I enjoy following value focused hedge fund managers. David Einhorn is obviously one such manager that I pay attention to. His most recent letter to investors details that he is still long shares of Apple (AAPL) and still thinks they are inexpensive.
Einhorn takes the time in his letter to present the four main arguments he comes across that investors provide for why it is a bad idea to own shares of Apple:
1. Too many hedge funds own Apple
2. If Apple's share price doubles it will have a $1 trillion market capitalization, and everyone knows a company can't be worth $1 trillion
3. Motorola, Research in Motion and Nokia were also market leaders all of which could not hold onto their market position and maintain margins, this will also be Apple's fate
4. Apple can't possibly maintain its current hyper-growth rates
The first point is obviously silly, it doesn't matter who owns a company. What matters is the amount of cash flow the company is going to generate in the future. That is what over time will determine the stock price.
The second through fourth points however are all basically related to the same argument. And these points represent why I don't own, and likely won't ever own Apple.
My reason for not owning Apple being that Apple is just so successful and generates such enormous amounts of cash flow that achieving future growth or even simply maintaining current levels of performance simply has to be a very difficult task.
Adding to my concern is the fact that I just don't think I'm smart enough to predict with any reasonable certainly what Apple's business will look like ten years from now. After all, this is a technology company that also must be popular with consumers. Fickle consumers and technology make for an unpredictable combination, which I tend to avoid.
Einhorn makes an excellent point in his letter though. That point being that Apple is really a software company, not a hardware company. Apple's value comes from iOS, the App Store, iTunes and iCloud. Apple isn't just selling a model of a phone that has to be reinvented every season. Apple is capturing its customers with multiple products which makes switching from Apple expensive, inconvenient and less likely.
If I had to predict what the next ten years for Apple would look like I would guess that annual cash flows will grow, but at slower rates every year. If that were to transpire Apple would likely represent a fairly decent investment at current valuations.
And if I had to bet on a mega-cap company I'd much prefer Buffett's Berkshire Hathaway (BRK.A) which continues to grow year after year from a diversified stream of cash flows and assets. Ten years from now I wouldn't be surprised if Berkshire with its multiple avenues of growth has actually grown more than Apple.
If Apple keeps hitting the ball out of the park there is unquestionably more upside in Apple than Berkshire. But I think there is also a lot more risk given the business Apple is in. I feel Berkshire's growth over the next ten years is certain. I don't feel that way about Apple.
The great thing about the stock market is that you don't have to invest in anything. So while Apple is a great company and will likely continue to do great things, I'll continue to be an observer and not a shareholder.