The Curious Investor

Is Apple's Stock Headed for a Reversal?

Hey Molltjm, Seeking Alpha editors provide the titles for my posts here. On my own blog at TheCuriousInvestor.com, I wrote "Are Apple bulls exhausted?" which is a more technically focused (and maybe more snarky) title.


On Oct 30 11:26 AM mollytjm wrote:

> i think your title was misleading, in an otherwise good article,
> which doesn't read like the title. The Title reads like you think
> Apple will fall apart, which i don't think you mean.
> even really great stocks have some ups and downs and some doldrums
> and unless you buy and hold (i do) then it's a gambler's game to
> try and figure out when to move in and out. i just look for dips
> so i can buy in cheaper.
> there's no way to put a cap on Apple's market share for any of it's
> products, since it's an international company now and just into China
> nov. 1 with the iPhone. Because it's market share is low in many
> places, there's enormous room for growth.
> And once people own an Apple product, it's pretty hard for them to
> put up with something else, or to be able to resist the next Apple
> product. I think Apple will keep making money for us.
> long APPL

Is Apple's Stock Headed for a Reversal?

Again, I am fully aware of Apple's fundamental value. If not, I wouldn't hold it. I think it's perfectly reasonable, however, to take a realistic look at how the stock trades. No stock trades in one direction only, at least in the short term. Is it not inappropriate to take profits and enter again at a better position.

Galleon had $7 billion under management. At $200/share and with average volume near 20 million shares a day, I don't believe Galleon could be entirely responsible for Apple's stock movements in the past weeks. It's an interesting point, but there very likely could be stronger forces at work.

3 Steps to Calculating if Apple Is Fairly Valued

P/E multiples are merely a "shortcut" in the attempt to determine the "value" of cash flows. When it comes down to it, fundamental value lies in cash flow and not GAAP earnings. In the case of Apple, GAAP earnings are misleading because of the accounting treatment of iPhone sales which are booked ratably over the two year contract that most iPhone buyers purchase under. As such, with the iPhone growing at astounding rates, GAAP earnings (the number your P/E ratios are based off of) will understate true cash flows since they will lag actual iPhone sales by over eight quarters.

This topic has been covered by bloggers for months and was what many believe was the source of the massive undervaluation earlier in the year. People, like yourself, avoiding the Company due to perceived "high" valuation based on a mythical P/E instead of real cash flows. Unfortunately (or fortunately for those of us who bought the stock), the market and Wall St. analysts seem to have caught on and nearly anyone who follows Apple now focuses most of their attention on the non-GAAP earnings numbers which they report (adjusting for the iPhone deferred revenue accounts).


On Aug 27 09:38 AM manuel wrote:

> sorry but you do not mention apple P/E, it seems high, 30 on Reuters,
> so Peg would be more than 1 if your growth is 15%, seems overvalued,

3 Steps to Calculating if Apple Is Fairly Valued

I use this analysis as part of many different analyses whenever I make an investment. I'll admit that over the past year I've held some positions "too long" and gotten caught in the downturn. I, in fact, purchased my first position in Apple at $150/share only to watch it rise near $200 and fall to $89 where I purchased again.

I'm not advertising this model as the be all and end all for your investment. I think it gives you a baseline for which to compare your assumptions. That is, I shouldn't buy the stock if the model shows that implied growth rate is greater than something realistic. Or, I should look to sell whenever market values imply a growth rate beyond something I'm comfortable with. The time frame, unfortunately, is difficult to pin point. Discipline is also another factor. I, personally, think that 14% year over year growth rate for the next five years is bordering on "reasonable" for Apple. Should I already have sold? Or, should I wait until the market implies something even greater than my comfort zone? (20% perhaps? which would equate to ~$180 - $200/share)

Dell's Perplexing Strategy

My main purpose in the article is to examine the motivation behind this attempt at a brand and image change is on the consumer end. Why play copy cat in a market environment where the "luxury" model has flagged? Further, I don't believe that any mass market PC manufacturer can, in fact, create this kind of brand image. As referenced above, even HP launches its "high end" computers at price points below Apple's. The baseline Adamo is $200 more than the MacBook Air and is suspiciously similar in specifications.

Is this not a big deal because Dell is mainly an enterprise focused business? Well, I think it definitely speaks to the quality of decision making at this Company. Further, it would seem that the consumer segment is a significantly higher margin business. It would be foolish not to pursue an effective strategy there when your Company clearly ought to have the core competencies to do so.


On Mar 19 07:54 AM cloughg wrote:

> Question - I presume your stats only focus on the consumer market
> share and CPU share? 80% of Dells revenues come from business to
> business sales therefore I would expect a predominately consumer
> focused manufacturer such as apple to be streaks ahead in the consumer
> space.
>
> 2008 Stats for Dell's consumer only business - Notebook units grew
> 43% in 2008 while desktops units were down 18%. Dell grew Notebook
> units in the consumer space 1.9 times faster that the rate of the
> industry concluding that Dell is gaining market share in the consumer
> space.
>
> Overall stats (consumer & business sales) are: Apple sold 2,5million
> Macintosh® computers during quarter Q4 compared to Dell's 4.47 million
> units. Therefore despite Dells Q4 decline in market share share they
> still shipped nearly double the number of units that Apple shipped
> in Q4.
>
> In 2008, Hewlett-Packard Company accounted for 20% of Intels net
> revenue (17% in 2007) and Dell Inc. accounted for 18% of Intels net
> revenue (18% in 2007). No other customer accounted for more than
> 10% of Intels net revenue including apple.
>
> The Adamo notebook on its own is not about gaining market share for
> Dell, im sure Dell dont beleive that launching a single notebook
> will do this.
> What is it will do is re-enforce the brand and image change that
> Dell are attempting to make and will continue to make throught 2009.
>
>
> The Adamo is a consumer gimic. Consumers buy gimics as they are emotive
> buyers if Dell continue to drive innovative designs like this in
> the consumer space it will continue to change the perception about
> Dell in both the consumer and business markets which can only be
> a good thing.
>
> The real money for Hi Tech companys is in the large corps - Servers,
> Storage and services are where the big $$ sit. Not in shifting tin
> like PC's, notebooks into consumers etc - there is simply no margin
> in this area.
>
> Tell me one fortune 500 that runs on apple? None
>
> Thats why apple will never overtake Dell or HP or IBM the dont have
> crediability to play with the big boys in the market area which makes
> the real money

Steve Jobs Value - Per Apple Share

Good analysis. I'm glad that our two separate methodologies resulted in such similar results in the valuation. I think it's also very interesting to note that both of us assumed no more than a traditional long term GDP growth rate to arrive at these valuations and have found that Apple shares are STILL undervalued relative to those valuations.


On Jan 18 03:23 PM Gino Verza wrote:

> Thank you for the article.
>
> I share the view that that current performance support substantial
> greater value than the current price. My computations are as follows:
>
>
> FCF for FYE9/08 is 4.11 (if we adjust for the "large" source from
> WC in FYE9/08 would make FCF smaller)
> FCF = NOPAT - Uses in Operating Capital (Working Capital + CAPEX).
>
>
> PV of the stock is about $97/share.
> PV is the value of a perpetuity of 4.11, growing at 2%, discounted
> at 7% (the difference between 9% in WACC and 2% growth rate). <br/>Increasing
> the growth rate (to a more realistic perpetual rate) would significantly
> increase PV.
>
> These figures are subject to adjustment for a variety of risk factors
> such as market factor, credit conditions, the economic stimulus program,
> and the Jobs factor.
>
> Regards.

What's Happening at Apple: Steve Jobs

Tom B,

I agree completely with your view that Apple needs "critical mass" in order to continue to grow and take market share both in the consumer and enterprise market. In fact, I believe I make that contention in the next part of this post series when I discuss potential successors to the Apple CEO position. In fact, I believe the Company is so well positioned today as far as reaching a "critical mass" of consumer users (and this is really their focus, not enterprise software) that, even without a visionary presence at the firm directing future strategic initiatives, any decent executive could manage the Company's product lines effectively enough to be profitable for a considerable period of time going forward. Hence, the argument for someone like Timothy Cook over Joni Ive.

All this aside, I think we can agree that Bill Gates was a driving force strategically at Microsoft and steered the Company to a very defensible business segment (enterprise software) that continues to be the source of its strengths today. Now, Microsoft is struggling to defend its enterprise business and at the same time identify new business areas to grow into.

Steve Jobs has similarly steered Apple to success over the last ten years and created a defensible position by establishing the Company's reputation for innovation and style. These strengths, unfortunately, are much harder to defend than enterprise. As you describe yourself, enterprise needs are easy to target. Consumer purchasing decisions are much more difficult. Just look at Crocs, for example. What's hot today may not be hot tomorrow.

Given that Apple's success has come only during periods of time that Steve Jobs has been providing the motivating direction at the firm, how can we as investors feel comfortable about Apple's ability to defend its business going forward?

I realize that Crocs isn't the best comp with Apple. But, Apple is as much a retailer as it is a tech business. And, it will continue to be more a retailer until it truly reaches critical mass within the consumer market and can capitalize on the network characteristics of inherent in its products (the key difference between making trendy apparel and making aspirational personal computing products). These days, as I contend in this post series, Apple's products are more just luxury substitutes for generally available computing products - a mobile computer, a personal computer, a personal media player.

Once again, I realize that Apple is not simply a company that puts a pretty package on Apple has the benefit of not just making personal computing products. It also controls proprietary file types, operating systems, and other software that go into the whole user experience which differentiates its products from the rest of the pack. This allows them an advantage over a plain-jane retailer like Crocs or maybe more appropriately HTC, a maker of very cool cell phones, mobile computers, and portable media devices. Apple's advantage is that theoretically they should be able to use their proprietary systems to lock-in their user base both through the establishment of a critical mass (network characteristics of tech products) and through individual consumer dependence on multiple products.

It's hard to say how successful Apple has been on this part of their business. In the end, iPod and iTunes usage didn't explode until after it was released for PC. Apple eventually released Safari for PC as well. The so-called "halo effect" everyone predicted since 2005 did not really appear until the last two years. There is, however, serious evidence that users are starting to finally buy into the whole Apple experience, not just individual products. Mac sales have outpaced broader PC sales. Safari browser share continues to climb. And, the iPhone is all but synonymous with the mobile computing market. This is why I continue to hold my stake in Apple, but cast a wary eye on anything that could potential derail execution of a strategy which will extend and strengthen the Company's competitive advantages including the potential loss of one of the most innovative and influential executives in the last twenty years.

What's Happening at Apple: Who Could Replace Steve Jobs?

Timbo,

I just realized that the link you posted was published on the 20th at 10:30am. The original version of my article was posted on the 19th and was delayed in its posting on Seeking Alpha because I've only recently become a member.

What's Happening at Apple: Steve Jobs

Sleepyg,
Maybe I made a semantic mistake in choosing to describe the community of Apple users as "adoring fans" of Steve Jobs. My point is basically that up until now, it's hard not to deny that Apple Fandom has been tied to the Steve Jobs as Chief Executive at Apple. There are few brands in the world that have a regular online following, multiple high-traffic rumor blogs, and a tradeshow circuit devoted entirely to their products and peripherals made for their products. This is most definitely the result of terrific execution and a tremendous foresight. I believe that Apple will survive beyond Steve Jobs, but I do think that it needs to (and has begun to) transition away from its reliance on "Steve Jobs (tm)" as its iconic salesman.

Arnold,
I do mention the WWDC and Apple Special Events in this post. Maybe you thought I should have made a stronger point on their viewership?

TimboM,
I agree and I think most investors agree with your point. The stock fell 7% but has rebounded quickly and is really trading roughly flat with prices pre-announcement. A lot of negative sentiment is baked in and Apple is in a perfect place to wow us with a tremendous set of product announcements and a healthy Steve Jobs appearance. But, inherent in the fact that they "gave away almost no information" is the fact that the information they did give away

Tom B.,
Microsoft continues to deliver strong earnings and revenue results despite perceived flubs in marketing and product development. Microsoft's bread and butter remains its entrenched enterprise software business for which the foundation was laid during the Bill Gates era. It's future success will ultimately be determined by how well it captures consumer and internet market share, but I think it's a bit early to judge this or to tie recent failures directly to the loss of Bill Gates.

Also, if you do think that Bill Gates leaving Microsoft resulted in its fall from grace, then it doesn't really help your contention that Apple will continue to thrive regardless of having Steve Jobs' as Chief Executive. Steve Jobs has been taking a slightly lesser role (at least publicly) for the last year or so (i.e. inviting other executives to speak for him at engagements and even on earnings calls) and will probably continue to transition away in coming years. How can this not be at least a minimal concern to a long-term investor?

What's Happening at Apple: Who Could Replace Steve Jobs?

TimboB,
My main focus on this article was to provide my own ranking of the people that many, many blogs, magazines, and newspapers have been throwing around as potential Jobs successors. I did provide links to some source information and, to tell the truth, most of the little snippets on each candidate are pretty much just simple bios. I don't know how creative I could have been on that kind of background information. In the future, I'll try to cite sources more accurately for you.

PK,
I think Fadell is very interesting choice and would not mind entrusting the company to the hands of a guy who is clearly experienced in both coming up with a game changing idea (iPod), selling it (getting Apple to bite), and executing it (leading hardware development for the iPod and iPhone). That seems like a winning combination of skills to me.

Buffeted,
I think the goal of my last three posts on Apple were definitely slanted towards the idea that what we are seeing is a shift in perception from "Apple brought to you by Steve Jobs (tm)" to "Apple, the standalone Company". And, more importantly, that this is not a bad thing. In fact, I do recommend the stock at these prices at the end of the piece and I am long Apple myself. But, generally, I like to cast a conservative eye on any stock that I own. I think that a more successful way for Apple to manage such a transition is to be more transparent about the plans of its senior management, at least until public perception changes from a focus on its senior management to a focus on just the Company and its product offerings.

What's Happening at Apple: Trade Shows

Timbo,

I don't know if maybe you're upset as you think I'm writing a negative piece on Apple. I'm not saying that at all. But, and maybe I didn't get this across very well, I feel that MacWorld Expo, in particular, is a very unique platform that Apple can use each year to reach adoring fans, the media, and the general public. Further, I don't think the recent decision to surprise shareholders with this news about Steve Jobs and MacWorld is the best way to go about such a strategic shift. While your points to the positive are very valid, even someone long Apple has to take pause and consider the downside. To that end, in the last of my three pieces on Apple, I do end up recommending the shares at these price levels.

Also, if you'd like to keep up to date on my postings, I'd suggest subscribing to my feed or simply visiting: thecuriousinvestor.com. I actually started this post series a week ago, but only joined Seeking Alpha this past weekend which explains the delay.

Tom B,

Thanks for the catch. I'll try to proof read better in the future. I, too, hope that this move is just a cost decision. We'll see in two weeks.