:

1. Apple's high margins--it has a cushion against competition. If necessary, it can reduce prices to partially ward off threats or expand market share, cutting off competitors' oxygen.

2. The Mac's low penetration outside the English-speaking world is due to its high margins and proprietary hardware, which creates a massive opportunity if Apple were to adopt a charge-what-the-market... strategy abroad (like drug manufacturers) by licensing its OS to PC box-makers (for domestic consumption only) there, starting with the BRIC countries.

3. The iTablet could become a nearly universal device, like the iPod, given the right features and price, and could be very profitable if subsidized by (say) Verizon. The potential feature-lists being tossed around on Apple boards are mind-bogglingly MUST-HAVE.

4. The Apple TV is just coasting along in the background and could take off like gangbusters if it got the right set of upgrades and the right deal got cut with Hollywood.

5. Apple's forward-looking Snow Leopard OS is poised to gain mindshare among the digitarati, because it takes slick advantage of 64 bits, multi-core, etc., and adds speed and space efficiency. These are opinion-leaders who will in time turn the herd.

=========
A. "a company can gain a huge competitive advantage for a limited amount of time and earn these "abnormal profits", but eventually, the rest of the market will catch up."

Here's the response I made yesterday to an author who wrote something similar: That was what analysts were saying a year ago: "Just wait for the competition--RIM's Storm, Google's Android, Palm's Pre, Nokia's whatever." Well, they've come and pretty much fizzled (although Android's new release will give it a fighting chance). Apple is actually lengthening its lead over its competition; it is defining a new normal. Its OS is the core of the iPhone's advantage, and it is unmatchable. This makes the situation different from prior generations of smartphones, which were just "consumer electronics"—i.e., gadgets. The iPhone is really a computer, not a gadget. Apple has the only truly "smart" phone, because of its OS. Also, the iPhone runs iPod music that owners have purchased. They'd have to abandon it (or upgrade all of it to a portable format at significant expense) if they were to move to another phone. Also, it's possible that the forthcoming iTablet will have a dock for the iPhone. If so, and if it's a big success, it will strengthen the iPhone's competitive position.

B. "Maybe the most pertinent question is whether Apple is a "fad." ... How can Apple claim to be the little guy when it may very well overtake Microsoft in size at some point in the near future? Could we see an Apple backlash or Apple fatigue develop sometime soon?"

Here's the response I made yesterday to an author who similarly wrote: "sell AAPL short ... until you feel the hype over AAPL has faded":

Your use of the term "hype over Apple" reveals you to be one of the many superficial scoffers who are baffled by Apple's success and unable to attribute it to anything but a flashy interface, status appeal, and "hype" (slick ads, vocal fanboys, Job’s charisma and reality-distortion field, etc.). But Apple is basically successful because its OS is built on rock, and because of the “feel” that goes into its product-design. Windows is built on a swamp.

C. "Could we simply find that consumers are less willing to pay high premiums for Apple products at some point?"

Here's the response I made yesterday or the day before to an author who made a similar "point":

You'd have said the same thing six months ago, wouldn't you? I can imagine the similarly superficial line you'd have taken: Sell Apple because it's a luxury product in a recessionary time. But that move would have worked out poorly--MSFT has lagged, while AAPL has surged.

Apple's products work better and consumers feel they're worth the money. Here's how I sum up the value proposition:

The Apple Tax: A dollar a day
The Apple Pax: Priceless.
Some things are priceless. For everything else, there’s Windows.
(A dolor a day.)

Of course, I wouldn’t put it past Apple to trip itself up, given its headstrong habits. (Two recent manifestations of this, now in the process of being corrected, were its removal of Firewire from its 13” laptop and the removal of a matte-screen option from most of its laptops.) It's its own worst enemy.

Sep 11 07:38 AM

[Roger Knights:]

PS: Timeline listed five advantages under the heading, "How can you financially value a business that is:" Here's a sixth: Exceptionally well run; i.e., good at "execution."

Sep 11 07:44 AM

[Mark Benedict:]

The whole premise that Microsoft was valued at ~$24 in 1998 and $24 today is...incomplete at best? Microsoft has paid over 20% in total dividends on that nominal price in the last 10 years. That is not a great return rate, but Apple doesnt pay dividends at all, so using just the share price is misleading.

Secondly and more importantly...MSFT has had 2 2:1 stock splits (1999 and 2003) since 1998. Doesnt that mean that MSFT is worth ~$100 a share in 1998 dollars? Looking at a single, very misleading, number and making an investment decision on that basis makes me wonder what your angle is.

Sep 11 08:52 AM

[Fabien Hug:]

Mark Benedict has a good point; adjust for splits. Generally speaking, for Apple; as long as MS isn't able to produce an OS that works smoothly and properly on the first time, Apple has a bright 90 something % future. My daughter told me that, in her LAUSD school, all 7 and 8 grade teachers received a new MAC for back to school. Against Apple; people in Europe show some irritation at Apple I-phones (screen cracking and bad corp. communication).

Sep 11 09:18 AM

[jgphoto1:]

"The basic premise is that a company can gain a huge competitive advantage for a limited amount of time and earn these "abnormal profits", but eventually, the rest of the market will catch up."

The same sentiment was fairly common three years ago. And in the three years before that. Since the iPhones launch two years ago how many "iPhone" killers" have been predicted.

As corporations go Apple represents a fairly rare anomaly. First they create great products that stand strong against the competition in and of themselves. Apart from being intuitive and looking good they share a superior proprietary software that sets them apart from all of the self anointed contenders.

Finally those products talk to each other. It is a family of products. An ecosystem that unleashes a level of possibility, satisfaction and ease of use for the end user that is unlike anything they have experienced prior. Once inside the ecosystem they are compelled to stay and deepen their relationship to the system by taking advantage of more of it's components. They are compelled not by force, although to be sure there would a level of cost and discomfort in leaving the system, but by desire. They want to be there.

That ecosystem will continue to grow deeper and broader in the years ahead as Apple refines existing products and adds new ones. A consumer who purchases to an Apple for the first time represents a strong likelihood that over time they will own several and when it is upgrade time their will be no thought of another brand.

What we see today is only the tip of the iceberg in terms of the ecosystem, integration and spectrum of products. Add in current market share potential and brilliant end to end execution (management) and you have formula for tremendous and sustained growth potential for many years to come. Imagine Apple with a Microsoft market share, a diverse product line and a corporate DNA that continues to focus on innovation and quality. Ten years.

Sep 11 09:19 AM

[Gandhi:]

The author is not looking at what is happening in the market, just what is happening financially with the company.

The reason why MSFT was $30 in 1998, $60 two years later, and is today sitting at $25 is because of the DoJ antitrust case followed by Steve Ballmer taking over at the helm. The antitrust case muzzled any aggressive moves by the company (and arguably is still the case), and Steve Ballmer cannot innovate outside of a card box even if his life depended on it.

The author mentions: "5. Led by hardware but followed by software" - the author could not be more wrong!!! It is the Apple software (in Macs and iPhones/Touches) that define and give Apple the competitive advantage. And then commits the cardinal sin of suggesting Apple license its OS to other box makers to put in their shabby PCs and sell in BRIC countries. Apple already has third-parties manufacture and assemble all its devices in China. It could easily make a cheap computer to sell - but that would be exactly that - a cheap PC. The author suggests Apple give away its crown jewels (license it OS) and tarnish is sterling/premium image (selling cheaper boxes) and sacrifice margins in order to have revenue growth.

This is the problem Microsoft faces today. Cheap PCs and netbooks are the result of PC box-makers unable to differentiate themselves in any meaningful way. They all run the same Windows OS. The few attempts to differentiate have resulted in higher prices and disappointing sales - Vaio high end laptops, or the Dell Adamo. So they continue selling cheap PCs with next to nothing in terms of margins. Look at Asus - great growth in terms of revenues off netbook sales - but look at their margins!

While a stock like AAPL with a P/E ratio of 30 is certainly priced to have growth expectations, having a non-profitable or low margin business means it cannot pursue, invest and nurture growth opportunities when the present themselves. The netbook/tablet market is hot right now, but Apple is taking its time to get things right before it releases the product. Because it can afford to get ti right and not rush out a beta product simply to hop on the bandwagon.

Author needs to do more research on the general market, not just financials, or stick to small caps he is familiar with.

Sep 11 09:35 AM

[southbeach:]

"Apple has 100 million credit card-registered iTunes users who have access to one-touch purchasing. This will swell, conservatively, by 4-6 million customer per quarter as iPhone and iPod touch devices require syncing and loading. No company on earth will have what Apple has within 2 years, and that's key to the software portion of the business."

Just to add a detail to this good point. In the mobile value chain, so called 'operator billing' - where the consumer pays for items via their monthly operator/carrier phone bill - adds a massive cost to the transaction flow, which makes the proposition less appealing to content providers and application store owners. So App Store could easily be not just the largest application store in the world, but the most efficient/profitable since it reduces the excess profit grab of the operators for their billing services.


On Sep 11 06:34 AM Timeline Strategy Consulting wrote:

> I think you're wrong, and here's why.
>
> In 1998</span>, Microsoft had established a massively dominant operating
> system and business suite (Office) business, as well as leading market
> shares in database, server, and other enterprise. There was little
> that it did in which it did not lead. Thus, its growth outlook was
> capped. It's ironic that Microsoft's current dominance in operating
> systems (93.06% for Microsoft vs. 4.87% for Mac via one measurement)
> is often used as the defense of investing in MSFT or against investing
> in AAPL. Such dominance is more risk than opportunity, for the company
> and for the shareholder.
>
> Contrasted, there is no space in which Apple competes, other than
> music players (which have now declined to 18% of its revenue) where
> it holds more that 10% market share. Not desktop or laptop computers,
> and despite the success of iPhone, not mobile handsets.
>
> Here's an open question for you. How can you financially value a
> business that is:
>
> <span title="Convert this amount" class="currency_conver...
> </span>. Already massive (<span title="Convert this amount" class="currency_conver...
> </span> million units sold worldwide for at least $<span title="Convert
> this amount" class="currency_conver... per unit,
> or $<span title="Convert this amount" class="currency_conver...
> </span> billion)
> <span title="Convert this amount" class="currency_conver...
> </span>. Growing massively (20% year over year)
> <span title="Convert this amount" class="currency_conver...
> </span>. Technologically up for grabs
> <span title="Convert this amount" class="currency_conver...
> </span>. The next consumer-driven revolution
> <span title="Convert this amount" class="currency_conver...
> </span>. Led by hardware but followed by software
>
> This, of course, is the smartphone market, and Apple's swiftly-growing
> position here on the technical side is somewhat muted by the manner
> in which it recognizes revenue via the 2-year subscription model.
> I am admittedly biased in favor of (long) Apple, but I believe that
> they are building an unassailable position in handsets and applications
> that go with them. Simply put, the competition is confused and scrambling,
> consumers are flocking, and Apple got 95% of the ecosystem right
> at exactly the point that the terrain was unclaimed.
>
> One practical example - there is currently a 5-8 week wait time for
> iPhone <span title="Convert this amount" class="currency_conver...
> </span>GS at various T-Mobile locations in the Netherlands and at
> other carriers throughout Europe. At those same locations, you can
> obtain practically any other handset the same day, but Apple can't
> make theirs fast enough. What's next? China, of course, and perhaps
> that's even the reason why these handsets are in short supply currently.
>
>
> And here's one point that should not be overlooked - Apple has <span
> title="Convert this amount" class="currency_conver...
> million credit card-registered iTunes users who have access to one-touch
> purchasing. This will swell, conservatively, by 4-6 million customer
> per quarter as iPhone and iPod touch devices require syncing and
> loading. No company on earth will have what Apple has within <span
> title="Convert this amount" class="currency_conver...
> years, and that's key to the software portion of the business.<br/>
>
> Practically speaking, AAPL sees $<span title="Convert this amount"
> class="currency_conver... earnings in 2010, which
> at a P/E of <span title="Convert this amount" class="currency_conver...
> </span> yields a share price of $<span title="Convert this amount"
> class="currency_conver...
>
> So, in summary, Apple's potential rests upon this area in which they
> snuck in. Once there, they quickly established something simultaneously
> untouchable by competition and very appealing to consumers, and that's
> the appeal.
>
> By the way, I think that you forget the 'not' in this sentence:<br/>
>
> "Of course, if you're buying Apple, you're too terribly interested
> in the assets."

Sep 11 09:57 AM

[Jon408:]

Great remarks above; thank you people!

My only comment is that the author has not actually looked at the financials, because Apple's financials are not published by anyone, including Apple, in any meaningful way. The deferred revenue of the iPhone is both huge and accelerating - an income stream that is so large that it boggles the mind - and it isn't reported. The author certainly didn't quantify it. Take that into account and you'll find that Apple's PEG isn't 1.5 (as Yahoo reports it), but rather somewhat closer to .6 or .3 or .7 or .2 or whatever (we don't know what it is, we only know it is NOT 1.5!).

Sep 11 09:58 AM

[fatwollit:]

What everyone else said.

Sep 11 09:58 AM

[romorris:]

"In fact, Apple's $153 million market cap is closing in on Microsoft's monstrous $220 million market cap!"

You seem to be missing a great number of 0's or confusing "M" with "B"

Sep 11 10:04 AM

[msbiz:]

....should have looked at it sooner??? sounds like SOUR GRAPES to me! Apple has made me one rich Mama! Glad I looked at it years ago. My philosophy of investing? BUY THE COMPANY...the company is and has always been great...time told us the rest of the story.

Sep 11 10:13 AM

[wobatus:]

He is using microsoft's split adjusted price, which price also adjusts for the dividends (although at that it wasn't $24 split adjusted on 9/11/1998 per yahoo).

At $24 MSFT was priced at 48 x cash flow in 1998. Apple is at 15 to 20x, and you are not deducting the cash on the balance sheet to arrive at an enterprise value, not capex to get free cash flow.

But if msft has maintained value (and we are going from a peak to almost trough market period you are viewing), if apple has the same performance, at the current price it is a decent bet to triple over the next 10 years.

A double every 9 years is the standard S&P 500 historical return, not counting inflation effects.

Sounds like Apple might not be a bad bet, IF it can maitain a dominant position as msft has. Other investors here can address that better than I can.

You are mistaking the ability to double or triple in a year that a small cap may have with long term wealth appreciation. Warren Buffett certainly shows you can make decent returns buying larger cap companies, even as he made huge money early on with smaller caps.

I have no current position in Apple.

Sep 11 10:17 AM

[User 214114:]

better stick to small caps....


On Sep 11 06:34 AM Timeline Strategy Consulting wrote:

> I think you're wrong, and here's why.
>
> In 1998, Microsoft had established a massively dominant operating
> system and business suite (Office) business, as well as leading market
> shares in database, server, and other enterprise. There was little
> that it did in which it did not lead. Thus, its growth outlook was
> capped. It's ironic that Microsoft's current dominance in operating
> systems (93.06% for Microsoft vs. 4.87% for Mac via one measurement)
> is often used as the defense of investing in MSFT or against investing
> in AAPL. Such dominance is more risk than opportunity, for the company
> and for the shareholder.
>
> Contrasted, there is no space in which Apple competes, other than
> music players (which have now declined to 18% of its revenue) where
> it holds more that 10% market share. Not desktop or laptop computers,
> and despite the success of iPhone, not mobile handsets.
>
> Here's an open question for you. How can you financially value a
> business that is:
>
> 1. Already massive (200 million units sold worldwide for at least
> $400 per unit, or $80 billion)
> 2. Growing massively (20% year over year)
> 3. Technologically up for grabs
> 4. The next consumer-driven revolution
> 5. Led by hardware but followed by software
>
> This, of course, is the smartphone market, and Apple's swiftly-growing
> position here on the technical side is somewhat muted by the manner
> in which it recognizes revenue via the 2-year subscription model.
> I am admittedly biased in favor of (long) Apple, but I believe that
> they are building an unassailable position in handsets and applications
> that go with them. Simply put, the competition is confused and scrambling,
> consumers are flocking, and Apple got 95% of the ecosystem right
> at exactly the point that the terrain was unclaimed.
>
> One practical example - there is currently a 5-8 week wait time for
> iPhone 3GS at various T-Mobile locations in the Netherlands and at
> other carriers throughout Europe. At those same locations, you can
> obtain practically any other handset the same day, but Apple can't
> make theirs fast enough. What's next? China, of course, and perhaps
> that's even the reason why these handsets are in short supply currently.
>
>
> And here's one point that should not be overlooked - Apple has 100
> million credit card-registered iTunes users who have access to one-touch
> purchasing. This will swell, conservatively, by 4-6 million customer
> per quarter as iPhone and iPod touch devices require syncing and
> loading. No company on earth will have what Apple has within 2 years,
> and that's key to the software portion of the business.
>
> Practically speaking, AAPL sees $7.50 earnings in 2010, which at
> a P/E of 30 yields a share price of $225.
>
> So, in summary, Apple's potential rests upon this area in which they
> snuck in. Once there, they quickly established something simultaneously
> untouchable by competition and very appealing to consumers, and that's
> the appeal.
>
> By the way, I think that you forget the 'not' in this sentence:<br/>
>
> "Of course, if you're buying Apple, you're too terribly interested
> in the assets."

Sep 11 10:46 AM

[User 466072:]

I am very long on Apple. But I watch carefully the p/e ratio. Once it starts climbing over 30 I start to get nose bleeds because, like the period just past, everything can go absolutely right for the company and the stock can still plunge 60%.

I believe that Apple stock will continue to move upward. As Timeline notes, if they make 7.50 a share in 2010, that projects to $225 per share, a nice bump up over the current price of 171. If you see the stock going over 225 any time between now and 2011, then you should look at taking some off the table.

Look for a solid performance on the stock as we move toward Christmas. Look for a sell-off in the first week of January or after they announce their spectacular holiday earnings.

This is a favorite short candidate for the monster hedge funds.

Sep 11 10:49 AM

[Josh B Thom...:]

The best thing AAPL does is wake up MSFT. A MSFT executive was just recently quoted as saying: "It's fun competing!" That was an eye opening statement regarding the culture of MSFT that shows for a long time MSFT thought of itself as having little competition.
An advantage MSFT has is MSFT is the only technical company that has the experience of dealing with the complexity and scale of their market share in the software world. It was the advantage IBM once had.

Sep 11 11:18 AM

[Aryamehr:]

A few things to ponder are, does Apple have a superior patented technology in the iPhone? Are their applications tethered only to the iPhone? Is the iPhone today really a better Smartphone than many of its competitors on the flanks. My answer is a big No, however that does not mean the iPhone is a bad phone, what I am saying is it really doesn't have anything that I would call superior to its competition. However this was the case two and a half years ago when they launched the first iPhone but not today and I suspect this will even be less with time. Apple absent of a destructive technology does not have the resources to match the likes of Google, Samsung, Msft etc. because the competition is coming from every flank. Lets just hope they can remain at the top with many equals.

Sep 11 11:31 AM

[mollytjm:]

bottom line... Apple just got a huge deal in China...there are a lot of people in the world who would love Apple products but don't have access yet. Apple will continue to grow...there really isn't any limit. And it's tech. In tech, the prize goes to company that innovates fast AND well. It's not like any other industry. No one thinks out of the box like Apple and no one really sees the future that Apple does.

I applaud the author's willingness to look at a type of stock he usually doesn't examine. However, it takes more than a 'look' to understand a technology company. One must understand the true nature of this type of technology and what it takes to excel at it.

Palm doesn't have it... they proved that by sticking with the buggy Treo because they had the market captured with it. Microsoft...sigh...7 years and then they produce Vista and Zune. Sony sat around with it's Walkman plugging its ears...their innovation was to make it in yellow. I could go on, but you get the picture, i hope.

I'm not sure an analyst who doesn't love and understand tech can really make insightful projections about a tech company. Apple is not only a great company but it's a growing company and a good long term investment.
long APPL

Sep 11 12:06 PM

[H.J. Huneycutt:]

Responses to the common responses:

(1) Apple is earning "abnormal profits" right now. The reason for this is because their products demand a premium price and people are willing to pay this premium. The question to AAPL investors is whether or not they can continue to earn those "abnormal earnings" over the long-haul and whether or not consumers will be willing to pay a premium for the Apple brand six years down the road. Look at the history of the consumer electronics industry over the past three decades and see how many companies managed to pull that feat off.

(2) Too many people point to the fact that AAPL was performing well six months ago and still is performing well now as a counter-argument. That's irrelevant. The stock price assumes they will continue to do well and grow for a decade or longer. I fully expect AAPL to dominate the smartphone market for the next year or two at the very least. Almost everybody with a brain on their head does. What investors do not seem to be anticipating is that the market will *continue* to rapidly evolve 5-10 years down the road and will do so in a way that AAPL no longer has a dominant advantage. [Think lower margins, as everyone copycats AAPL]

(3) P/E ratios are only useful so long as the "E" part holds up. I question whether the "E" can hold up. Moreover, the "E" needs to eventually average above $10 per share to justify AAPL's current share price.

(4) The commenter who says that one can not possibly quantify Apple's "deferred revenue" should glance at their statement of cash flows. I already mentioned this issue in the article.

(5) The argument that AAPL has tons of rooms to grow because they have low market share in many of the industries they operate in has some merit; but it's also a very optimistic argument. AAPL also has tons of rooms to be squeezed by lower-margin, lower-price companies in nearly every industry they operate in, as well.

(6) Forward P/Es are terrible ratios to value a company by. Everyone was using forward P/Es last year for the solar industry --- do you know of any solar companies that are selling higher now than they did last summer? The problem with the "forward P/E" is that it doesn't represent anything real. It merely represents "expectations." You are assuming those extremely high growth expectations will be meet when you say that Apple deserves a forward P/E of 30. So to say that AAPL *merely* has to earn $7.50 per share is completely false. AAPL probably needs to earn upwards of $15 per share at some point to justify a price of $225.

(7) Apple's computer business, not mentioned in the article, might be the most susceptible one. Windows 7, netbooks, and Linux all have the potential to chip into their margins. Indeed, AAPL is feeling pressure already and has gone ballistic now that MSFT has pointed out the high prices of AAPL computers in commercials.

(8) High margins are a sign that a company is doing a good job. They are also a sign that the company is potentially overvalued, because competition will come in and undermine those margins eventually.

(9) The MSFT splits are irrelevant because the data on Yahoo Finance [where I got the info] takes into account splits. Moreover, the point of this article is to simply display that for most of the past decade, MSFT has traded sidewards with a top range of about $30 and a bottom range near $20. At $170, there's not much room for AAPL to go upwards, short of a speculative bubble. Sure, it could tip $200 at some point, but the risk you take on is certainly higher than the reward you gain (a 15% - 20% return).

(10) The fact that one cannot even suggest that Apple is "fairly valued" or slightly overvalued without being subject to a barrage of under-the-belt attacks is probably one of the best indications out there that too many investors have an emotional attachment to AAPL stock. Emotional attachment means that people are willing to ignore fundamentals and a reasonable underlying valuation. Forward P/Es of 30 are not a "reasonable valuation"

(11) I wouldn't short AAPL because the company is too well-run to *bet against*. If I owned AAPL, I would sell here and buy something with more upside (or if you're an income investor, something that actually pays a dividend.) I don't say this because I dislike AAPL --- if it were selling at $80 right now, you can guarantee that I would say it's a "buy". Not so much at $170, though. It's not longer a "growth" stock at that price. It's a "buy and pray that Apple can continue to grow at a phenomenal rate so that I can maybe chug out a 10% - 20% return eventually" stock.

Sep 11 12:11 PM

[H.J. Huneycutt:]

Also, let's be clear of something --- I'm not saying that I believe AAPL will fare poorly any time over the next decade. It's an extremely well-run company and it will continue to perform extremely well. But one should not mistake a "macro" analysis of the company for a legitimate valuation of its stock price.

At $170, is there an upside? Yes. I could envision a lot of scenarios where AAPL is worth more than that. But the problem is that I can't envision too many scenarios where it's worth *SIGNIFICANTLY* more than that. Yes, it might be worth $200. Yes, it might be worth $225. But it's not going to be worth $340 any time soon (barring a massive bubble).

Which is my basic premise here --- there are some considerable business risks that many AAPL investors are ignoring. This is how bubbles are formed. People only see the bright and sunny upside, while they blind themselves to the downside. AAPL has a considerable downside at this point; I have laid out several scenarios that could undermine their profits in the future.

The question becomes, is the limited upside worth that significant downside? That's left to each individual investor, but generally speaking, I would always say "no."

Sep 11 12:26 PM

[despicable:]

I am laughing at your article, all the way to the bank. Steve Jobs is funding my retirement, and 10 years from now, you still won't understand what he's doing.

Sep 11 01:18 PM

[Paul Harper:]

On Sep 11 09:58 AM Jon408 wrote:
"My only comment is that the author has not actually looked at the financials, because Apple's financials are not published by anyone,
including Apple, in any meaningful way."

best comment so far, too many Apple apologists here (as ever). No dividend is also a negative for me.
If Apple can keep the management style going as & when Jobs drops out (I feel this will happen in the next 5 years) , they will certainly continue to be strong.
However we have to look at focus, what does Apple actually want to be ? A device vendor, a digital media platform or a developer of niche products. Hard to tell right now & I find that worrisome to some extent.

Sep 11 01:49 PM

[Infinite loop:]

I'm wondering how long it will take you to realize companies don't trade on Fundamentals. Since when do 100+ variables provide guidance? Did it work for MSFT investors 10 years ago?

Ever taken Statistics or Finite Math? The probability you have covered every concievable variable influencing your holding is unrealistic. And who is to say if you have covered every possible base the final result is profit.

You are only fooling yourself if you think companies trade on Fundamentals.... and you just provided the proof.

Want to know what they do trade on?........ Emotions. Nothing more.

Sep 11 04:59 PM

[Infinite loop:]

On Sep 11 01:49 PM Paul Harper wrote:

> On Sep 11 09:58 AM Jon408 wrote:
> "My only comment is that the author has not actually looked at the
> financials, because Apple's financials are not published by anyone,
>
> including Apple, in any meaningful way."
>
> best comment so far, too many Apple apologists here (as ever). No
> dividend is also a negative for me.
> If Apple can keep the management style going as &amp; when Jobs drops
> out (I feel this will happen in the next 5 years) , they will certainly
> continue to be strong.
> However we have to look at focus, what does Apple actually want to
> be ? A device vendor, a digital media platform or a developer of
> niche products. Hard to tell right now &amp; I find that worrisome
> to some extent.

I've made 100% on AAPL in the past 6 months. There is your dividend.

Sep 11 05:01 PM

[john1940:]

One thing Apple has to deal with is pricing power erosion. Computers are dropping in price (including Apple). The iPhone is overpriced and should come down soon. The iPods have already eaten their own tail in pricing or substitute Apple products. To offset this revenue decline takes incredible new products at premium prices (because that's what they're replacing). I think there's risk out there for Apple and at current prices, it's time to lower your risk to this company by selling or hedging some of your position. That's conservative investment advice, not AAPL advice.

Sep 11 06:12 PM

[houserich:]

AAPL has several moats that allow them to price high for a long time. Their product design, quality, brand-loyalty, partner model, micropurchase customer base, etc. are all robust and will take some time to erode.

However the more success they have, the harder it becomes to outdo themselves. We see glimpses of how increasingly difficult is is to get customers to move off of good products and onto new ones.

So generally speaking, I agree with the article in regards to AAPL upside starting to become balanced with downside.

In terms of the comparison to MSFT, not so sure, the DOJ certainly did damage. That crushed the stock, never to recover. And a healthy cross section of the top talent called it quits then, morale was dismal, and all products showed it (especially Vista). MSFT might have made it past that phase, recent products are looking better. I am not expecting that type of blow to occur to AAPL.

Sep 11 08:53 PM

[User 338722:]

On Sep 11 11:31 AM Aryamehr wrote:
...
> Is the iPhone today really a better Smartphone than many of its
> competitors on the flanks. My answer is a big No, however that
> does not mean the iPhone is a bad phone, ... it really doesn't
> have anything that I would call superior to its competition.

Actually it does, and I can tell you're not a programmer, Apple's
overwhelming advantage is spelled O ... S ... X. Remember it.

The correct answer is a big YES. Thanks for playing.

Sunny Guy

Sep 11 09:52 PM

[sleepy:]

One way I like to look at this is to consider the market cap of whole markets that Apple is in (PC's; cellphones; music and video players; music and video distribution; web services; retail; music, photo and video creation) and estimate the smallest market cap Apple might take from incumbents in each market. The answer gives a surprisingly large total, even without Apple being a dominant player in any market. (And that's before you consider retail banking as a possible market for Apple - give it a few moments thought. A hundred million credit cards registered could become a hundred million retail banking customers.)

Apple knows full well that the market is more powerful than itself (unlike Microsoft, although Microsoft may finally be learning). So Apple can't rush off into the distance with innovation; to move the whole market they have to keep their innovation bottled up and let the competition get close enough to keep up. Some read this as risk from competition and falling margins but it's simply Apple playing its unbeatable hand for maximum long term gain.

Sep 12 04:46 AM

[Yourope:]

Why did you write "Can competitors such as Research In Motion (RIMM), Palm (PALM), Nokia (NOK), and T-Mobile (DT) [partnering with Google (GOOG)] undermine AAPL's market dominance at some point?"

According to my knowledge Symbian has approximately 51 per cent of the smartphone market while Apple has only 13 per cent. It surely isn't Apple that dominates the market.

Sep 12 09:11 AM

[Anthony B:]

"In fact, Apple's $153 million market cap is closing in on Microsoft's monstrous $220 million market cap!" -- You clearly spend a lot of time with small caps...

Sep 12 01:27 PM

[boisterousbob:]

"The author mentions: "5. Led by hardware but followed by software" - the author could not be more wrong!!! It is the Apple software (in Macs and iPhones/Touches) that define and give Apple the competitive advantage. "

I respectfully suggest the truth is right in the middle. Apple software "just works" and one of the main reasons is that it only runs on Apple hardware. Eliminating commodity hardware not specifically tested extensively TOGETHER with the software is what gives apple products a deserved reputation for being solid and reliable.

I concur that suggesting apple license it's OS to run on other's hardware is anti-ethical to their entire business model and would be a starkly retrograde step. Owning the entire platform is what allow's AAPL to concentrate on giving users exactly the experience that they designed.

I would also suggest there is a substantial potential stumbling block for AAPL in the future. If they become too large in any one segment, for example portable music, we can imagine a regulator insisting that aaple open up itunes to competitor hardware.

I agree with the author's sentiment. AAPL's share price is partly based on it's ability to continue producing innovative blockbuster products like iPhone. Mere competence will not cut it. Investors need decide how frequently AAPL must do this, and exit the stock timely if AAPL looks like it is not going to continue to amaze at the same pace.

AAPL can milk its current product set for sometime to come, but the competition will catch up with all the current offerings. Consider comparing ipod/iphone to Sony's lead in inventing portable music with Walkman, and look where Sony are now in this field. I also add my standard warning that windows 7 is the most (and perhaps only) simply brilliant product that MSFT has introduced.

Sep 12 01:27 PM

[Relic37:]

One thing I rarely see addressed in analyzing Apple is the demographic it serves (averaged broadly) It tends to the younger end of the scale - probably skewed to those under 35-40. As these hyper-loyal customers replace the older generation that grew-up with PCs and Microsoft, the natural evolution of things would seem to be continued growth for Apple and diminishing returns for the PCs and Microsoft. My college aged child is hooked on Apple, and so are most of her college friends. Apple would have to stumble BADLY and probably repeatedly to drive them into the PC world.

I'm in my mid-50s and have thrown in the towel on the Dell / Gates product combo. I find it refreshing to use a computer (Apple) that just works - no crashes, no viruses, no problems. The slightly higher cost is not a deterrent because....it works. At this point, I can't conceive of anything Dell or Microsoft could do to tempt me to ever buy their products again. And more and more of my friends are coming to the same conclusion.

The short-term is always a crap-shoot, but long-term Apple is the 200 pound gorilla, rapidly growing large enough to push the 800 pound gorilla off the mountain top. Some day financial analysts may be comparing Microsoft to Sears.

Sep 12 06:20 PM

[Terence Chow:]

Thank you Timeline & Thank you Rogers Knights.
Thank you author as well.

I have looked at Apple on and off last fall when pretty much all my friends started getting i-Phones. (Actually it seemed that only my successful friends were getting it...oh how that bodes well for Apple...)

Like the author, and so many others, I found the value of Apple extremely hard to calculate due to growth expectations that I could not identify as accurate or not.

This article opened up a great discussion and I have to thank Timeline and Rogers Knights for pointing toward some key qualitative industrial factors I had not looked at. Your comments and the author who spurred conversation, deserve appreciation.

Thank you!

Sep 12 06:56 PM

[redbeard20000:]

What nobody seems to be mentioning is that nearly all of Apples growth the past 2 years has been from the Iphone, and not really any of their other products (macs have grown decently but Ipods are tailing off). Or that the Iphone has ridiculously high margins (somewhere north of 60%), and that the reason why the Iphone has such high margins is because of telco subsidies. At&t is paying apple somewhere in the 350-400$ range, PER PHONE! That is the biggest risk to growth for apple, and nobody is talking about it. Sooner or later these subsides will get reduced substantially and margins will take a huge hit. Apple fans are touting the China Unicom deal as a huge win for Apple, when they really should be more concerned because its foreshadowing the reduced margins. China Unicom is buying Iphones for 300$ a pop, which is a lot lower than the 550-600$ they get here in the US.

Sep 12 10:47 PM

[Josh B Thom...:]

All MSFT stockholders in 1998 would not have seen it your way. Hopefully, MSFT stockholders of today are right, obviously, in 1998 they were wrong.

Sep 12 11:49 PM

[mna:]

Apple's has 2 big strengths in the market right now. The first is attractive hardware with solid software (iPhone, iPods, Macs), and backed up by excellent content (the 800 lb gorilla that is the iTunes Store). The second strength is that people who invested in the above products are loath to abandon the platform because of previously purchased content. The first strength draws people in, and the second prevents them from leaving. It's a formidable combination that has worked for Apple and will continue to do so in the future.

However, the author has an excellent point. Apple's stock price is already extremely high. The point is not whether or not Apple is an excellent company or that it will continue to lead in the next couple of years (it will), but whether or not it can maintain that position in the future without profit erosion. By future, I don't mean the next 2-3 years, but the next decade. Someone above mentioned the 20% growth. But that growth was driven largely by the App Store. How many more growth drivers like the App store are in the Apple Pipeline to ensure the 20%+ growth?

Remember, similar competition already exist on the horizon. Google's Android is already a solid software platform, and all it will take is a hardware company like Motorola to Team up with Google, and provide content in order to compete with Apple. Sure there are millions of iTunes users with billions of $ of purchased content. But... I wouldn't discount the will of the consumers to purchase "portable" content that will work across platforms (iTunes Store content is all proprietary, save for Videos.) Also remember that the media companies are sick of Apple's control, and want to break away from the rigid pricing schemes. It wouldn't surprise me in the least if someone like, say, Samsung or Motorola, decides to develop a phone based on Android, and for Google to announce an Content Store joint venture with the Media companies to back the platform with cross-platform open content. Add that to the competition from Microsoft's established (albeit poorly run) Windows CE in the tablet scene, and you have some potential headwinds. Will they succeed? I really don't know. All I know is, at today's prices, you're pretty much betting that all those companies won't, and will never, succeed. It's really up to the individual to decide if that gamble's worth it to you.

Sep 13 03:44 AM

[AdamC:]

Everyone here sounds like a financial analyst sprouting all sorts of expert advice or guesses where the company stock price is heading.

I really don't know myself but I just buy Apple stocks because I have faith in Apple that they will keep coming out with great products.

With only 4% of the world's computer market and 13% of the smartphones market they have huge potentials. Not forgetting the ecosystem of tying all the products together and an OS that laid the foundation for future potential expansion and last but not least the $1B server farm in NC. Is Apple clueless about where they are going?

With their proven track records and vested interests I don't mind putting my bets on Apple.

Sep 13 03:50 AM

[Bling Daddy:]

When you use an Apple product, you are using a piece of art. It is not just a machine to do work. Apple has a style that transcends functionality. This creativity combines entertainment with practical use. This marriage is slick and powerful. I don't see the innovation stopping anytime soon given that Apple has been recruiting the best minds for quite sometime. They are constantly changing the game and their future products will stun the world. I think Apple has plenty of room to grow and many as yet unforseen market niches to exploit. The bigger problem is that a tepid economic recovery could attenuate the acceleration of this growth over the next decade. That being said; how cool is it to own a piece of Apple! A piece of history. Personally, I would like to see an AAPL price around 150 to invest a little more, but that's more my feel for the entire state of the stock market.

Sep 13 04:41 AM

[guyal:]

Enjoyed the article. Can't stomach the repetition of the fallacy that Apple's products are somehow purchased "at a premium", i.e. priced above their nominal value. I have purchased, used, and frustrated myself with enough modern Dell, HP and Sony computers in the last 5 years to know that Apple's products cost more because they provide more, far beyond the Apple logo, with higher quality in the hardware, the OS and the user interface. Compare the scary flimsy CD tray on the average non-Apple computer to the CD tray on a Mac, for example. (talking averages here, Apple makes mistakes too, yada yada).

In 2006, I purchased a Dell XPS M1710 and a (then) new 17" MacBook Pro. Both had 2 Intel CPUs, 2G RAM, 17" screens. Marketing-wise, I had the top of the line laptop from the 2 vendors. The Dell was perhaps 20% less performant, with said flimsy disk tray, and an all around painful Windows UI with a sea of bizarrely bad Dell add-ons. The MacBook was my first non-iPod Apple purchase, and is still in heavy service today (I'm typing on it right now), with same cavalier attitude in 2009 as I had in 2006 about how many programs I can run simulataneously. A sterling example of "You get what you pay for," which started me on a run of new Apple product purchases and ruined my brand image of many Apple competitors. I can't say whether the stock is overpriced, but their retail prices are - to this consumer - bargains.

Sep 13 04:58 AM

[Uli:]

> hit. Apple fans are touting the China Unicom deal as a huge win for
> Apple, when they really should be more concerned because its foreshadowing
> the reduced margins. China Unicom is buying Iphones for 300$ a pop,
> which is a lot lower than the 550-600$ they get here in the US.

Expect to see less admirable earnings in China. IPhone is designed for english-speaking western markets and it's most praised touchscreen features are based on capacitive displays that on the other hand are inaccurate and unreliable to recognize hand-writing which is tremendously more usable than virtual keyboards in languages with thousands of characters.

Apple brand works though - the Chinese will still buy IPhones but don't expect too much.

Sep 13 06:41 AM

[Uli:]

On Sep 11 07:38 AM Roger Knights wrote:

> Here's the response I made yesterday to an author who wrote something
> similar: That was what analysts were saying a year ago: "Just wait
> for the competition--RIM's Storm, Google's Android, Palm's Pre, Nokia's
> whatever." Well, they've come and pretty much fizzled (although Android's
> new release will give it a fighting chance). Apple is actually lengthening
> its lead over its competition; it is defining a new normal. Its OS
> is the core of the iPhone's advantage, and it is unmatchable.

iPhone OS is really a short-term advantage, it helped Apple to grab a share with its revolutionary UI, but the long-term advantage is it's integration to Apple's software and services - thinking ITunes here. This integration of devices and services will most likely be the future of cell phone and smart phone markets and there are 3 major players globally, Apple, Google and Nokia. BlackBerry and Microsoft are players too, but their strategy is not as focused as the big three have. Palm, Samsung, LG, Motorola, SonyEricsson and the rest are either incapable to react or just missing the moment and will be left behind as plain device manufacturers with much smaller margins.

1. Apple will have a very strong position in western world because of their premium brand and ubiquitous ITunes and very well working app store. However, in devices Apple will and can not compete with Nokia on global market, they simply have different strategies and iPhone is simply too expensive in many markets where Nokia phones are profitable. Competing could also hurt their premium brand. On software-side, Google's Android and Nokia's Maemo will be sucking the mindshare from iPhone developers because of the openness.
2. Google will be a winner even though it does not compete in device front. Google's web services are top-notch and free and because of this, Google will grab a great share of mobile service and advertising markets too. With open source products like Android (and upcoming ChromeOS) Google just solidifies its position as a leading web service provider.
3. Nokia is actually The 800-pound Gorilla to beat here (it's almost funny how US-based media such as Seeking Alpha keeps ignoring it's significance). Nokia phones have the highest penetration in everywhere outside US. During the last 10 years, Nokia has been building and will continue to build a strong brand in those very countries where smartphone market will grow the fastest. With customer base of hundreds of millions, their OVI services will instantly be major mobile services. Nokia is also a very profitable device maker, thanks to huge volumes and logistic advantages - they can reap profit from even the cheapest of handsets.

So it's not just who makes the best phones. If I'd have to predict, Apple would have hard time to increase its smart phone market share significantly. Instead they will choose to maintain the premium brand and focus on milking the cash cow in mobile service side with ITunes or some new content service. Interesting to see how it all turns out with these three and if Microsoft has anything to offer to keep with competition.

Sep 13 07:50 AM

[ratobranco:]

Great Article HJ, I tend to agree with you. Money right now is better invested elsewhere.

Sep 13 09:25 AM

[Paul Harper:]

On Sep 13 07:50 AM Uli wrote:

Nokia is actually The 800-pound Gorilla to beat here (it's almost funny how US-based media such as Seeking Alpha keeps ignoring it's significance). Nokia phones have the highest penetration in everywhere outside US. During the last 10 years, Nokia has been building and will continue to build a strong brand in those very countries where smartphone market will grow the fastest. With customer base of hundreds of millions, their OVI services will instantly be major mobile services. Nokia is also a very profitable device maker, thanks to huge volumes and logistic advantages - they can reap profit from even the cheapest of handsets.

am with you 100% on this, joining the dots on Nokia at the
moment regards their overall strategy, which up until the last
few weeks was in the mud category.
iPhone is great, but outside of developed countries, the
potential user base narrows dramatically, Nokia, Samsung,
LG & Sony Ericsson play across a variety of niches & Nokia
seems to still enjoy the best distribution.

Sep 13 01:56 PM

[guardinvest:]

I find the Apple defenders a bit too strident. The article's author makes a good point about MSFT being dead money for a decade (and BTW, his calculation of split adjusted price for '98 vs '09 is correct). He could have also mentioned other tech favorites of the late '90's like Cisco.
Here's my worry about Apple: technological obsolescence. I love and own an I-touch (won't buy the phone until someone other than ATT is the carrier). I am in the market for a new notebook. Cannot bring myself to payu $2,300 or so for an Apple when Costco is selling net books from Dell at under $400. Think about the Cloud. If I can store my data remotely created using Google based spread sheet and word processing applications on line, why would I want to pay for hardware and software with my files resident on a hard drive that needs constant backing up because the drive may die?
While Apple is a fabulously creative company, until the Cloud threat to their computer offerings is clarified in my mind, I'd stay away from the stock.

Sep 13 02:11 PM

[Yourope:]

It's so nice, and so open. The Freedom Phone. I shall have one.

maemo.nokia.com/

Sep 13 02:59 PM

[MikeOz:]

On Sep 13 04:41 AM Bling Daddy wrote:

> When you use an Apple product, you are using a piece of art. It
> is not just a machine to do work. Apple has a style that transcends functionality.

I've been in IT for 25 years, and to me, and no offense meant here, comments like that sound a little warning bell about over-hype (whether its to products or the share price / expected earnings).

Apple is a company that sold (mainly) good quality desktop / notebook hardware with the better of the 2 main operating systems. With the increase in power of hand held devices in the last 2 or 3 years, they've been able to leverage their operating system knowhow onto the iPhone.

Apple is 2 to 3 years ahead of most of its competitors (including MS and Nokia) in terms of UI for the handheld.
It's also got a major marketing advantage in the consumer area that will last a bit longer than that - it's a "cool" band for everyone under 30 because of its association with music (ipod).

I think they will make big money over the next 2 or 3 years, but as with all technology, when you lose competitive advantage for a minute, and you have nothing else to tie your customers to you, you can end up dead in the water.

Remember - for a short time even Microsoft was cool - I can remember when windows xp was about a year or so old my son aged about 13 refused to even look at an apple computer - all his friends were on MS Chat !

Sep 13 07:14 PM

[QuasiYoda:]

I think Judging from all the Ultra Positive Comments that everyone has already bought the the Apple Myth or drunk the Apple Koolaid.

This is the definition of a top in most any stock or commodity.

You all believe in Apple you've pulled your funds together to get in . . . where are the Doubter's the I'm not sure folks on the sidelines who have yet to be convinced.

Combining this with a population that is losing their jobs, tightening up their budgets, seeking ways to accomplish tasks with as little outlay as possible and I see Apple right in the crosshairs.

This comments is gonna kill my feedback. Oh well sometime the truth is very popular. Especially these days.

Cheers

Sep 13 08:11 PM

[Relic37:]

"Think about the Cloud. If I can store my data remotely created using Google based spread sheet and word processing applications on line, why would I want to pay for hardware and software with my files resident on a hard drive that needs constant backing up because the drive may die?"

Putting my data on some server, somewhere "out-there", hoping it will always be accessible (server not down, internet connection available, security of the server not breached, etc.) makes me shudder.

Sep 14 11:04 AM

[Dialectical...:]

Apple, besides having zero debt and a cargo ship full of cash, is further ahead of their competition than most of their competition realizes. They came out with the iPod and then just when folks were realizing why that was a better music player than their products, they turned it into a phone. And not just a phone, but a phone that could actually do things, not just pretend to do things. And then as the competition begins to wake up to why the iPhone is so good, they will be introducing a tablet or some such device (that will take plenty of advantage emerging cloud applications, BTW), and they will once again leave others scratching their heads as to why what they've done is so much cooler than everyone else's product. Eventually, others will copy the tablet and by then Apple will have the next "big thing." How do they do it? By understanding design and integration and creatively looking at where computing is headed, not margin shrinking and bean counting and skimping on production costs. Only the competitors still think chasing apple with an inferior product at a lower price point will somehow win the race. My money is with apple. I may be a fanboy, but I didn't start as one. I was PC all the way in the 1990's and then was won over by products I love to use and don't mind paying for.

Zero debt, load of cash, innovative and hip with a loyal and growing customer base? Hmm, that sounds like a company I would love to own.

Sep 14 05:50 PM

[jack dee:]

Nok are the borg, but they are the Borg with a loving massive installed user base, that think the sun shines out of NOKs OS.

Sep 16 02:55 PM

[buyitcheap:]

What you're alluding to is the equivalent of "escape velocity" vis a vis apple's market cap. Same thing happened to MSFT, goog, Orcl all of them. . Did the market really intend in 98 to value it at half a trillion dollars or something approaching that? No. It could not get past the gravity, the pull back to reasonable valuations. aaple will have the same issue. There's simply not enough thrust to break it and even if it did, it would be a spectacular blow off.

Nov 10 10:12 AM