Why Apple Is Worth $80 139 comments
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By Kai Petainen
Jim Cramer thinks AAPL (AAPL) is worth $300 and I think AAPL is worth less than $100. To borrow Jim Cramer's line, 'Where do I get this stuff?' I'll point it back at him and ask, 'Where does he get that stuff'? Perhaps all he did was multiply two numbers? I can multiply two numbers, I have a passion for the markets and I too am opinionated. Can I have a TV show too, please? Jon Stewart, would you like to multiply two numbers? You can do it too. I'll show you how. I'll come on your show and multiply them for you if you like.
Now, just to be clear, I'm not attacking either Cramer or Stewart or their shows. I like watching Cramer, and I like watching Jon Stewart. I like the passion that Cramer has for the markets, but I don't have to agree with all of his stock picks, nor do you have to agree with mine. He'll make some stock picks that he'll get right, and he'll make some that he might get wrong. After all, I think we're doing this to 'entertain and educate'. Stewart, he too does some entertaining and educating (or so I believe). So, let me entertain and educate you just a bit. And if you make money, I'm happy for you, and if you lose money, it's not my fault... this is just entertainment. In fact, probably all of this is B.S. and so don't take anything I say seriously.
A few weeks ago, I was giving an overview of valuation techniques to a student group, and I had decided to demo a variety of valuation tools in the market. So, I'll demonstrate these tools to you as well.
Method #1: What funds own the stock?
Taking a look at the top mutual fund owners of AAPL in MSN Money, I notice that I see a bunch of funds that are called 'index', 'growth', and 'blue chip'. From that first glance, AAPL does not appear to be a 'value' stock, but more of an index, growth and information technology stock. In the top mutual funds, I don't see one fund that is called 'Value'. I'm a 'Value' investor, short AAPL.
Method #2: Some key 'Value' ratios.
Generally (but not all the time), value stocks tend to have a low P/E, a low price/book and a low price/cash flow. Utilizing FactSet, I found a P/E of 34, a price/book of 6.9 and a price/cash flow of 17.5 for AAPL. Now, the weighted median P/E in the market is around 17, price/book is at 3 and the price/cash flow is at 11. All three ratios are higher than that of the market. From that perspective, short AAPL.
Method #3: The Dividend Discount Model (DDM)
I generally do not like the DDM model, as it places an emphasis on dividends. But, I need to mention it as it is commonly used. I read a paper the other day by Richardson, Tuna and Wysocki called "Accounting Anomalies and Fundamental Analysis: A Review of Recent Research Advances", and in it, they asked practitioners, "What valuation method do you use?" and in 5th place at 26% of users, they list the DDM model. Now Bloomberg has a DDM model, and I've noticed that although most stocks that I try don't pass this test, if something passes it, then it's probably a value stock. So, I typed 'AAPL Equity DDM' and it gave me a default target price of $209.
At first glance, it looks like the model and the street are at an agreement. There is a huge problem in this argument, because valuation models depend a lot on the terminal growth rate. In this example, it assumes that AAPL will grow at 18.8% FOREVER, and that gives the target of $209. If I assume that AAPL will grow at 22.7% forever, that gives a price target of $300 (Cramer thinks it's worth $300). Personally, I'll assume that as time goes on and 'forever' occurs, I'll assume the company grows at a growth rate similar to that of the GDP, and so when I enter 5% as the terminal growth, I get a price target of $54. Short AAPL.
Method #4: The Residual Income Valuation (RIV)
Bloomberg also has a model called the RIV model in its system. To get it in Bloomberg, type 'AAPL Equity RIV' and the default price target for AAPL is listed as $94. By including the EPS for the next period, I get a target price of $114. In both cases, the stock is worth less than $300 or even $200. Short AAPL.
Method #5: The AFGView Model
My favorite quick valuation method is through The Applied Finance Group's AFGView.com. You can certainly read about it here. From personal experience, if the stock doesn't pass this test, it's not a value stock. Mind you, sometimes I'm wrong and this is just an opinion. Anyways, if I take the default assumptions, and assume the default of a competitive advantage period of 21 years and a discount rate of 7.68%, I get a price target of $114 for AAPL. Short AAPL.
I can get a price target of $300 for AAPL, but I need to assume a discount rate of 6% and that AAPL will dominate (AAPL fans rejoice) for the next 35 years. Now, when I run models, I like to use a discount rate of 8%, and I'll assume that AAPL has a competitive advantage over its peers of 10 years. That gives me a price target of $64. Short AAPL.
DISCOUNTED CASH FLOW MODELS
Analysts spend a lot of time trying to figure out the EPS for this period and the next, but the power in the DCF model does not come from the short term, but the long term. If an analyst does a DCF model, many will focus in on the EPS estimates, but ask them these 4 key questions (and you might be surprised by their answers). If they don't have an answer, but claim to do DCF, think a bit more about their analysis.
What is the time horizon you used? Was it 5, 10, 20 years?
Personally, I like to use 10 years for consistency.
What is the 'discount rate' that you used? Was it 6%, 8%, 10%, 12%?
Personally, I like to use 8% for consistency. Some will argue that it should be higher/lower depending on the industry, but I'll disagree with that as I like to know over time how the valuations change, and know that they changed while I kept some value constant. When I value the discount rate for the market, almost always I get a target between 7% and 9%. So, I use 8%. With regard to AAPL, AFGview gave me a discount of 7.7%, Bloomberg's WACC default model had it at 9.7%, FactSet's WACC default model had at 9.1%, eVal uses a default of 10% and I use 8%. Which one is right? I don't know. I use 8% for consistency.
What is the terminal 'sales growth' that you used? Is it much higher than long term GDP?
Personally, I like to use 5%. Generally I see numbers between 3% and 6%. Anything higher and you better justify the number.
And this question can destroy some of the best valuation models / analysts:
What is the terminal ROE in your model for the company? Why is it so high? Was it historically that high?
In general, if a company is making a profit and you increase the time horizon, lower the discount rate, increase the sales growth and increase the terminal ROE, you can get a very high target price. If you do the opposite, you'll lower the target price. An analyst that wants to be optimistic about a company might actually use a short time horizon, a low discount rate and a low sales growth, but by making a model that has a high ROE they can make almost any company look good. Let me try to demonstrate.
Method #6: The Discounted Cash Flow Model (eVal model)
Using a product called "eVal" by Lundholm and Sloan, I entered AAPL's 10-K and did a bit of analysis. I made a model that had a 10 year forecast and taking the default assumptions that it had, I got a target price of $291 and EPS estimates of $9.35 this year and $11.89 for the next.
But that model had many flaws. Modifying the shares outstanding to reflect the number I see in Yahoo finance and lowering the discount rate to 8% from 10%, I was able to get a stock price of $527 and estimates of $9.27 this year and $11.79 the next year.
Notice, the strength wasn't coming from the EPS assumptions, but from other factors.
What was causing the difference? It was primarily the terminal ROE, as it was saying the AAPL would have a ROE of 23.5% forever. Perhaps I would accept that terminal ROE for AAPL, but look at AAPL's history and you'll see that through the years the ROE fluctuates as they innovate and stagnate, innovate and stagnate, and so I'll argue that they cannot maintain that high ROE forever. I'll change the model, so that as time goes on and more competition occurs, their COGS/Sales, R&D Sales and SG&A/Sales will increase, but they'll stay within historical levels and AAPL's ROE will approach that of the cost of capital of 8%. That model gave me a target price of $76 and EPS estimates of $8.01 and $9.36.
Next, I modified the model so that the model reflected the analyst estimates of growth, but that it also reflected the EPS estimates given by analysts. According to Cramer, he argued that analysts would increase their earnings targets as AAPL would change their revenue recognition and EPS would sky-rocket. I'll give a simpler argument... analysts should change their EPS estimates, because the consensus estimate of 30+ analysts missed AAPL by $0.37 last quarter. How 30+ analysts can miss this EPS so badly I'm not sure. Perhaps AAPL is superb? Is there an accounting anomaly? Are the analysts just missing the boat? You do realize that next quarter, if AAPL doesn't beat by $0.37, the stock could drop? According to MSN Money, I note that the highest EPS estimate for 2010 is $7.87 and the highest is $11.04. Presuming that AAPL will beat by $0.37 each quarter, I'll make a model that reflects a model with $9.35 for 2010 and 12.52 for 2011.
I get a target price of $80. Note... by changing the short term ratios, it only moved the target from $76 to $80, the strength of DCF on AAPL is at the terminal assumptions. Once again, short AAPL.
Method #7: The Discounted Cash Flow Model (FactSet template)
FactSet has a cool DCF model as well, and within it I was able to create a similar model and 'justify' a target price between $247 and $292. Again, the results relied not so much on the short term, but on high terminal revenue growth estimates. And if you look a bit closer, you would realize that the price target came from the default assumptions that AAPL would grow at 36% forever. That's not a mistake of FactSet, that's a mistake of the user or the analyst.
Adjusting the numbers, once again I got a price target < $100. Short AAPL.
Method #8: The Quant Model
There are a number of ways to run 'quant models', but to simplify the process it can look like this: Take a bunch of 'anomalies' that are illustrated in academic literature. You can go to websites like www.aaii.com or www.ssrn.com to find such anomalies. Test the anomalies, weight the anomalies, and give stocks a score on how it performs in each anomaly.
For example, suppose I create a quant screen (and this is best done in FactSet), and in that quant screen I place a lot of factors relating to value, 'smart money', quality, and momentum. Stocks that appear nice on such a screen can appeal to a wide variety of investors, as I can take the stock and pitch it to a value firm, a momentum firm, a quality firm, and that in turn might lead to more 'investor recognition' which would drive up the price more. Now AAPL has some 'nice' qualities that 'help' the stock: it has low short interest, a decent 'Piotroski Score' (financial health score), earnings momentum and price momentum. AAPL also has some negative qualities that can hurt the stock, as it has a: high P/E, high price/book, high accruals, some insider selling and a high fscore (read the paper called 'Predicting Material Accounting Misstatements' by Dechow, Ge, Larson and Sloan). So, there are some good qualities to AAPL, but there are also some bad qualities to it as well, and since I hate to say 'HOLD' as analysts love to do, I'll say.. AAPL... short.
Method #9: Muliply PE * EPS. Hey Jon Stewart, check it out.
Multiply PE * EPS. That's it. Forget everything I told you and multiply those numbers. I hate this method, but it's quite common. In the paper listed earlier, Richardson et al. ask practitioners, 'What valuation method do you use?', and 74% of them look at earnings multiples (59% use DCF). Wow. It's quite common to hear something like this: "Taking the forward EPS estimates by our distinguished panel of analysts, and multiplying it by the industry P/E, we get a price target of $$$". Then, for the next 20 pages, the analyst will discuss how they got the EPS estimate and spend 95% of the time marketing the product. If they don't like the stock, instead of saying 'sell', they might just drop the stock.
After all, people don't like to hear about bad news. The problem is, is that analysts sometimes only focus on the EPS estimates now, and they forget to look at the future beyond. Some look at the EPS estimates now as they'll get in the news, and if their estimate matches that of the company, it sure makes the analyst look good. But, how do you do this? A few weeks ago, I was looking at Yahoo Finance and noted that the highest PE listed for AAPL was at 30.37 and the highest EPS estimate was at 8.68.
Price Target: 30.37 * 8.68 = $264.
A few days later, Cramer came on his show and gave a price target of $264. Then, just a few days ago, Cramer came on his show again and gave a target price of $300. Guess what? On the night of his show, I saw the 8.68 and this time the P/E was at 34.75.
Perhaps Cramer did some fancy math to get his target price and deep analysis like I did above with the valuation models, but I was able to get the same result by multiplying two numbers. Who knows what procedure he followed, but I was able to replicate it rather easily.
Here are some common questions I get about AAPL:
Do I hate AAPL?
No. I actually love iTunes, iPhones and iPods. It's important to note that although I love the products, it doesn't mean that I have to think the stock is undervalued. I hate it when I see or read stock pitches and 95% of it sounds like a marketing commercial. I'm concerned about numbers, risk, ratios, insider transactions, and earnings. I know the company gets products for a widget, makes the widget, and sells it. If I want to hear a marketing pitch, I'll go to the store.
What about the change in revenue recognition?
As Cramer explains on his show, he mentions that AAPL should have an increase in EPS as they recognize some revenue earlier. Although perhaps true, this confirms one of my beliefs that analysts spend a lot of time on the near term EPS estimates and sometimes neglect the long term estimates. Realize that if AAPL recognizes some revenue earlier, that is revenue they would have announced later, so although it might produce a short temporary jump in EPS, at some point the upcoming EPS should be lower than expected since they won't be announcing the revenue that they would have recognized then (and instead announced it earlier). Also, some companies like to smooth earnings and although I'm unsure AAPL would do this, I don't like seeing EPS numbers that fluctuate wildly.
What about Steve Jobs?
A common argument about AAPL relates to how Steve Jobs is loved by AAPL users and so the stock should go up as he is a creative influence. Fine, I'll agree to that argument, but... if that is true, then what do you think of DIS? Why is it that when DIS announced that they were buying Marvel comics, that I don't remember hearing one interview asking Steve Jobs, "Steve, what do you think of the Punisher character and the image of him carrying a machine gun with Mickey Mouse ears"? Oh, you didn't know... I was looking at FactSet and noticed that Jobs has about $1 billion (0.6%) ownership of AAPL, but he also has about $4 BILLION (7.4%) ownership of DIS. Which company do you think I'd be concerned about if I was him? AAPL or DIS? If you like Jobs, perhaps you should buy the company he has more of, buy DIS. Analysts, next time you talk about Steve Jobs, talk about DIS, please.
Haven't I had bad luck with timing AAPL?
Yes and no. In 2007, I wrote a blog about how I thought AAPL was worth $75 and that blog went on MSN Money when it was trading around $130. The stock shot up $200 and I looked like an idiot. The stock ran down to $120 in 2008 and MSN had an article called "One Who Saw Trouble" and I felt good. Bad luck came around to me, and AAPL flew up to $190 once again, and I felt crappy. It dropped again, but it fell more than the S&P 500 and it came close to my target with a low of $78 - I felt good once again. Now, in the past year, AAPL is up at $200 and again I look dumb. So, yes, I do think AAPL is worth $80, but timing is critical with this stock. I might be wrong, I might be right, but unlike most of the 30+ analysts covering the stock with high target prices, I'll say sell/short to AAPL.
So, there you have it. Take it as entertainment. Here's an opposing view to the crowded world of analysts who love AAPL. I'm bearish on AAPL, and I think it's worth $80.
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This article has 139 comments:
"As Cramer explains on his show, he mentions that AAPL should have an increase in EPS as they recognize some revenue earlier. Although ... it might produce a short temporary jump in EPS, at some point the upcoming EPS should be lower than expected ..."
No, it'll produce a long-term bounce in the EPS, as long as sales of the iPhone are growing.
$80/share x 914M shares = $73B market cap
Subtract $34B in cash = $39B Enterprise value
2009 FCF was about $9B
So you are saying Apple is worth 4 x current cash flow.
Does not make sense.
He must be shorting the stock and trying to cover. Up to now, I like reading seekingalpha for it objective and sensible analysis. I hope that this article is written as an entertainment rebuttal to to Cramer...otherwise it is the worst type of analysis I have ever seen. Seekingalpha is going on to my ignore list.
On Oct 25 12:12 PM Stefan Sidahmed wrote:
> You discussed DCF a lot, but I do not see one cash flow number in
> this article. EPS does not equal FCF.
>
> $80/share x 914M shares = $73B market cap
> Subtract $34B in cash = $39B Enterprise value
> 2009 FCF was about $9B
> So you are saying Apple is worth 4 x current cash flow.
>
> Does not make sense.
2. Can he apply similar yardstick to other stocks and say what are they worth? Would, for example, Google according to him be valued at $500 per share and Apple at $80???
3. Total wast of time - his writing the article and we reading it.
This one isn't contrarian at all.
Down right silly if you ask me.
In terms of entertainment value.
Forrest Gump made money investing in a Fruit Company.....
I can´t answer that but this analysis you are doing can be extrapolated to many others stocks (in both directions overvalues and undervalues), why companies with wonderful numbers gets mild responses of the public (natural gas was an example during most of this year).
Why? imitation? imagination? sympathy to Mr Jobs. (by the way the DIS % was a Pixar byproduct) whatever, perhaps this is the point that supercomputer models can´t handle yet....thanks God.
While I can commend you for taking such a BOLD stance against an obvious "Steller" stock, sadly for you if you are really shorting AAPL you will be heading to the welfare line very "shortly".
A couple things you may have overlooked, the averages you mention like the market has an average P/E ratio of 17 etc, you forget that means there are stocks with a higher P/E lets say 34 and a lower P/E lets say 10 etc so you get an average with AAPL at the upper scale of the average...just an example
Next, the drops in the price you mentioned were all caused by "market" events and not specific to AAPL except when Steve was reported dead or something, again, a knee jerk reaction by the "traders" that dominate this market.
also how many of the companies you dabble in have 30 billion of cash on the balance sheet and tremendous free cash flow, are loved, yes I repeat loved by their consumers who are willing to pay top dollar for their products...how many companies can say that...I can't think of any.
Apple is a growth stock, unique, to most of the stocks traded in the market today and will continue to be a darling of the market unless it faulters on earnings or other company "specific" event, then, yes it will be a short for maybe 25-50 points.
Speaking of Cramer, I suggest you take some advice he has often offered..."When you are wrong about a stock...Admit it to yourself and move on"... I suggest you head that advice or you may be hearing this two words ringing in your ears...."OUCH! OUCH!"
If one wants to model growth out 2 to 5 to 10 or 15 years, one cannot simply play with guesses. If it were that simple, we would be predicting all sorts of world events by now.
Many factors will influence how AAPL will fare in a year or two or beyond. These factors are beyond just a simple single "growth percentage" because many real world conditions can impact growth. The factors require a deeper understanding of the entire field in which Apple and its competitors are playing.
Better to use these factors to derive the input that we can use. At least then we can clearly articulate what the assumptions are, why we make them and what the limitations of our assumptions are. From there, one can better understand what factors can cause AAPL to come crashing down and what factors may cause it to continue rising and all that subject to some well understood and well stated initial conditions and limitations. Even then, one has to constantly adjust the models by updating, removing or adding factors and regularly update the associations between these factors. Their evolving relationships can impact the output. The world is not static.
Without a dynamic model that includes meaningful factors, one can only do "Guesses in and Guesses out".
Over the last 5-10 years, when would your models have told you to buy and sell Apple? Could you add some charts for that?
You see, I would like to see if any of the models you use in your article can predict the Apple stockprice with any accuracy (greater than 50% of the time). Only then will you know if you can actually rely on any of them. Same thing goes for Cramer's model. When during the last 5-10 years did it predict when to buy or sell AAPL correctly?
Throwing numbers around is like you said: entertainment or a commercial. And that's why I really would like to see you go the extra mile on this one, to figure out which model would have made the most money predicting Apple's stock price.
"The Economic Margin Framework is more than just a performance metric, as it encompasses a valuation system that explicitly addresses the four main value drivers of enterprise value: profitability, competition, growth, and cost of capital. Unlike traditional valuation approaches that utilize highly sensitive perpetuity assumptions, AFG’s approach incorporates company specific competitive advantage periods which identify companies that may lose excess returns over time faster than their competitors."
Now, could you give us an opinion of AAPL base in these premises?.
Regards.
Why did he choose aapl? Just because this company is following by small investor. "Little investor run, u gonna lose all ur money if u stay in aapl."
The only thing to say : aapl stock climb with a decrease of volume . So only smalls investors sell, And Big buy all the stock.
Good try Kai Petainen u got ur ten minutes of glory
@Kai: As with the majority, I strongly disagree that Apple is "worth" $80. The most obvious reason why is the companies outstanding balance sheet.
Apple has over $26 per share in cash and has a book value per share of $31. Are you trying to tell us that one of the most innovative companies in the world that is growing at a phenomenal rate should be trading at 3x cash and 2.5x book value? Heck, even value investors would be tempted by those multiples.
If u put cash in bank now the interest rate is 0%
6.29$/0 = $$$$
If you live in Canada u can expect 0.5%
6.29$/0.005 = 1258$
If u borrow money on your home one year ~2.0%
6.29$/0.02=314$
if u evaluate at 4% = 157$
8%= 80$
Too bad, I prefer 60% (if you charge that when you borrow money, you gonna be throw in jail.) 6.29/0.6 = 10.50$ That's the real value of Apple. Less than the cash Apple have. Better for me to sell all my aapl stock, before all of u wake up.
Be positive, write an paper on what's good to buy instead what's wrong.
Cramer is right, this stock is headed to $300 and it will never touch $100 again, sorry Kai. DO NOT short AAPL or you will be on the wrong side of the trade. This holiday quarter is going to blow every past quarter away!
On Oct 25 12:12 PM Stefan Sidahmed wrote:
> You discussed DCF a lot, but I do not see one cash flow number in
> this article. EPS does not equal FCF.
>
> $80/share x 914M shares = $73B market cap
> Subtract $34B in cash = $39B Enterprise value
> 2009 FCF was about $9B
> So you are saying Apple is worth 4 x current cash flow.
>
> Does not make sense.
Here's a hint for you: Apple is not like the rest--and that's a good thing.
"The stock shot up $200 and I looked like an idiot." And tragically, nothing about you has changed. Oh well, I guess there's some character value to consistency.
In the PC market, AAPL has serious competition.
In the OS market, AAPL has serious competition.
In the PDA market, AAPL has serious competition.
In the cellular market, AAPL has very serious competition.
In the portable music market, AAPL has some competition.
BUT: in the integrated PC-PDA-cell-music market, AAPL has NO competition - a situation that will remain for years. Can you say "market leader"? I knew you could.....
----------------------...
He's concerned about Apple. Its his reputation - and where he has re-established himself as one of the all time titans.
I think he could care less about a Billion here or there........He's Steve Jobs......and thats what he cares about.
For your own sake I hope you haven't got too much riding on this short. I don't own AAPL, but I know they grew profits 47%? this past quarter, most other folks considered it a "beat" if they were down 15%. Between now and CMAS (which is Apple's prime selling season) where do you think the new retail investment money is going to flow to? And this time they might be right - if Apple can do what they did this past quarter, CMAS might be off the charts.
Having said that the author has the right "theory' but in reality its not so
The public loves stocks like apple and at 80 dollars a share its way too cheap
Do i think its worth 300 like Cramer says ?no
Buy the strong large cap multinationals when they are priced right
The stock could be $50 or it could be $300, with good arguments either way.
Well, perhaps. But the other possibility is that the conclusion is truly, and absolutely, downright LUDICROUS.
Just check whether this author puts the REAL EPS from last quarter ($3.10) into any of his analyses. DID = take another look, he may be onto something. DIDN'T = the author is completely unaware of the effects of subscription accounting on the numbers that he is using to compute valuation. If the latter is true, then his numbers are completely bogus.
On Oct 25 06:18 PM superintelligent wrote:
> Just the fact that this article has attracted so many harsh attacks
> proves that the author must be on to something... something that
> hurts those who love AAPL unconditionally. So unconditionally that
> they
And now, YOU ARE DOING THE SAME THING.
Worse, the rules of accounting are about to change, and soon, Apple won't be spreading these REAL EPS figures (e.g. $3.10 in the previous quarter) over 2 years.
Result: bigger EPS reports coming, and all of your computations are going to get caught with their pants down when it happens.
How could anyone that appears to be so smart and thorough (your article and the different ways you view this) possibly miss something so critical and obvious? I am definitely shaking my head on this one.
Most Value investors never learn. The question is not whether a Company is trading over or under it's intrinsic value, the question is WHY the market is trading any given company at those irrational levels.
Seems to me, with the Cramer's et al talking up AAPL it is a perfect 'castle-in-the-sky" investment.
Good luck clown! You will need it!
I'm laughing myself all the way to the bank. Sorry fellow-contributor, I know I shouldn't be rude, but you deserve a slap round the face for publishing such tripe on a site like this. If I was SeekingAlpha I'd be embarassed to see in published under my banner.
"Before relying on the editor's opinions, always assume that the editor and other investors influenced by the editor have material financial interests in these stocks and hold or trade them contrary to those opinions."
But hey, nice graphs and good use of repetition. Say "short apple" 5+ times (just don't forget the ruby red slippers) and your dreams will come true. Good thing I do much better with all my studies in psychology than with... well, remember: lies, damn lies, and statistics.
Seeking Alpha, your stock has just gone down by publishing this trash.
-Iphone in China
-A LOT of room for mac growth..find a 15-20 year old and the computer he is using (or at least wants) vs the average 30+ yr old. who is more likely to buy the pc? Look at the average college campus 5 years ago vs. Today-- there is clearly a trend. These people will also continue to use macs.
-TABLET RELEASE.
First-
It seems most of your models rely on "terminal growth rate." This is a tricky thing here. We all know that Apple will not increase at this rate forever. No one expects Apple to own the whole universe in 25 year, which is what it would at its current rate of growth. (Well, maybe 50 years - you can do the math.)
Let me make an analogy here - tho granted it is a bit forced. We all know that each of us humans is going to die. So we each have a terminal growth rate of 0. Now let us suppose that in 1987 you applied your formulae to both me and to Brad Pitt, in that year he played a party goer in "Less than zero" So there we were, I in grad school and Pitt in "Less than zero" your analysis would have put our stock at the same price, since we both had negligible income and both would reach 0 TGR. I wish my income were just a slightly larger fraction of his than it is now.
My point is simply this: what happens in between NOW and reaching your TGR happens to be important. For you seem to imply that two companies with the same TGR should have the same value even if Co A is already at their TGR and Co B will double before reaching it.
Some of us feel that Apple will continue to grow at a high rate for several years to come. Hey - just go back in time to 2003, AAPL = aprox $20. Now apply your models what you get? Probably that Apple will be worth only $20 in 2009.
---- Myth BUSTED! ----
All your messing around with EPS. "... the hiighest EPS estimate was 8.68"
If you use the non-GAAP figures from Apple, and make a reasonable guess at next quarters (I used last Q + 20% which is very low for the last 2 years) then you will arrive at $11 for THIS calendar year.
The current price is then a P/E of less than 20. This is not extraordinary for a fast growing company.
You can see my figures at:
seekingalpha.com/user/...
NEVER get emotionally involved with any stock. I have no love affair with apple and I love to read these posts of people defending the stock like they are married to it. This shows me there are plenty of greater fools left to drive this stock to $250 with no problem.
Yes, and that is where the future is and AAPL will be leading the way...add video too.
Thanks for the article...but I would not short AAPL.
On Oct 25 04:25 PM brent lane wrote:
> Technical analysis can go hang - this is why AAPL is still a Value
> Stock:
> In the PC market, AAPL has serious competition.
> In the OS market, AAPL has serious competition.
> In the PDA market, AAPL has serious competition.
> In the cellular market, AAPL has very serious competition.
> In the portable music market, AAPL has some competition.
> BUT: in the integrated PC-PDA-cell-music market, AAPL has NO competition
> - a situation that will remain for years. Can you say "market leader"?
> I knew you could.....
On Oct 26 08:22 AM LaChic wrote:
> The author has excellent points, you guys are assuming the market
> just going to keep going higher and higher, lol...folks, have you
> not learned anything yet?
I did enjoy this article, but if the models used are hopeless at predicting the share price of AAPL (which I think they are) then the author should discover and acknowledge this, even privately.
On Oct 25 01:22 PM Mikael wrote:
> First of all, thanks for a fun to read article. I have some questions
> and thoughts.
>
> Over the last 5-10 years, when would your models have told you to
> buy and sell Apple? Could you add some charts for that?
>
> You see, I would like to see if any of the models you use in your
> article can predict the Apple stockprice with any accuracy (greater
> than 50% of the time). Only then will you know if you can actually
> rely on any of them. Same thing goes for Cramer's model. When during
> the last 5-10 years did it predict when to buy or sell AAPL correctly?
>
>
> Throwing numbers around is like you said: entertainment or a commercial.
> And that's why I really would like to see you go the extra mile on
> this one, to figure out which model would have made the most money
> predicting Apple's stock price.
Eventually, new market participants will come in and compete viciously. Second, consumers are fickle and will eventually find the next big thing. This company(ies) may not even exist yet. It could very well be Chinese or Korean, new consumer companies like LG are very competitive right now. What about Google or even Yahoo? there is nothing stopping them from eating their lunch.
It
However what your analysis overlooks is the talent of the AAPL team. Steve Jobs is but one leader in the company - certainly the most important one but not the only one. Jonathan Ive - SVP for Design at Apple - is responsible for the design of almost every product that has driven the company's success: the various versions of the iMac, the iPod, the iPhone. Steve's role has been to enable Ive's work, to champion it within the company. Now that he has been firmly established, Ive is able to drive the same kind of quality and innovation without Steve's oversight.
I believe this talent dimension makes any analysis of Apple's future problematic. Having a terminal growth rate becomes a complete guess. Who knows what new products the innovative team at Apple will come up with and to what extent will those products drive financial performance. Given the track record of Mr. Ive et al, it is difficult to imagine that they will not create another wildly successful product in the next 20 years.
The Cramers of the world with their astronomical price estimates may appear irrational, but they are betting on Apple's talent. I'm not long on AAPL, but I can certainly appreciate their exuberance.
This poster is right. The best comment realizes that a 4x FCF is pretty far off for a couple like AAPL. That might be an appropriate FCF multiple for a Mom and Pop restaurant!
I welcome the author's premise. That is to challenge, the main stream thought that AAPL can do nothing but go up. It was worth the read, but there are too many flaws in your reasoning and assumptions.
One flaw that is evident is the author's lack of understanding and/or explaination for just slapping an 8% discount rate into a DCF model. I dont have time to run DCF models on individual stocks now. But if the author is going to publish, he should have a better understanding as to why he is using a stated discount rate within a certain model. WACC, for example, is dependent on a companies debt/ value ratio, the required return on equity and required return on debt. One should spend a lot of time to determine the Rd and Re before just slapping a hurdle rate into a model. Try reading Shannon Pratt's "Cost of Capital" for an authoratative view on the subject.
I do agree, however, that assuming 20%-plus growth rates in terminal value of FCF's is a recipe for overvaluation.
On Oct 25 03:05 PM isellapple wrote:
> This is the best reply by far. Stefan points out the huge cash pile
> Apple is sitting on and is making yearly profits of $10B+ based on
> current numbers.
>
> Cramer is right, this stock is headed to $300 and it will never touch
> $100 again, sorry Kai. DO NOT short AAPL or you will be on the wrong
> side of the trade. This holiday quarter is going to blow every past
> quarter away!
>
> On Oct 25 12:12 PM Stefan Sidahmed wrote:
First, you seem to be determined to show that AAPL is not a value stock. Who said it was? What is a “value” stock anyway? My understanding is that “value” investors try to find companies with prices below their perceived value. My use of “perceived” is intentional. The “growth” investor however, is dependent on the company growing rapidly from where it is, and therefore being more valuable in future than it is now, whether or not its price is presently depressed. Both concepts expect Mr. Market to eventually price the stock more than it’s worth today.
Warren E. Buffet has called investing an art and a science. The science is the easy part he says, which is figuring out what the company has done in the past. The art, the hard part according to him, is trying to predict, with a certain level of confidence, what the company’s performance might be in the future. Let’s try to do that quickly.
Your favorite research sites will all show stellar performance for AAPL in the past (6 years). See, that was the easy part. Let’s make some forward-looking statements, then try to assess our confidence in AAPL achieving these.
1. AAPL has significant brand power allowing them to charge significantly more than competitors.
2. AAPL’s products are loved by consumers, and there is plenty room for growth:
a) only 1 iphone carrier in many countries, b) carriers have been changing networks to be able to sell iPhone, c) recently officially introduced in the most populous country (China) and added a carrier in the UK. (All this is just iphone, I will let you all do the rest for mac, macbook, ipod touch, itunes, app store, software, periphals )
3. AAPL will to continue to innovate.
I am very confident about 1, 2, and 3 above. Let’s look at the downside. A better product might come along in each area of AAPL’s markets, e.g.. Palm Pre, Android, Blackberry, Windows 7, Dell PC’s, Google’s music service, no netbook, lawsuits from Nokia, and the list is endless.
With all these threats, I am still confident AAPL will increase sales, and with that, increase profits at rates similar to what they
I have no position in AAPL, but it's important to point out an apparent flaw in your use of the Bloomberg Dividend Discount Model (DDM) function. The Bloomberg DDM has two inputs for growth rate. The first, perhaps misleadingly called "Long Term Growth Rate" (on the left) appears to be the dividend growth rate over a specified, finite period of time ("Growth Years"). The model then uses another input ("Transitional Years") to smooth the dividend growth rate down to "Growth Rate at Maturity" (on the right) which in both your runs seems a perfectly reasonable 5.319% in nominal terms, roughly equal to long-run (nominal) GDP growth.
I should add that in the absence of dividends (as is the case with AAPL) the model appears to assume growth of *earnings* according to the user inputs until the "Payout At Maturity" or payout ratio assumption kicks in.
Your run of the model with "Long Term Growth Rate" set to 5.000% is assuming that AAPL's near-term EPS growth rate is 5.0%, massively below recent results and consensus estimates.
You should probably re-think your price target.
With all these threats, I am still confident AAPL will increase sales, and with that, increase profits at rates similar to what they've done in the past, accounting change or not.
Now when this stops, and AAPL reaches its “terminal growth rate” (which nobody thinks is next year, or the year after), maybe they’ll start paying a dividend, similar to what Microsoft is doing.
So rather than using preferred growth rates and discount periods and all of the other magic numbers, add some meaning to the numbers, then factor in your confidence in these numbers, then interpret the results.
I sincerely hope you don’t have access to all these fancy software tools because you are investing somebody else’s money for them.
Next time you think a company is overpriced, try to target the assumptions Mr. Market has made about the future performance of the company, not just the numbers you think Mr. Market is using. As you have proven, you can predict anything you want to.
Using your preferred values in 25 different models doesn’t prove anything, however.
p.s Method #1 is the most ridiculous piece of garbage I have ever seen masquerading as analysis.
Thanks for the entertainment, but next time, leave it to Cramer and Jon Stewart.
You write,
"In this example, it assumes that AAPL will grow at 18.8% FOREVER, and that gives the target of $209."
This is wrong... If the Bloomberg model assumed AAPL will grow at 18.8% forever, the "Theoretical Price" would be infinite (with the given discount rate assumptions).
Remember that the DDM model (in simplified form) says that present value of the stock price equals the discounted value of the perpetual dividend stream, or
PV = D / (r - g)
where
D = next period's dividend per share
r = discount rate
g = dividend growth rate
If your dividend growth rate (g) is greater then your discount rate (r), then the PV (the stock price prediction) is infinite. Look at your DDM model on Bloomberg. Your discount rate is 9.671% (3.391% + 6.290%).
You're right that inputs matter a lot when using valuation models, but understanding the underlying math is pretty important too.
My comment does not relate to the technical evaluation in the article. Because Apple does not sell iron ore, it sells pop culture. I believe the long term future of Apple is it's Ipod and low end laptops, not the Iphone. Many market watchers forget that most 'average joes' don't understand the details of the recession or they think it's already over. So when their 17 year old asks for an Iphone with $100 data plan they think OK. ( I have average friends, they all fit this description) When the reality sets in, this will change. I read an article earlier this year (www.nytimes.com/2009/0...) saying smartphones are not luxury anymore, but necessity. Bull, these phones don't have any essential functions that the owner doesn't already possess. Tightening budgets will reflect this. I am skeptical on the limitless potential predicted for Apple stock price based on this phone.
Option Bob
Since investing is humankind's second most serious GAME, next to war, better know the valuation model I call "Play the players." Some say no other is really needed.
That model seeks out the most experienced, knowledgeable and best informed, active, at-risk, and highly-motivated market participants, and finds out what they are doing with their own money.
It recognizes that even these players cannot realistically see what is likely to happen to an equity-based investment beyond the next 6 months. It also recognizes that two things are being invested, capital and TIME.
Capital, when lost, is hard to recoup, but possible. Time is impossible. Be even more careful about how time is invested.
Our best candidates for the players to study are the big bulge-bracket brokers' (BBBB) block desk market-makers and their insurance providers, the proprietary traders of the same community.
We daily analyze 2,000 equities to see what the BBBBs are charging and paying for insurance to protect the position exposures they must take in order to compete for the business that pays their 7-8 figure salaries and bonuses.
It tells what are the price extremes of each issue they need to be concerned about, both higher and lower. Then we keep book on how right they have been over the following 3 months.
FYI, their Friday-close look at AAPL is a price range of $190 to $207, or an upside of +11.3% and a downside of -6.8%. In 1132 recent past daily forecasts 288 have had similar reward and risk proportions.
From those, AAPL's daily closing price over the next 3 months has been higher 76% of the time by an average of +16.8% and lower by an average of -7.3%, for an odds-weighted average of +9.9%.
AAPL's worst single-day exposure in the 3 months after such a forecast averaged -13%, while its best experience was typically +30%. The stock ranks on a reward-to-risk scale better than 94% of our population,
Making +9.9% in 30 market days (compoundable 8+ times in a 252-day year) is an annual rate of +121%. Good, but more than 100 other stocks or ETFs offer better at the date.
Disclosure: We have no positions in AAPL, but regard it highly at present.
My best guess is that $200 assumes 25% sales growth and 20% EBITDA Margins for at least the next five years. Lowering years 3-5 to 15% growth lowers the target price to around $150. I am sure AAPL will continue to look impressive for the next 8 quarters, and the stock will probably continue to surge - but I certainly don't want this to "pants" me when I am the one holding the shares when this karma dissipates as EPS moves flat. Will it be 3-5 years from now, or in 2010? I don't know, but it seems too risky to find out.
I understand AAPL is loved by its army of Volkswagen driving Latte drinkers - but I would never bet on the Apples O/S becoming a market leader. I tried to run an Excel file with VB macros built into it and it wouldn't let me. Unless the business world starts to place a premium on Garage Band, I wouldn't count on their computer market share changing anytime soon. Maybe someday they'll let third party publishers create programs for them, but then they will have all of the security issues Microsoft has already built their programs around. Kind of a catch-22, especially in the wake of their fairly libelous Microsoft ads.
I don't own AAPL - I would consider it if it was still trading around $125, but at this level it is not an attractive entry point. But this blog comment board is certainly dominated by those with positions, and their comments tend to be meaningless because they are pretty over-the-top with the irrational bias.
A successful company this large does not depend on one man. BTW, this is not Apple computer any more. It is now a very different company.
On Oct 26 09:56 AM GrahamJ wrote:
> Nice analysis. It appears that by most valuation methods, AAPL is
> indeed overvalued, and certainly isn't worth the target values suggested
> by Cramer and others.
>
> However what your analysis overlooks is the talent of the AAPL team.
> Steve Jobs is but one leader in the company - certainly the most
> important one but not the only one. Jonathan Ive - SVP for Design
> at Apple - is responsible for the design of almost every product
> that has driven the company's success: the various versions of the
> iMac, the iPod, the iPhone. Steve's role has been to enable Ive's
> work, to champion it within the company. Now that he has been firmly
> established, Ive is able to drive the same kind of quality and innovation
> without Steve's oversight.
>
> I believe this talent dimension makes any analysis of Apple's future
> problematic. Having a terminal growth rate becomes a complete guess.
> Who knows what new products the innovative team at Apple will come
> up with and to what extent will those products drive financial performance.
> Given the track record of Mr. Ive et al, it is difficult to imagine
> that they will not create another wildly successful product in the
> next 20 years.
>
> The Cramers of the world with their astronomical price estimates
> may appear irrational, but they are betting on Apple's talent. I'm
> not long on AAPL, but I can certainly appreciate their exuberance.
Thanks for your honesty.
On Oct 26 01:22 PM Peter F. Way, CFA wrote:
> What a perfect example of the CRAP being taught to students about
> investments and investing!
>
> Since investing is humankind's second most serious GAME, next to
> war, better know the valuation model I call "Play the players." Some
> say no other is really needed.
>
> That model seeks out the most experienced, knowledgeable and best
> informed, active, at-risk, and highly-motivated market participants,
> and finds out what they are doing with their own money.
>
> It recognizes that even these players cannot realistically see what
> is likely to happen to an equity-based investment beyond the next
> 6 months. It also recognizes that two things are being invested,
> capital and TIME.
>
> Capital, when lost, is hard to recoup, but possible. Time is impossible.
> Be even more careful about how time is invested.
>
> Our best candidates for the players to study are the big bulge-bracket
> brokers' (seekingalpha.com/symb... block desk market-makers
> and their insurance providers, the proprietary traders of the same
> community.
>
> We daily analyze 2,000 equities to see what the BBBBs are charging
> and paying for insurance to protect the position exposures they must
> take in order to compete for the business that pays their 7-8 figure
> salaries and bonuses.
>
> It tells what are the price extremes of each issue they need to be
> concerned about, both higher and lower. Then we keep book on how
> right they have been over the following 3 months.
>
> FYI, their Friday-close look at AAPL is a price range of $190 to
> $207, or an upside of +11.3% and a downside of -6.8%. In 1132 recent
> past daily forecasts 288 have had similar reward and risk proportions.
>
>
> From those, AAPL's daily closing price over the next 3 months has
> been higher 76% of the time by an average of +16.8% and lower by
> an average of -7.3%, for an odds-weighted average of +9.9%.
>
> AAPL's worst single-day exposure in the 3 months after such a forecast
> averaged -13%, while its best experience was typically +30%. The
> stock ranks on a reward-to-risk scale better than 94% of our population,
>
>
> Making +9.9% in 30 market days (compoundable 8+ times in a 252-day
> year) is an annual rate of +121%. Good, but more than 100 other stocks
> or ETFs offer better at the date.
>
> Disclosure: We have no positions in AAPL, but regard it highly at
> present.
You'd have to say that starting earnings are understated by FOUR TIMEs to get to the current stock price.
On Oct 25 07:06 PM thompr wrote:
> There are three reasons that the analysts have underestimated AAPL
> in previous quarters: (1) Apple successfully "sandbags" their guidance,
> so analysts don't have a solid basis for their estimates, (2) we
> are in a recession, so without a solid basis, analysts will naturally
> underestimate any company that is somewhat defying the recession,
> and most importantly (3) none of the analysts add in a contribution
> from deferred earnings that are due to be realize EVEN THOUGH THESE
> AMOUNT ARE AVAILABLE.
>
> And now, YOU ARE DOING THE SAME THING.
>
> Worse, the rules of accounting are about to change, and soon, Apple
> won't be spreading these REAL EPS figures (e.g. $3.10 in the previous
> quarter) over 2 years.
>
> Result: bigger EPS reports coming, and all of your computations
> are going to get caught with their pants down when it happens.<br/>
>
> How could anyone that appears to be so smart and thorough (your article
> and the different ways you view this) possibly miss something so
> critical and obvious? I am definitely shaking my head on this one.
But with that being said Apple, like many other tech stocks, are in a bubble thanks to the Fed flooding the market with liquidity. The bubble will burst again.....
And don't forget that Apple's main market will continue to be the slow growing US market. Overseas, they don't think much of Apple products - it's no big deal - they had similar products years ago.....
On Oct 25 12:12 PM Stefan Sidahmed wrote:
> You discussed DCF a lot, but I do not see one cash flow number in
> this article. EPS does not equal FCF.
>
> $80/share x 914M shares = $73B market cap
> Subtract $34B in cash = $39B Enterprise value
> 2009 FCF was about $9B
> So you are saying Apple is worth 4 x current cash flow.
>
> Does not make sense.
All valuation should start or include some sanity test like this:
On Oct 25 12:12 PM Stefan Sidahmed wrote:
> You discussed DCF a lot, but I do not see one cash flow number in
> this article. EPS does not equal FCF.
>
> $80/share x 914M shares = $73B market cap
> Subtract $34B in cash = $39B Enterprise value
> 2009 FCF was about $9B
> So you are saying Apple is worth 4 x current cash flow.
>
> Does not make sense.
And there are no hidden issues: cash flow is growing, strongly, not a capital intensive industry.
Using complex math to create a result simple arithmetic would dismiss is what con artists do.
And those of us who follow AAPL know that the cash flow is REAL. It's been consistently growing every quarter (and is proof that subscription accounting is a fiction.)
What this article tells me is that there is enough ignorance that this stock actually has room to run. And will benefit from the accounting change even though all the facts of AAPL's business are already fully disclosed.
On Oct 26 01:22 PM Peter F. Way, CFA wrote:
Making +9.9% in 30 market days (compoundable 8+ times in a 252-day year) is an annual rate of +121%. Good, but more than 100 other stocks
or ETFs offer better at the date.
Then he uses a multiple that is entirely inappropriate for the growth (which he doesn't notice is occurring) and he also doesn't properly account for cash.
Put it all together, and he is easily a factor of 4 off.
On Oct 26 04:24 PM Graham and Dodd Investor wrote:
> DOUBLE the author's starting earnings estimates for the reasons you
> mention, and use his other assumptions, and I get a price of $108
> instead of $54.
>
> You'd have to say that starting earnings are understated by FOUR
> TIMEs to get to the current stock price.
Time to get hard-headed. Most stocks are 5x overvalued, and AAPL is no exception.
That cold numbers are not so important in markets (looks AONE offer or Natural gas stocks 2 extreme oppsite examples).
I learned that markets are still moved in certain proportion by human emotions.
Rgds
On Oct 26 08:22 AM LaChic wrote:
> The author has excellent points, you guys are assuming the market
> just going to keep going higher and higher, lol...folks, have you
> not learned anything yet?
India is quite similar, do you know where is the biggest Rolex store...in Peking!, the most important sales volume of Chanel...Peking!
Wrong...the biggest push of Apple is outside USA.... by far.
On Oct 26 04:46 PM Tony Daltorio wrote:
> I agree that the author's "analysis" was laughable........
>
> But with that being said Apple, like many other tech stocks, are
> in a bubble thanks to the Fed flooding the market with liquidity.
> The bubble will burst again.....
>
> And don't forget that Apple's main market will continue to be the
> slow growing US market. Overseas, they don't think much of Apple
> products - it's no big deal - they had similar products years ago.....
Remember one of the principle rules of investing. Price is what you pay, value is what you get. Although I don't have the same numerical details, I'm inclined to partially agree with both Cramer and Kai. This stock has a lot of momentum, and will continue growing in the short (and maybe medium) term. However, at some point in the future, the growth rate will have to come down, and the multiple will compress. That's simple economics. It doesn't mean I'd ever consider shorting this stock though.
What I like to do is come up with the sell price and then discount off of that. For this I use Free Cash Flow per share and multiply that number by 30 times.
These are my free cash flow per share estimates for the next three years and then the results of selling it at 30 times Price to Free Cash Flow;
2010 = $6.88 * 30 = $206.40
2011= $9.70*30 = $291.00
2012 =$ 11.51*30 = $345.30
So when Cramer says $300 he is using 2011 estimates.
Disclosure = No position
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice.
It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.
Disclosure: I've been long APPL for some time, and expect more profits in the next five years as the company evolves into something that doesn't exist today, a consumer information/entertainment organizer.
I had to call out User 367804 (I guess I am not calling him out, unless he is the latest Astrodroid model)...and hopefully by addressing some glaring errors in his comment, add to everyone's Apple valuation efforts with what the author just ignores above - well-informed human perspectives from within the technology industry (I have been in the industry for 12 years). Not once does the author mention human interaction of any sort - I don't want to be rough, but relying on fairly basic, linear software solutions that take your data inputs and churn a number out, and then making a recommendation without speaking to experts and analysts in a volatile vertical subject to Disruptive Technologies that can change things overnight (think iPhone and mobile my man)...honestly, I consider this recommendation not just absolutely wrong, but irresponsible.
OK, back to my Astrodroid friend, who wrote:
"I understand AAPL is loved by its army of Volkswagen driving Latte drinkers - but I would never bet on the Apples O/S becoming a market leader. I tried to run an Excel file with VB macros built into it and it wouldn't let me. Unless the business world starts to place a premium on Garage Band, I wouldn't count on their computer market share changing anytime soon. Maybe someday they'll let third party publishers create programs for them, but then they will have all of the security issues Microsoft has already built their programs around. Kind of a catch-22, especially in the wake of their fairly libelous Microsoft ads.
I don't own AAPL - I would consider it if it was still trading around $125, but at this level it is not an attractive entry point. But this blog comment board is certainly dominated by those with positions, and their comments tend to be meaningless because they are pretty over-the-top with the irrational bias."
1. I don't drink lattes, I prefer single malt scotch in the morning, and I don't have a Volkswagon - I have a smog-belching bi-turbo with four chrome tailpipes - you are plugging in demographic numbers and blindly communicating to the public what an Apple enthusiast is, very much like the author above does in his rather linear approach to determining valuations. Think Different!
2. Let me throw down a little knowledge, son. Mac OSX market share increased 22% in 2007, then accelerated to a 32% growth rate in 2008, ending the year at 9.63%. During that same time period (2007-2008), all the combined Microsoft Windows OS versions declined from 92% to 88%. My latest figures show 85% in December 2009 - that is with Microsoft's Windows 7 launch estimates factored in, so it may end up lower. The bottom line is, it is indeed a realistic possibility in the next 5-7 years for OSX to be the market share leader in a operating system marketplace with numerous players - Google Chrome OS and Android for netbooks, Linux, Windows and Mac OSX.
3. Good Lord man, who wants to run Excel programs with Macros in the first place!!! This comment is totally redundant - the trend is your friend brother, and that trend is away from the desktop-chained Office software and toward cloud-based solutions like Google Documents - simpler, universally accessible from any device with a browser, easy-to-share...Google is hell-bent on wiping Microsoft off the desktop, and they will (this is also a net-negative trend for the Windows OS).
4. You make an emphatic plea for Apple to work with third party publishers to create programs for Mac OSX, "maybe someday." Apple works currently with a very large number of third-party software developers, and there are countless third-party programs available on OSX, including Microsoft Office. I want my single-malt scotch back brother!
5. Apple may or may not have future security issues, although if you have been behind the curtain on both as I have, you innately understand why Apple is never going to have to go through the security issues Windows had to.
7. Additionally, you indicate that Windows has experienced, and has built "all their programs around now." Windows security issues have been numerous and ongoing, they are still not solved, and at least you are accurate on one point - it is indeed Microsoft programs that suffer the vast majority of security issues.
8. There is no Catch-22 because Apple does work with third-party software companies for programs on OSX, as well as the fact the new commercial spots are in no way libelous. In fact, the Apple spot Broken Promises could now be considered reality TV, with the numerous driver issues Windows 7 is experiencing today.
As far as the stock valuation, I can tell you from a boots-on-the-ground level in Silicon Valley, the widespread sentiment is that Apple is going to shake the earth in 2010 with the expected Apple Tablet launch. While I don't know anything more than anyone else, I do have a source at Apple who indicated I should expect Apple to revolutionize mobile computing for the second time in two years.
Here are the predicted factors I would consider when projecting 2010 performance:
- The before-mentioned Apple Tablet...if it's anything like the very latest I and others are hearing, this would have a major impact on earnings and valuation. If it is truly the netbook killer, priced at $600, 10" touchscreen, extremely thin, unmatched Apple fit and finish, and packaged with major content (there have been ongoing talks with content providers - I am surprised I have not heard gaming rumors, I would think this device would be a killer-app for gamers), expect a major impact on earnings and stock price.
- A major iPhone update, with an improved dual-core processor and another leap in storage capacity, camera update with video, and a flash solution for the browser. Apple is working closely with gaming programmers; this collaboration may lead to further hardware innovations to continue the surge in game apps.
- Potential of Verizon adding the iPhone 4G.
- Major game application launches in 2010, as the iPhone starts to eat into Nintendo and Sony (several analysts predicting iPhone will be the market share leader in portable game consoles in 2012).
- Substantial MacBook Pro updates are widely expected.
- New subscription accounting treatment revenue recognition to begin FY Q1, which will be a blockbuster quarter for the iPhone.
- Expect one or more major content provider announcements - insiders expect Apple to be the leader in finally bridging major gaps between traditional broadcast television and IP delivery of content online in a dynamic format/platform. This is fuzzy, I just will say stay tuned...
- Expected Apple TV update, which would of course align with the above-mentioned content innovations.
I do see some potential stumbling blocks. Quickly, Google and Apple have not been playing together well as of late; I have several close relationships at Google but no guidance at all. Android, and the launch of Motorola's Droid smart phone, I do believe has a chance to be a serious contender - but based on several fractors, my strong opinion is Droid is more damaging to Nokia, RIM, Palm and other smart phone makers than iPhone. Android has two major disadvantages as we head into the holiday shopping season:
- Android has no where near the applications iPhone has; that will change, but not in time for CYQ4
- Android, and Droid, are at a major disadvantage to the iPhone when it comes to the dynamic entertainment and content that iTunes/iPhone deliver
Windows 7 will have minimal effect on Mac sales. The economy, however, could impact sales. Macs are just plain expensive, and if this recession continues well into 2010 or gets worse, I would expect deterieration of MacBook and MacBook Pro sales. Despite the economy, I expect the iPhone to continue to drive record revenue increases.
I do intend on giving Droid a try, the dropped calls are a real problem Apple needs to address. Verizon would obviously be the solution (if indeed it is AT&T that is the problem; majority of experts I have read and spoken to, as well as my own experience, points that way). You can read my blog posting about leaving my beloved iPhone to give Droid a try here:
seekingalpha.com/insta...
Good day to all!
However, I found, on an individual company basis, that a model that does not back-test 5 − 10yrs reasonably well, will not usually do well in the future.
So, based on the numbers for AAPL 10 years ago, how did your favorite model do in predicting prices of the stock?
The result? Many strong products that are each in different phases of their life-cycle, and then a synergistic effect ( iPhone users switching to Mac Desktops), making this company's revenue projections extraordinarily complex looking out 10 years.
One fact remains, though Steve Jobs participation may have little effect on year to year results, ten years out, he has is a huge effect.
However, too many people rebuffed the author
Blog: Maximize401k.wordpress...
On Oct 25 01:22 PM Mikael wrote:
> First of all, thanks for a fun to read article. I have some questions
> and thoughts.
>
> Over the last 5-10 years, when would your models have told you to
> buy and sell Apple? Could you add some charts for that?
>
> You see, I would like to see if any of the models you use in your
> article can predict the Apple stockprice with any accuracy (greater
> than 50% of the time). Only then will you know if you can actually
> rely on any of them. Same thing goes for Cramer's model. When during
> the last 5-10 years did it predict when to buy or sell AAPL correctly?
>
>
> Throwing numbers around is like you said: entertainment or a commercial.
> And that's why I really would like to see you go the extra mile on
> this one, to figure out which model would have made the most money
> predicting Apple's stock price.
On Oct 26 09:14 PM GSlusher wrote:
> isn't the point of a "free" market that something (including a share
> of stock) is "worth" what someone will pay for it? I may contend
> that a Ventures LP I have is "worth" $1,000, but, if I can only get
> $1.98 for it on eBay, it's "worth" $1.98.
But as you can see, apple has more fans than all the sports teams in the world put together. There is NO WAY they would let apple get even close to 80. Below 100 and people would be buying this like there is no tomorrow.
Sometimes you analysts get way too hung up on numbers. Look at things qualitatively as well.
FYI, if you are a writer on seeking alpha, why would you write something negative about apple? Even if you can make a good argument (which you did not). It is suicide.
Does anyone know of a website that provides instant volume of buyers and sellers? My online brokerage website does not have a feature in which investors/traders can see volume (buyers and sellers) separately.
Thanks
On Oct 27 01:46 PM Hester wrote:
> I do not know if this has been stated in a previous comment, because
> I do not have the time nor the inclination to read all these comments.
>
>
> But as you can see, apple has more fans than all the sports teams
> in the world put together. There is NO WAY they would let apple get
> even close to 80. Below 100 and people would be buying this like
> there is no tomorrow.
>
> Sometimes you analysts get way too hung up on numbers. Look at things
> qualitatively as well.
>
> FYI, if you are a writer on seeking alpha, why would you write something
> negative about apple? Even if you can make a good argument (which
> you did not). It is suicide.
But there is another issue. If these analysis tools are so apparently so wrong in this case, can they be relied on, in any case? As the writer says these tools are widely used.
If not these tools, which tools? Or are we all emotion now?
Who knows where Apple will be in 10 years? Many of these models need these inputs. At one point, AOL was one of the best companies in the world, they had what seemed to have a wide moat. But that moat literally vanished overnight as technology changed. Dell was in a similar situation, they were a great company, but their business model also deteriorated and turned stagnant. I am not saying that Apple will be an AOL or Dell, but tech companies change fast. An innovative product (ex: iPhone) will cause the stock to skyrocket over the new few years, but a lack of innovation will cause the stock to tank. Things changes very quickly in tech.
On Oct 27 02:59 PM User 420556 wrote:
> I guess your article was read by many traders and decided to listen
> to you. I wish I had. I would have made a lot of money if I had shorted
> it. Although your analysis seems to have some good points, the market
> is currently trading on momentum rather than fundamentals. Oh....
> smart money has a free calculator to obtain valuation.
>
> Does anyone know of a website that provides instant volume of buyers
> and sellers? My online brokerage website does not have a feature
> in which investors/traders can see volume (buyers and sellers) separately.
>
>
> Thanks
I've been working towards the CFA Level II; one of the things I've taken away from my studies so far is how difficult it is to understand what an EPS number truly is saying about a company's results, thanks to the increasingly complex accounting methods employed. I've always thought Cash Flow was the most useful measure, but like all fundamental (and technical aka "heretical") tools, they are only tools to help one make a rational decision.
Long Appl; till short signal flashes
1. Nice run up due to strong sales. revenue recognition FASB ruling is not a reason for a runup, so Kramer's arguement is not valid.
2. Taxes. Lots of funds/investors have tax loss carryforwards. As the year nears, its probably a good bet to take some returns w/o having a tax penalty.
3. The response to this article. AAPL may not be worth $80, but the response here that it's worth much more gives me reason to think that fund managers will be taking profits at the expense of people who don't know when something is overvalued.
note: I bought AAPL in '05 around $70 sold around $100...missed the run up to $200 and the crash. Bought again late last year @100 and sold @ 200. had i held onto my stock from '05 I would made the same in return, but in real terms I've done better.
I hope the author doesn't expect to hold his short AAPL position until it gets to $80...if so, I expect he'll be going on "a few weeks vacation" soon enough.
PS - And therein lies the reason Kai has no tv show.
"The Xerox Alto, developed at Xerox PARC in 1973, was the first computer to use a mouse, the desktop metaphor, and a graphical user interface (GUI), concepts first introduced by Douglas Engelbart while at SRI International. It was the first example of what would today be recognized as a complete personal computer."
Microsoft saved those losers at Apple in 1997 by investing $150M:
www.wired.com/thisdayi.../
On Oct 26 10:30 AM etcsizebid wrote:
> OMG OMG, I made a fortune shorting the crap out of pets.com, Krispe
> Kreme and the rest of the insanly overpriced crap the market had
> for us in 2001, but its one thing not to buy, its quite another to
> short. Is apple going to zero??? That's the kinda stock you short.
> If you had shorted MSFT during its growth phase you might the poorest
> person on earth. Let's all be honest...the guys at AAPL invented
> the operating system. Where would Windows be without the its garbage
> pail and other icons...it would be on the scrap heep of history.
> These guys have been innovating since the beginning. Don't bet against
> the most creative minds in computers. You'll only go poor.
Pay that Apple tax!
www.youtube.com/watch?...
Death to Apple!
www.youtube.com/watch?...
Reminds me of Michael Dell recommending that Apple shutdown and return the capital to shareholders.
Glancing through the comments you can see how vitriolic people get when anything remotely negative is mentioned about their beloved apple.
Well don't worry thats why this is a great stock to short. In fact you could have made a fortune a few times over on the long and short side of this stock over the past few years. I prefer the short side....its quicker .
The fact that so many private investors and money managers are almost religious about this stock actually means prices can tank really fast.
Recent history shows this. Despite the fact that apple has done a fantastic job of growing its earnings, that did not stop the price collapsing 40% in 2008.
It's come all the way back. Guess what it could go all the way back down again!
The Titanic was deemed to be the first unsinkable ship in the world. It sank on its maiden voyage.
Too many people believe this company cannot fail. that it has only one way to go and that is up......
The long side is just too over crowded
$80 may be a bit optimistic, but as with the upside apple always pleasantly surprises on the downside.
On the other hand, should their brand falter (I never understood why Macs are less susceptible to viruses...), AAPL would falter as well. Given none of us here know if AAPL will be a Coke- or a GM- means that at some point, you'll want to exit the stock based on your risk profile. As long as AAPL is on a winning streak, their shares will do well, but a serious stumble could set the stock back by 100 points, sure.
Just out of curiosity, what's Apple's "one trick"? Is it the iPhone? The iPod? The Macintosh?
On Oct 26 12:10 PM Techtrader10 wrote:
> Apple is a one trick pony and
> riding the crest of the wave right now.