Apples and Oranges
"Millions saw the apple fall, and only Newton asked why."
Bernard Baruch
I remember taking a close look at AAPL back in October of 2007 as the stock was rapidly closing in on the magical $200 level... I liked the company products, business model, management and the only real negative noted was the hefty price... Here is a quote of my rationale from that post: "I think AAPL is a great company with unmatched products, shrewd management and loyal customers but, at the time of this writing at $171 a share, I personally do not believe that the risk/return tradeoff for this stock (not a company) is favorable. It is quite possible that given some luck and momentum, the market could carry AAPL another 5-10% higher, but at this price just as easily any negative news could easily lead to a gap down that could be quite severe"
Rereading my original thoughts on the subject it is hard not to notice that my rationale turned out to be on target (I am considering that may be I should doing this for living some day soon) and even "the original target" market cap of $120B is awfully close to Friday's price of $114B. I am not sure whether it was simply a lucky call, brilliant insight :) or merely a coincidence, but there where quite a few occasions in the last several weeks when "driven by populist pressure" (yes I even received some "hate" emails from Mac lovers) I considered jumping in and buying some shares on the way down. But every time I thought about finally pulling the trigger, my skeptical mind has intervened. And now here is the "why I didnt'" part...
First, I do think Steve Jobs is a genius. There are only few people in the technology world whose words arguably carry similar weight (Bill Gates, Steve Ballmer, Larry Page and Sergey Brin) and he probably has no equals in his ability to market products. In addition- the ingenuity of AAPL's R&D team, the "simple and brilliant" design of AAPL's products still remains an envy of the entire IT world. The loyal customers of AAPL are willingly shelling out ever larger sums of cash for never slowing flurry of newer and better products. But this is precisely where AAPL got in trouble and why it is so vulnerable today...
AAPL simply defines what "consumer discretionary" term means. It is also quite clear, unfortunately, that timing for significant growth in consumer discretionary purchases is not that great. With US economy on the way to recession or may be even already there, there is simply not enough discretionary spending out there for all the new and improved iPods and iMacs. As the anemic 5% growth rate in number of iPods sold last quarter shows -not even AAPL's unmatched innovation could force the consumers to substitute their perfectly good iPods with iTouches...And when recession fears become an acknowledged reality - iMacs (which by the way deliver most of the financial benefit) might just become another target for slowing growth. HP and Dell by the way have souped up the design of their products recently and can offer cash strapped consumers a healthy high double digit discount for the comparable performance vs Macs...
Things are a just a little brighter on the iPhone side... It is certainly true that buying an unlocked iPhone in most BRIC countries is not only a habit; it is rather a must for any "new middle class" wannabe. But AAPL's iPhone business model is quite heavily reliant on the commissions from the Mobile carriers which are not going to materialize when phones are not activated on the partner networks. It is widely acknowledged that almost 25% of the iPhones purchased, end up being unlocked on the other networks. In that case AAPL only earns one time cash payment albeit at a healthy margin. But absent major announcements from more carriers in Russia, Brazil and China, the iPhone current partners alone can't quite deliver the growth in earnings high enough to justify the still hefty multiple and still high growth expectations...
Here is another concern for shareholders- while AAPL is arguably more innovative than Microsoft it is certainly behaves as a less mature company, and I don't quite mean that in a "good" way. I personally still can not quite comprehend why would a company with $18B (15% of the market cap) in cash on the balance sheet does not deploy it in a productive way. Steve Jobs needs to swallow his pride and do the right thing- buy back stock, pay a dividend or at the least make a smart acquisition... Hint, investing in clean energy at stupid multiples like Google is not a smart way to achieve dominance in the consumer device space, but may be buying something reasonably priced like GRMN or TIVO might just do the trick..
To sum it up, absent good news on the economic front and smart capital allocation announcements AAPL is at best a good "hold" here.
P.S. Here is a re priced high level "Vad's sum of the parts valuation" for AAPL:
"PC Unit- value no more than DELL= $45B; iPod/iTouch with iTunes- value no more than the entire Sony Corp=$47B; iPhone value no more than a 1/3 of RIMM based on the number of subscribers of 3M vs 11M growing at roughly the same unit value or roughly=$16B. So even this very rough but generous new total target price comes out to roughly $108B which is now a roughly 5-7% discount to today's price.
Stay safe and cheers,
Vad www.skepticalcapitalist.com
former "Dishwasher"
Helicopter Ben...
"Most of us can read the writing on the wall; we just assume it's addressed to someone else"
Ivern Ball
It has been a only few days since the event that might go down in history as a day "when Federal Reserve has finally acknowledged the existence of the former "Greenspan or now Bernanke put". By cutting rates by 75BP Fed has in effect told the investing world- "we will do whatever it takes to prevent a severe decline in the financial markets..." Whether it was a wise move is still open for debate, but one thing is clear to me personally- nominal stock price levels will be defended at all costs even if it requires "inflating" away the "real" savings.
I guess I was right to predict last Monday night, that the group of Fed governors was quite "weak in the knees" and thus was very likely to intervene with some kind of remedy to prevent another decline in the stock indices. And sure enough just 12 hours after my post, they cut rates abruptly :) While one might say it was a lucky coincidence, I think it wasn't at all surprising. What's more, this move was very typical of what we came to expect from the US Fed over the last twenty years- in the battle of fear and greed- Fed will always err on the side of greed, because battling fear is easy and makes them look smart in the short term, while battling greed is something "that Federal Reserve can not control" and is almost certain to cause some serious political pressures...
I remember how the surprise rate from Bernanke in August has for a short while forced me to question my understanding and logic of how the financial markets function in general and what role should Fed's play in the economy...
But after reading Greenspan's book my original views of benefits of less frequent interventions from the Fed have been reinforced and now more than ever I believe that US Fed has a lot to learn from ECB's Trichet... As far as Greenspans's legacy goes, even today I still have a lot of respect for him personally as well as for his deep understanding of the world economy. It is also true, that his ultra low, arguably unreasonably so, interest rate levels helped to trigger the real estate bubble... But it will be Bernanke's hasty rate cuts that are likely to determine whether US will go through a short term, mild recession or rather something more significant, something we have not seen since early 80s- a period of potentially anemic growth and stubbornly high inflation...
It is popular to say now that if Greenspan was at the helm of Federal Reserve today he would have dealt with it similarly to how Bernanke is responding. But I am not so sure -if you read his book carefully, he states clearly that situation surrounding us today is quite different from anything he had to ever deal with. The disinflationary influence of Chinese, Indian and former Soviet labor force entering the world economy has now diminished.
What's more, with the continued rapid wage inflation in these countries and rapid appreciation of "real asset" prices, these economies are now likely to cause just the opposite effect- more inflation. As Milton Friedman famously said-"Inflation always and everywhere is purely a monetary phenomenon"... Thus while it is quite simple to blame high food and oil prices for the latest inflation spike, it is simply a side effect of excess liquidity. And thus injecting more money into the economy in the face of the highest inflation level in 17 years is almost a "guaranteed" recipe for another bubble somewhere and in something...
Hence there lies an underlying opportunity. Where will this excess liquidity show up? I am going to watch the developments closely and will deliver my thoughts as they come in... :) For now,
