H.J. Huneycutt

Buying Apple Today: Like Buying Microsoft in 1998?

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

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

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

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

Buying Apple Today: Like Buying Microsoft in 1998?

Responses to the common responses:

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

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

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

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

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

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

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

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

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

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

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

38 Reasons the Google IPO Isn't the Big Deal Some Are Making It Out to Be

The author puts up an extremely weak case. Of course there are some small cap and micro cap stocks that have performed better than Google over the past few years. That's a silly comparison.

Also, saying FSLR outgained them is sorta irrelevant, because 99%+ of us probably do not depend on any FSLR products; whereas, a majority of us do depend on at least one Google product. It's pretty impressive that a company of Google's size could be one of the biggest gainers over the past five years.

So Apple outgained them? Big deal.

Now, I'm sure the media is overhyping this, because really ... who cares about the anniversary of an IPO ... I certainly don't. But all the same, I think trying to pretend that Google's IPO wasn't one of the most important IPOs of the past few decades is silly.

Microsoft: Whistling in the Dark

That should read "manufactured by the same company"

<The main
> advantage of Apple computers is that the software and hardware is
> manufactured by the same computer, which doesn't create the issues
> that Microsoft has to deal with.

Microsoft: Whistling in the Dark

(1) Apple would probably not have much success with enterprise solutions. That's not precisely their area of expertise, nor their niche of the market.

(2) Releasing OS X for "PCs" (i.e. IBM-compatible machines) would actually undermine Apple's business model for computers. The main advantage of Apple computers is that the software and hardware is manufactured by the same computer, which doesn't create the issues that Microsoft has to deal with. Why would Apple want to release their software to "PCs" and give away a competitive advantage? Moreover, why would anyone purchase OS X for a PC?

Linux-based operating systems pose more of a threat to Windows than Apple OS X.


On Aug 14 08:41 AM User 332757 wrote:

> Apple has two current advantages over Microsoft that should make
> any Microsoft stockholder shudder:
> 1) At any time, Apple could focus on offering an enterprise solution,
> which could be as market altering as their entry into the music or
> phone markets. They currently are not focused on that.
> 2) At any time, Apple could release OS X for all PCs, making Windows
> dominance because of its default placement on PCs highly disruptable.

Microsoft: Whistling in the Dark

Somewhat interesting, if very flawed article. It was mostly full of inane hypotheticals.

How would Microsoft have "crushed" Apple in the late '90s? The belief that they could have is as preposterous as the belief that Microsoft is doomed because they *ONLY* earned $14.5 billion in their last fiscal year. (Which also happens to be the year before their prime new product, Windows 7 is to be released.)

I actually agree that Microsoft's advantages are withering away, but the article sounds more like an advertisement for Apple's stock than a realistic critique of Microsoft. Only problem is that Apple may have some issues of their own heading into the future.

For one, that 'high-end laptop' market the author claims they control 90% of is mostly 'high end' only because consumers have been willing to pay a premium for the trendy Apple brand over the past several years. Those high margins might start to wither away soon, as well, as consumers decide that paying more money for the same computing power isn't all that wise.

It's true that Apple has done well with the iPhone and all that sorta stuff, but if there's one thing I know about consumer electronics in America, it's that trends come and go. Apple has been trendy, but that wears off after awhile. I'm not saying that Apple is in trouble or even that their stock is a bad investment (I don't analyze it closely enough to have an opinion). All I'm saying is that the author's implied contention that Apple is going to crush Microsoft is ludicrous.

Microsoft has more to fear from Google and open source than it does from Apple. And Apple is not necessarily any more safe than MSFT on that front.

Three Strikes from Apple and Palm May Be Out

I'm in agreement. You never completely know how consumer electronics products are going to turn beforehand, but at PALM's current price, investors are basically assuming that the Pre will have record sales and bring PALM profits *AT LEAST* twice as large (and maybe three times as large) as they made in some of the boom years.

I realize the smartphone market is growing, but it's also crowded. Not sure how PALM earns enough to justify its share price even if the Pre is a success. And I'm not sure that consumers are dying to pay $300 for a Palm Pre on Sprint during one of the worst consumer environments of the past two decades.

I could be wrong, but it seems like a long shot to me. If I had to wager, I'd guess the Pre has good initial sales but then fades a little bit, but never really comes close to earning what current shareholders believe it will.

Does Palm's Pre Have Anything on the iPhone or Storm?

PALM is overpriced right now even if the Pre is a success. At the current price, PALM needs to earn at least twice much as they did in their best years during the boom earlier this decade. None of the PALM buyers seem to be analyzing the financials very much, though.

13 Safe Stocks in a Return to the 1970s

Good article. Not my personal style of investing (I mostly target small caps with high potential and commodity stocks), but I like the reasoning and analysis behind it.

Three Thriving Companies: Wal-Mart, Apple, Apollo Group

I think Linux poses more of a threat to Microsoft than Apple, particularly in the current environment. As people have less discretionary income, they are going to look for ways to cut back and open source is cheaper from a consumer perspective. Ubuntu and some of the other Linux variants are easy enough to use that consumers will consider embracing them.

Three Thriving Companies: Wal-Mart, Apple, Apollo Group

I definitely agree that Apollo is overvalued right now. However, I think it's worth mentioning that there are some who disagree that they are "thriving". Citron Research has called into question some of their practices:

www.citronresearch.com.../


I'm not sure that I'd agree that Perini's run is "unsustainable". They still look undervalued to me at $20.

Wal-Mart will continue to perform well during the recession or even during a potential depression, but their stock appears slightly overvalued to me, so there's probably little upside. I'm not sure if Aldi poses a threat or not since I've never been to one in my life - but I think that high gas prices are the biggest threat to Wal-Mart. Their business model relies upon an assumption that people are willing to travel sizable distances for discount prices --- it doesn't necessarily hold true if gasoline is $5 per gallon. But so long as oil prices stay suppressed, Wal-Mart's grocery sales will benefit. And if there is a depression, oil will probably stay suppressed. Of course, on the downside, Wal-Mart's retail sales will decline in an economic downturn: I think investors have ignored that leading to a slight overvaluation.