Apple: Set to Double Again 62 comments
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The current GAAP 2010 earnings consensus for Apple (AAPL) is $6.85. Assuming Q4 iPhone sales of 8M to 11M, Apple will close out FY 2009 with somewhere between $12B and $14B in deferred iPhone revenues. This equates to somewhere between $3.64 and $4.02 in deferred GAAP EPS to be realized in 2010. For argument's sake, let’s say Apple sells 9.5M iPhones in Q4 2009. This equates to $3.85 in deferred earnings to be recognized in 2010 and $1.75 in 2011. These earnings are already booked. The iPhones were sold in 2008 and 2009. This means the analysts, on average, are expecting Apple to earn $6.85 - $3.85 = $3.00 in new earning in 2010 from iPods, computers and iPhones.
To generate $3.00 in EPS Apple needs to sell about $26B in iPods and computers in all of FY 2010. In the first 3 quarters of 2009 alone they have sold $26.7B in non-iPhone products, so this doesn’t seem like much of a hurdle.
To sum this up: Under current GAAP rules, for Apple to meet analyst expectations for 2010 they only need to sell as many computers and iPods as they did in the first 3 quarters of 2009. No iPhones need to be sold to meet analyst expectations. Shut down the line! GAAP or non-GAAP, I don't know what the analysts are looking at.
As I said in my last article, “Apple’s iPhone Subscription Accounting Leftovers,” should FASB approve the accounting rule change, Apple would post 2010 earnings exceeding $12 on top of the nearly $4 in deferred iPhone earnings for total GAAP earnings of $16.
A forward P/E of 20 to 25 on GAAP earnings of $16 equates to a share price of $320 to $400 and cash has not even been discussed. As of Q3 2009, Apple had over $31B, or $35/share in cash and equivalents. By the end of FY2010, Apple should have over $45B in cash, equal to $50/share.
So, even after more than doubling from less than $80/share to over $180/share, Apple can still double – again.
Full disclosure: The author is long AAPL.
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This article has 62 comments:
People like dingding are wet blankets and just think the country should fold and go down the toilet. No one can enjoy its current PE, no its impossible. Lets all just die. Enough bears. Enough. You guys just fold already. Bitter much, bears?
I am long Apple and agreed easily with your logic.
Hogtown
Long APPL
True valuation is based on future cash flow. I don’t disagree with this, but the DCF model is not exactly perfect either. You can argue all day about the cash flow estimates what discount rate to use, terminal value and what to do with the excess cash on the balance sheet.
In the end you should really calculate value using several techniques and compare. P/E is a simplified DCF method (if the EPS are reasonably representative of cash flows) which most understand, quickly brackets a price range and is easy to talk about at the water cooler.
But I think you make a very common error here regarding future cash. You say:
"As of Q3 2009, Apple had over $31B, or $35/share in cash and equivalents..."
Later:
". As of Q3 2009, Apple had over $31B, or $35/share in cash and equivalents. By the end of FY2010, Apple should have over $45B in cash, equal to $50/share"
Also:
However, if we do away with subscription accounting, then we need to subtract the $12-14B of deferred revenue from that. EVEN IF we do not give up subscriptions, your argument for revenues includes iPhones (or in some places purposely excludes it) so once again you cannot count it in.
This is not a huge factor - it still leaves $20 - 30 B in cash. But again - you can not eat your cake and save it too.
Cash is cash and is tangible.
The subscription accounting creates an entry on the liability side of the balance sheet called Deferred Revenue (non-tangible). Every iPhone sale feeds Cash on the asset side and Deferred Revenue on the liability side. When deferred revenues are recognized, they come from the Deferred Revenue entry. When/if the accounting change goes through, the iPhone will keep feeding cash, but stop feeding the Deferred Revenue entry. iPhone Deferred Revenues will fade away over two years as they migrate to the income statement and become recognized.
Cash is cash is cash. It is not some intagible thing on the balance sheet.
On Sep 18 09:53 AM jmmx wrote:
> Overall I agree with you, and I am also long Apple.
>
> But I think you make a very common error here regarding future cash.
> You say:
> "As of Q3 2009, Apple had over $31B, or $35/share in cash and equivalents..."
>
> Later:
> ". As of Q3 2009, Apple had over $31B, or $35/share in cash and equivalents.
> By the end of FY2010, Apple should have over $45B in cash, equal
> to $50/share"
> Also:
>
> However, if we do away with subscription accounting, then we need
> to subtract the $12-14B of deferred revenue from that. EVEN IF we
> do not give up subscriptions, your argument for revenues includes
> iPhones (or in some places purposely excludes it) so once again you
> cannot count it in.
>
> This is not a huge factor - it still leaves $20 - 30 B in cash. But
> again - you can not eat your cake and save it too.
I simple question here -
When Apple lists its CASH ON HAND, does this include the deferred revenue or not? For me it does not matter it it is ALSO listed in liabilities, only if it is included in the cash figure.
If it is not included, then I stand corrected. (The danger of going out on too many limbs - occasionally one breaks.)
Whether he adjusted enough is open to question, but you're just plain wrong in asserting that he's not making a correction for change in PE.
On Sep 18 07:46 AM dingding wrote:
> Keep dreaming. You are assuming that AAPL will continue to enjoy
> its current PE multiple after the accounting change. You cannot have
> your cake and eat it too.
Cash is cash. Deferred revenue is an accounting term. The two are not the same, nor is there any simple relationship for how they are related.
In some cases, you can count something as revenue even if you do not have the cash (for example. selling an item with 30 day terms). OTOH, you can get cash even if you have not counted revenue (a deposit, for example).
In the iPhone case, it is likely that they receive cash for the iPhone sale something like 30 days after recognizing the sale, but they spread the revenue out over the life of the contract. So, cash jumps shortly after making the sale, but it takes 2 years before that cash is recognized as revenue.
On Sep 18 10:24 AM jmmx wrote:
> Stefan-
>
> I simple question here -
> When Apple lists its CASH ON HAND, does this include the deferred
> revenue or not? For me it does not matter it it is ALSO listed in
> liabilities, only if it is included in the cash figure.
>
> If it is not included, then I stand corrected. (The danger of going
> out on too many limbs - occasionally one breaks.)
But reality is that analysts use non-GAAP EPS and ignore GAAP and the non-GAAP eps reported quarterly already takes the revenue in so the writer is way off base.
Accounting change will have 0 impact on balance sheet cash but will eliminate deferred revenue line so bottom line will be nothing.
On Sep 18 10:24 AM jmmx wrote:
> Stefan-
>
> I simple question here -
> When Apple lists its CASH ON HAND, does this include the deferred
> revenue or not? For me it does not matter it it is ALSO listed in
> liabilities, only if it is included in the cash figure.
>
> If it is not included, then I stand corrected. (The danger of going
> out on too many limbs - occasionally one breaks.)
Entry when they sell ipod:
Debit Cash
Credit Deferred Revenue
Then over 48 months they amortize the deferred revenue and depreciate the related Cost of Goods sold (EXPENSE) to the ipod so if they have a 10% profit margin all you get is a net 10% increase in revenue for only the increase in sales as after 2 years the impact disappears as bottom line sales income is sales income and this is just miscomprehension of GAAP by some.
So they then debit deferred revenue and credit income but they also make the entry for the expense side for the Cost of Good sold related to the product.
On Sep 18 10:06 AM Stefan Sidahmed wrote:
> jmmx: I completely disagree with you. Cash does/will not disapear
> off the balance sheet if they do away with subscription accounting.
>
> Cash is cash and is tangible.
> The subscription accounting creates an entry on the liability side
> of the balance sheet called Deferred Revenue (non-tangible). Every
> iPhone sale feeds Cash on the asset side and Deferred Revenue on
> the liability side. When deferred revenues are recognized, they come
> from the Deferred Revenue entry. When/if the accounting change goes
> through, the iPhone will keep feeding cash, but stop feeding the
> Deferred Revenue entry. iPhone Deferred Revenues will fade away over
> two years as they migrate to the income statement and become recognized.
>
> Cash is cash is cash. It is not some intagible thing on the balance
> sheet.
On Sep 18 10:41 AM regretsshort wrote:
> With that thought while RIMM is a Canadian company they also follow
> the same US acctg rules for the Blackberry so they should also benefit.
> Any company who sells a product at a gain w/ software should "benefit".
>
>
> But reality is that analysts use non-GAAP EPS and ignore GAAP and
> the non-GAAP eps reported quarterly already takes the revenue in
> so the writer is way off base.
On Sep 18 11:19 AM dingding wrote:
> I was trying to make the simple point that AAPL is the same company
> irregardless of what accounting method is adopted, so changing accounting
> method will not change its true value.
On Sep 18 10:06 AM Stefan Sidahmed wrote:
> jmmx: I completely disagree with you. Cash does/will not disapear
> off the balance sheet if they do away with subscription accounting.
>
> Cash is cash and is tangible.
> The subscription accounting creates an entry on the liability side
> of the balance sheet called Deferred Revenue (non-tangible). Every
> iPhone sale feeds Cash on the asset side and Deferred Revenue on
> the liability side. When deferred revenues are recognized, they
> come from the Deferred Revenue entry. When/if the accounting change
> goes through, the iPhone will keep feeding cash, but stop feeding
> the Deferred Revenue entry. iPhone Deferred Revenues will fade away
> over two years as they migrate to the income statement and become
> recognized.
> Cash is cash is cash. It is not some intagible thing on the balance
> sheet.
I see what you are saying. And got to admit you - and Stefan - are right. (pretty silly of me actually) .
Since the liability is to self the cash will just move from the liabilities to the revenues, but will still stay in the bank. Like DUHHHH.... (Sometimes I amaze myself!)
hehehe
Thanks - and sorry for being such a dolt - this time.
The cash does not move or transfer, it just gets the proceed of all of Apple's sales minus CGS, SG&A and taxes. If you went to Apples bank, the money would be there.
The liability you need to look for is called "Deferred Revenue". There is current and non-current. This is where all the action is. Every quarter, a piece of the current deferred revenues is moved to the income statement as Revenue when it is due to be recognized. iPhone sales get split up approximately like this: 1/8 to the income statement as revenue, 1/2 to current deferred revenue and 3/8 to non-current deferred revenue. Also a piece of the non-current deferred revenues become current. Lots of moving pieces.
In a subscription, the liability is not to self, but to the customer. If you buy a $12 script to Forbes magazine, Forbes gets $12 up front and adds it to their Cash on the balance sheet. They also create a $12 liability, thus there net is zero for this transaction. When they deliver the first magazine, the reduce the liability by $1 and claim $1 in revenue. Cash is still $12. Liability is $11. Why? Because if you cancel your script after one month they have to give you your $11 back. Now the cash moves, not revenue, but back to the customer. This model does not fit the iPhone. Go buy and iPhone, hold it for 12 months then try going back to Apple for half your money back. The deferred revenue liability is not a true liability and does not reflect how their business operates.
On Sep 18 04:58 PM jmmx wrote:
> @ regretsshort -
>
> I see what you are saying. And got to admit you - and Stefan - are
> right. (pretty silly of me actually) .
>
> Since the liability is to self the cash will just move from the liabilities
> to the revenues, but will still stay in the bank. Like DUHHHH....
> (Sometimes I amaze myself!)
>
> hehehe
>
> Thanks - and sorry for being such a dolt - this time.
I have no idea what the precedent is for something like this.
On Sep 18 12:49 PM rjdude wrote:
> If they agree to the accounting change, more likely they would have
> to go back and restate all the affected prior quarters to put back
> the revenues when they actually occurred. There won't be a dwindling
> down of iphone deferred revenues going forward. That in itself will
> create a lot of confusion to the average investor.
On Sep 18 10:56 AM regretsshort wrote:
> For those who question if RIMM follow US GAAP, their footnotes say
> they follow US accounting rules SOP 97-02 which is the same as Apple
> does.
then debit deferred revenues vs. credit to income.
The only difference is the profit margin on the item in the new accounting.
Under the new treatement when the sell the item they will no longer have deferred and will book it direct to income and the cost to expense. Just note that since depreciation was over 2 years, the impact becomes flat other than for the impact of the increase in sales.
On Sep 18 10:47 AM regretsshort wrote:
> Cash is cash, it comes in and is posted debit cash, credit deferred
> revenues and is amortized over 48 months into revenues. After the
> 48 months the impact is mute. The related expenses will also no longer
> get depreciated so that impact needs to be taken into account. <br/>
>
> Accounting change will have 0 impact on balance sheet cash but will
> eliminate deferred revenue line so bottom line will be nothing.
>
>
If it doesn't, its up to the company to promote the "pro-forma" number.
Cash flow - what is that? You mean, companies should be measured on cash, not earnings? Who needs cash when you have great pro-forma "earnings"?
Most investors can't even read or understand an income statement, let alone a cash flow, let alone understand how stock option expenses or deferred assets/liabilities should be interpreted, which is why investors herd into and out of stocks.
It will make the Stock Price better reflect it's TRUE value.
Great article, thank you.
PS The potential for Apple products, combined with new ideas like the genius of Google Wave are going to mean great things for APPL alike. Which means this stock is a no-brainer for holding long, as I do too.
No matter which city, or the time of day, that store is rocking!
On Sep 18 08:57 AM mollytjm wrote:
> Apple has absolutely everything going for it, including a hunger
> to be the best and the brightest. I go to the King of Prussia Mall
> and i see stores with lack luster sales, bored clerks and lots of
> empty space...until i get to the Apple store, which is jammed, jumping,
> humming with excitement and products flying off the shelves. This
> is a company that knows what it's doing. I don't know who you have
> to be to miss this. It's not a question of being a fan...Apple has
> earned it's wonderful reputation. It's not a fad... it's the leader
> of the pack.
> Long APPL
I don't think Apple is near maturity. They have low market share and are the leaders of innovation and synergies between products. Yes, if the share price doubles, they will have a huge market cap, but that's ok as long as the cash flows are their to back it up. I don't believe in "too big". It is an unqualified statement.
The cash horde does concern me. I just don't see how they can re-invest that much back into themselves and provide good incremental ROIC. On the good side, I don't see their management getting bored or desperate. Bored/desperate management with lots of cash usually equals stupid acquisitions. I would prefer large stock buy-backs.
On Sep 19 07:59 AM skeptic1 wrote:
> Amzing how little thought is put into these notes. At your price
> range apple will be worth between $290-$360 billion. Exxon is currently
> at the top of the SP 500 at 330billion. This is a company that is
> at the end of its run from a stock growth perspective. The margins
> are just not there to justify it. When you pass 100billion in mkt
> cap the predictability of future cashflows for the next ten years
> becomes very important. Technology companies that get this big, especially
> ones that rely on the ability to continually squeeze suppliers and
> earn a margin for their branding do not warrant multiples north of
> 15x forward 1-year earnings. The cash buildup becomes a drag on return
> as the growth opportunities dwindle. You shift from growing and disrupting
> everyone else in the space to protecting your cash cow. Microsoft
> is a perfect example of this. It has struggled to find growth post
> windows/office despite a cash hoard. Why is this? because most of
> the growth is in areas that threaten its core business. Its hard
> working getting to the top, but its even harder work staying there
> as a point in time will arrive where the right move is to quickly
> shift away from everything that has worked for you. Remember msft
> has 90% plus margins on windows and office and has had a vrtual monopoly
> for almost twenty years on enterprise software and the home pc market.
> Apples business is non-existent in the enterprise space. Furthermore,
> their key to success, differentiation/ individual expression via
> consumer electronic product, becomes their achilles heel once they
> are mass market. Eventually some new company will pop up with a cool
> must have gadget that will succeed because its differentiates itself
> from apple or more importantly because it offers what apple is not
> willing to offer because it would be too disruptive a change to their
> model. This is of course precisely what apple accomplished with the
> ipod/iphone and exactly why it now is the only consumer electronics
> company with a market cap north of 100billion. Look at its competitors...samsung,
> sony, rimm, nokia, and to a certain degree dell....they are nowhere
> close to apple in market value.
Apple isnt selling, drilling, and refining oil. And it has little to no market share selling their product to enterprises. You say yes if their share doubles "they will have a huge market cap, but that's ok if the cash flows are there to back it up." That is an understatement. They would be the MOST VALUABLE company in the S&P 500. My point is that the most valuable company in the sp500 should have cash flows that can be discounted years out. Longevity is key.
Apple right now is riding the boom of a hot product cycle. They have executed to perfection and been extremely innovative. But they are still a play on consumers and their ever changing tastes. The same reasons many people have become die hard apple product buyers will be the same reason they switch away one day. When everyone is using the same phone, ipod, etc its hard to earn a fat margin on it. You become the seller of a commodity, unless of course you have managed to somehow monopolize the market and earn unsusally high margins for an unusually long period of time with the benefits of mass scale. If your selling a commodity and discounting cash flows based on that then you better be selling one that has guaranteed demand for as far as the eye can see.
Stop looking at numbers and the accounting and think through your argument. I was long apple from 2001-2006. I was also long rimm for a similiar time frame. I got out of both way too early,but i dont regret it. You want to keep assuming that the company grows at a very high rate, you want to keep giving it a high multiple, but you don't want to factor in what this means for margins. Remember for a company that is driven by "hot prdouct cycles" the growth repricing the minute they find themselves without an instant hot seller is devestating. Furthermore, when multiples are built under the assumption that the iphone will have another product on the back of it that can replace it with at least the same growth, you have a major problem.
I don't know if apple will sharply decline from here or whether they will manage to do a microsoft and milk this for a decade. What i do know is that at this point the last thing you do is buy and hold the stock. It will be everything apple managment can do to conitnue to mantain their current market cap without drastically shifting away from hardware and towards applications. If it goes markedly higher it will be because all other asset prices rise drastically. Apple at 300billion will mean exxon at 500-600billion. And microsoft will be shifting totally to focusing on network based applications.
I don't think I miss the point with respect to Apple. Our views are different, but I am going to save mine for my next blog/article here on SA. This article's comment stream is getting long and I would be interested in getting more readers into this debate.
Thanks, Stefan
As for valuation...microsoft has blasted out 3 successive years of 50billion plus revenues with avg net margins of 28%. This has been the post growth throw money at all kinds of things looking for an identity before my bread and butter starts its rapid decline microsoft. Apple can only dream of net margins that fat. The 14% or so they have averaged will likely revert back to 9-10% as they rely more and more on pricing power and scale to stifle competitors....a luxury they now have.
Googles margins have gone from 30% to 20% over the last 3 years as they spend like crazy on r&d and sga. They have that room because they have pricing power when it comes to their search model. Msft has done the same. Apples business does not have that luxury. Their margins are not fat enough to go expirmenting in new areas without seriously risking profitability. So, they either have to make amazing acquisitions with their cash or they need to consistently come up with an iphone type product that can sell at the same margins at launch as its predecssor or they need to control the applications and make their money on the back end by becoming the visa/mastercard of the online applications world consumers rely on. If they can do that, they will become like msft and be worth another run. But understand that means id be buying apple because i beleive it can monopolize apps and milk it at the expense of the consumer, the carrier, and even the apps creator. This is the exact opposite of the reason i bought apple 8 years ago. Irony.....i think so.
On Sep 19 01:48 PM Stefan Sidahmed wrote:
> skeptic1: I appreciate your comments. They really make me think because
> you make a sound, valid argument. I agree with everything you say
> about XOM and MSFT. Huge predictable cash stream deserves big value.
>
> I don't think I miss the point with respect to Apple. Our views are
> different, but I am going to save mine for my next blog/article here
> on SA. This article's comment stream is getting long and I would
> be interested in getting more readers into this debate.
>
> Thanks, Stefan
I am very interested in your articles I like how your concise and to the point. I have been in the finance area for about 3 years and I would like to know where you get this data from and how do you compute some results. Please let me know how I can contact you or if you can explain further.
Thanks,
Gabriel
As to the accounting change, this is more clear. I completely agree with you that the accounting change will not affect the companies cash flows. I was looking at it from the point of how The Street might value the company at this time next year from a simple P/E valuation based on the proposed new GAAP accounting rules. If you don't like the P/Es I used to bracket the price, or you want to back out the $4 in deferred earnings because it represents sales from 2008 and 2009, then go right ahead and re-do the calculation. This is why I provide the basis for my target price. I suspect you will throw the whole thing out because I didn't project cash flows out for 5 or 10 years and pull a discount rate out of a hat.
On Sep 19 02:57 PM skeptic1 wrote:
> Hmm, i think that was the non-reply reply. If you are arguing for
> a 350 billion dollar mkt cap on the basis of an accounting rule change
> which has zero cash impact you are missing the point. You are boosting
> earnings today at the expense of tomorrow.
Thanks for the book reference. Looks like a must read.
Stefan
in tech right now rimm is a lot more appealing than apple if you buy into all the current valuations. They have surprised me with their ability to transition away from the enterprise, and their network efficiency should not be taken lightly as a competitive advantage with service providers. However, i don't really buy into current valuations, but thats more of a macro story. I also like palm. Not particularly because i think the pre will be a big winner in smart phones or because i beleive the stand alone entitity can ever provide the earnings power needed to back the share price risk/reward here, but more so because i think there are too many cash rich tech companies that feel they need a share in this market. For that reason i doubt palm is an independent company 12 months from now. Whether its hpq, dell, or even a sony or samsung; i don't know. But somebody will buy them because some banker will convince them its a good way to spend their cash or current lofty share price.
i was die hard nokia for a while, but it seems they have stumbled badly. Moto i have always hated, but thats not exactly a news flash anymore. Samsung seems to have found a comfortable niche.
in software i like crm for the same reasons as palm(actually more so as i think they have built something sustainable). The p/e(over 100x) is useless as the company has chosen a blitzkrieg strategy to become the dominant provider of software as a service. There was a point where i doubted their ability to reach critical mass before msft, orcl, sap, or maybe even a google responded, but we are now clearly past that point. Dislodging crm will be hardwrok, buying them and turning on the profit engine hidden under all that aggressive sales and marketing budget will be a lot easier.
I am also very curious to see how the migration to a network based model plays out versus the old pc based model. Data centers, web hosting infrastucture, database applications, search(will natural language become a threat to google? personally i doubt it, but its worth keeping an eye on), online applications, security, and virtualization/optimiz... software all are interesting stories for the future.
On Sep 19 03:53 PM Stefan Sidahmed wrote:
> skeptic1: I have some work to do, so don't look at it as a non-reply,
> but rather a delayed reply. Your comments on the future growth prospects,
> the threat of eroding margins, maturing company, etc are all very
> real concerns which require some thought, so I am not going to give
> you an instantaneous reply.
>
> As to the accounting change, this is more clear. I completely agree
> with you that the accounting change will not affect the companies
> cash flows. I was looking at it from the point of how The Street
> might value the company at this time next year from a simple P/E
> valuation based on the proposed new GAAP accounting rules. If you
> don't like the P/Es I used to bracket the price, or you want to back
> out the $4 in deferred earnings because it represents sales from
> 2008 and 2009, then go right ahead and re-do the calculation. This
> is why I provide the basis for my target price. I suspect you will
> throw the whole thing out because I didn't project cash flows out
> for 5 or 10 years and pull a discount rate out of a hat.
If Steve starts having problems that multiple could thin out quickly.
Take:
- Current and non-current deferred revenue from 10Q/K
- The GAAP to non-GAAP reconcile number from quarterly press releases.
- Set up a deferred revenue table based on actual quarterly sales.
- Use the solver function to solve for actual quarterly sales while minimizing the error between actual deferred revenues and deferred revenues from your table. The GAAP to non-GAAP reconsile number can also be generated from this table, so use it as another error checker.
do the same for deferred CGS (from the 10Q/K) and you will have actual sales of CGS for every quarter back to 2007.
You should be able to get the errors for any given quarter down to 1% or so.
The trick is that revenues are spread over 2 years starting from the time of sale. An iPhone sold on day 1 of the quarter will see 1/8th of its revenues recognized that quarter and each of the following 7 quarters. An iPhone sold 2/3 of the way through a quarter will see 1/24 of its revenues recognized that quarter, 1/8th for the next 7 quarters and 2/24th in the 9th quarter. So I set up an additional variable for each quarter to account for this. If you don't do this, you will have significant errors.
Good luck,
Stefan
On Sep 19 03:12 PM gkr87 wrote:
> Hello Stefan,
>
> I am very interested in your articles I like how your concise and
> to the point. I have been in the finance area for about 3 years and
> I would like to know where you get this data from and how do you
> compute some results. Please let me know how I can contact you or
> if you can explain further.
>
> Thanks,
>
> Gabriel
For a huge company that has not paid dividends for so many years, they should have a lot more cash than they do.
For Apple, how much cash did you calculate they have?
On Sep 19 11:15 PM talld wrote:
> I dont understand why people continue to draw a correlation between
> Apple's earnings and their stock price. Apple has not paid a dividend
> in fifteen years, so it is kind of a moot point what they earned.
>
>
> For a huge company that has not paid dividends for so many years,
> they should have a lot more cash than they do.
> For Apple, how much cash did you calculate they have?
you need to be wary of a confirmation bias you may have developed by thinking the current stock apprecciation you've expereinced being long apple can be attributed to any signficant analysis and subsequent alpha generation on your part.
the only thing apple did was mitigate the downside and reduce the relative volatility in your portfolio when compared to one that was more heavily weighted towards less fundamentally sound companies.
Your views on Apple seem very sane. But I wonder if you might be selling their future a little short.
1) They have a vast opportunity to expand into enterprise, where you say they have little or no footprint. The iPhone is the first shot across the bough here. The "tapplet" computer they will be coming out with will be designed as much for the salesman and insurance adjuster as it is for the consumer. The growing "cloudiness" of corporate data management further extends the reach of apple into enterprise, as their tools are designed with this coming phase change already in mind. The ease of user designed applications will further make these devices more valuable to companies who can easily design apps to handle the exact job they need from their workforce -- and it will prove easier and more secure than using a company intranet with a browser (I predict).
Additionally, you suggest they are at the top of a product cycle. I heard the same thing about the iPod before the iPhone came out. Yes their future depends on delivering, but so do all companies... and those that stagnate die a long slow death like MSFT. But this company is not designed nor is it functioning like a monopoly that is riding the wave all the way into the shore. It seems to be constantly pushing the envelope and staying ahead of the curve. Yes, it will need to do this in the future to be successful, but it looks to me like a good bet to do this. No company lasts forever no matter how strong or old it is (RCA as a case in point), but Apple is the company of the near term. It is in an industry (and will soon be serving some other industries) which are the future. I'm thinking research and education with a side of health care. An iPhone app that can read an MRI is just the beginning. Scads of med students may be using apple's wireless devices running custom apps in as little as five years.
Yes, some of this is not based in the now, but in the future. But this reply is just intended to show some very real ways Apple may not yet be at the peek of its game or its earnings power. It is not seller of pet rock consumer fads -- it is a real hardware company that understands the future of computing (which in many ways is the future of society). Double in value? I don't see why not.
On Sep 19 07:24 PM skeptic1 wrote:
> important as the recurring revenue stream depends on the ability
> to find a "new" hot product to replace an old one on a very consistent
> basis. That is assuming they don't become more of an apps driven
> company.(which btw i wouldnt rule out as jobs is no fool and must
> have a good grasp of where things are heading). I am sure everyone
> would like to be able to launch an upgrade like msft has done with
> windows and office every 18months and milk it at the same margins,
> but at the end of the day the competition in hardware has always
> been a lot stiffer.
>
thanx V
Imagine you are a soveriegn wealth fund, if you had 135billion dollars in cash would you buy this company? You are putting the type of capital to work that requires you being comofrtable for the next 10-20 years. Apple's business doesn't afford you that luxury. Size does matter, and with apple to comparable investments are probably more important than the actual stock specific analysis. If you are buying here at this multiple anything short of it turning into one of the most valuable companies on earth or the most valuable company could prove disappoinitng.
On Sep 20 07:59 PM Dialectical Materialist wrote:
> skeptic:
>
> Your views on Apple seem very sane. But I wonder if you might be
> selling their future a little short.
>
> 1) They have a vast opportunity to expand into enterprise, where
> you say they have little or no footprint. The iPhone is the first
> shot across the bough here. The "tapplet" computer they will be coming
> out with will be designed as much for the salesman and insurance
> adjuster as it is for the consumer. The growing "cloudiness" of corporate
> data management further extends the reach of apple into enterprise,
> as their tools are designed with this coming phase change already
> in mind. The ease of user designed applications will further make
> these devices more valuable to companies who can easily design apps
> to handle the exact job they need from their workforce -- and it
> will prove easier and more secure than using a company intranet with
> a browser (I predict).
>
> Additionally, you suggest they are at the top of a product cycle.
> I heard the same thing about the iPod before the iPhone came out.
> Yes their future depends on delivering, but so do all companies...
> and those that stagnate die a long slow death like MSFT. But this
> company is not designed nor is it functioning like a monopoly that
> is riding the wave all the way into the shore. It seems to be constantly
> pushing the envelope and staying ahead of the curve. Yes, it will
> need to do this in the future to be successful, but it looks to me
> like a good bet to do this. No company lasts forever no matter how
> strong or old it is (RCA as a case in point), but Apple is the company
> of the near term. It is in an industry (and will soon be serving
> some other industries) which are the future. I'm thinking research
> and education with a side of health care. An iPhone app that can
> read an MRI is just the beginning. Scads of med students may be using
> apple's wireless devices running custom apps in as little as five
> years.
>
> Yes, some of this is not based in the now, but in the future. But
> this reply is just intended to show some very real ways Apple may
> not yet be at the peek of its game or its earnings power. It is not
> seller of pet rock consumer fads -- it is a real hardware company
> that understands the future of computing (which in many ways is the
> future of society). Double in value? I don't see why not.
First as an AAPL long for many years I would like to express my thanks for your insights and opinions. I very much enjoy my ideas being challenged by intelligent debate and you have provided me with many things to chew on.
As to your last point, I personally would not be surprised to see Apple being "one of the most valuable companies on earth" as software and integration is the future and Apple is doing both better than anyone right now.
However, I do agree that buying at these levels is not worth the risk/reward. But when AAPL below $100/share earlier this year I was an aggressive buyer and had thoughts of taking out a second mortgage when it dropped south of $80. Unfortunately (or possibly fortunately) it did not stay down there for long and I was not able to seriously consider it. But I will continue to buy shares of this company whenever it's value is pushed down for no "good" reason until I feel that Apple is squandering its many advantages.
On Sep 21 09:19 AM skeptic1 wrote:
> If you are buying here at this multiple anything short of it turning into one of the most valuable companies on earth or the most valuable company could prove disappoinitng.
I say this because Jobs will never allow himself to become lazy, comfortable or complacent with Apple's MO and its present arc of ascendancy.
If the Innovator's Dilemma is a factor to insert into the Apple success equation, as Skeptic suggests ... and it is a valid suggestion, then so too must allowance be made for Jobs' influence as the 'Innovator's Solution'. He has been a disruptor and he has been rather spectacularly disrupted by the thief Gates and the wimpish Sculley.
Now,we may all be wowed by Apple's results and its products, and why not my dears - they are wonderful. But that would be to miss the point of focus. Consumers will continue their love affair with Apple for reasons most of them may never understand. The world is falling in consumer-love with Apple. It is a heady experience for them. The thing is, they are just not used to being empowered rather than screwed by a vendor. They don't realise it yet but it is there in their unconscious understanding. That is a raw and very powerful place for any company to position itself so firmly. It affects our paradigm of life as consumers. And we like that soooo much.
I see it like this.
Yes, yes, yes .....the products are great. They call to customers like sexy sirens and appeal as must-have items in most cases. They are the Merc or Omega offering in a market with too many GM and Timex offerings.
But the products are merely the easily visible shell of Apple's strategy for 'never' being disrupted out of business by another, greater, upstart of an innovator. It is less and less about the products my dear bedazzled ones.
The hidden kernel of the Apple strategy is full of goodness. It is about empowering the customer. It is about democratising whole marketplaces. It is about being recognised (in time) and remembered (in perpetuity ... maybe) as the one Company, the ONLY significant champion of the ordinary Joe, to win back for the consumer the power of choice and free access to common wants at a fair price with less and less room for vendors to gouge their customers. What am I talking about?
Excellence in COMPUTING at a fair price to quality ratio. I mean, if you want the Proton car experience, go buy one and don't complain to me later as I wipe your saliva off my Merc.
Liberation of the MUSIC market away from the grasping record companies to the huge benefit of new bands/musicians and giving the consumer back the right to buy only the songs that were wanted, soooo easily and at a fair price.
The same for the MOVIES market in time. Everything from AppleTV to Mac to iPod/iPhone video.
Ditto the domestic GAMES market. AppleTV anyone? !!Danger!! Falling prices!!! Mind-boggling choice!!!!
The same for the PUBLISHING market in 2010 onwards. Newspapers, magazines and books at a rock bottom price because you will buy only the news or articles that interest you and not have to stomach what an editor decides you should HAVE to read. There will be an explosion of new writing by authors who stood no chance of publication under the existing model. Journalists of merit will gather a following of people who will pay for genuine news or informed comment, rather than biased opinion.
The same for the TV VIEWING market in 2015 onwards. Pick the programs you want to watch. New production houses and groups will spring up all over the world. A huge choice of non studio-sourced viewing that is non-homogenized, not dumbed down gutless goo sanctioned by advertisers etc. In short a diversity of content beyond the wildest imaginings.
EDUCATION for all by bringing the best curricula from around the world to a global audience for free or for a small charge. No more student loans anyone? Build your own MBA from Harvard, London INSEAD and Yale whydontcha? Learn to program an iPhone from home. Learn whatever you want, whenever you want at your pace, in your place without going broke.
RETAILING GOODS AND SERVICES Create an app store like marketplace for STUFF. Manufacturers/Providers offer their wares and drop shippers/fulfilment operators do the rest. Prices may tumble.
HEALTHCARE SERVICES
Access to the best professionals, clinics and hospitals without the traditional routing processes and billing roller-coasters that often kill - death by dollars.
And so on.
And so on
You get the picture.
It is a nice picture because it puts you in charge of your choices and the value for money you deserve.
So.... tell me:
How do you disrupt the ace disruptor?
How do you displace the champion of consumer interests?
How do you undermine the one who destroys traditional business models across so many markets to the customer's advantage and completely democratises them in the process?
Amazing Apple.
An American treasure.
I can say that because I am not an American.
I can say that because I have been a customer since 1979.
Thirty years' easy loyalty.
And Apple is just getting started.
Think Different
I rest my case.
Chandra Coomaraswamy