Comments on: Why Apple’s cheap http://blogs.reuters.com/felix-salmon/2011/12/05/why-apples-cheap/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: DrFuManchu http://blogs.reuters.com/felix-salmon/2011/12/05/why-apples-cheap/comment-page-1/#comment-33836 Thu, 08 Dec 2011 08:21:50 +0000 http://blogs.reuters.com/felix-salmon/?p=11377#comment-33836 * an analysis. Please add an edit feature.

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By: DrFuManchu http://blogs.reuters.com/felix-salmon/2011/12/05/why-apples-cheap/comment-page-1/#comment-33835 Thu, 08 Dec 2011 08:21:20 +0000 http://blogs.reuters.com/felix-salmon/?p=11377#comment-33835 “The iPod changed the way the world listened to music, it helped to revolutionize the music industry”

No, that would have been the many other MP3 players that existed before the ipod.

I find it odd that at no point do you mention Steve Jobs. Jobs was a maniac for quality and design, and apparently the only person in the computing and consumer devices industry who thought that industrial design should lead product development. He was well known to be dying for years. And yet, you don’t think that plays into expectations of performance at Apple? Maybe you could write us analysis of Berkshire Hathaway without mentioning that guy that people always talk about as if he runs it.

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By: SamPenrose http://blogs.reuters.com/felix-salmon/2011/12/05/why-apples-cheap/comment-page-1/#comment-33787 Tue, 06 Dec 2011 17:10:58 +0000 http://blogs.reuters.com/felix-salmon/?p=11377#comment-33787 @CDN_Rebel: you’re right, terrible guesstimates on my part. Reading Horace at www.asymco.com should however make clear that iPhone has a TON of headroom.

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By: winstongator http://blogs.reuters.com/felix-salmon/2011/12/05/why-apples-cheap/comment-page-1/#comment-33782 Tue, 06 Dec 2011 14:55:50 +0000 http://blogs.reuters.com/felix-salmon/?p=11377#comment-33782 Where you could see a huge increase in value is in software. The Mac OS is far superior to any MSFT product. MSFT makes in the neighborhood of $10B of profit off OS sales. There is also lots of growth available for their Mac hardware business. Price differences have slimmed and the barrier to entry of learning a new OS is virtually zero.

Plus how many more middle class consumers will there be in 10 or 20 years? 300M in China, maybe 100M in India, lots in Brazil & other Latin American countries.
http://www.brookings.edu/~/media/Files/r c/papers/2010/03_china_middle_class_khar as/03_china_middle_class_kharas.pdf

Say the number of consumers for Apples products doubles. Will their overall profit double? Gross margin is a poor indicator because their margins are so high. Fixed costs (R&D) are significant, so growth in sales make up a quicker growth in profits. Apple’s products are not as resource intensive as some others will be from that increased size of the world middle class.

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By: TinyTim1 http://blogs.reuters.com/felix-salmon/2011/12/05/why-apples-cheap/comment-page-1/#comment-33780 Tue, 06 Dec 2011 13:46:23 +0000 http://blogs.reuters.com/felix-salmon/?p=11377#comment-33780 Felix, what you are omitting is the fact that while PEs might compress for a time, they will eventually find a floor.
Once you have a stable multiple, earnings just need to grow for the stock to rise.
No new iPod, no mythical new product.
As a rule of thumb I would happily pay 10x for stable low growth megacaps.
EPS expected for Sep-13 year is $39. A better metric – cashflow per share is $45.
However the cash on the balance sheet isn’t worth NOTHING.
Take it at 50c on the dollar.
There is $88 per share today and in say 2 years that will be around $160.
So price in two years: 10x $45 + $160*0.5 = $530 or 35% upside. Not a terrible IRR.

The key (obviously) is the word “stable”
I would claim that stable is a WORST case.
I mean 50m iPhones in the last 12 months?
That’s 5% share of the 1bn unit market.
Why? BECAUSE iPhones aren’t available on every network!
Because the low end iPhone (nano?) hasn’t launched yet.

Your analogy with the iPod was weak because you think that for some reason the market size of music players is somehow comparable to the market for cell-phones or PCs…
Bizarre.

The correct analogy would be to suggest that AAPL takes 80% global share of one or two more consumer electronics categories as it did with digital music players.
80% share of cell-phones?? You would be looking VERY much higher than a $530 stock price.
80% share of PCs/laptops/tablets? Likewise.

Oh and “one more thing” – 80% share of TVs?
Done and done.

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By: CDN_Rebel http://blogs.reuters.com/felix-salmon/2011/12/05/why-apples-cheap/comment-page-1/#comment-33777 Tue, 06 Dec 2011 12:55:59 +0000 http://blogs.reuters.com/felix-salmon/?p=11377#comment-33777 @SamPenrose There are now 7B people in the world, let’s say half are adults as per your assumption. So 1 in 1000 from 3.5B is 3.5m… Apple sold over 50m iPhones in the last four quarters, and over 200m since the first iPhone came out. If we say half of those 200m sales are repeat customers (ie people that upgraded once, say from iPhone2 to iPhone 4) than that’s 100m adults served, from 3.5B, or 1 in 35. SOOOO according to your logic Apple is already AHEAD of where they should rightfully be, at about 1 in 50. Sell now while you can!!!

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By: FifthDecade http://blogs.reuters.com/felix-salmon/2011/12/05/why-apples-cheap/comment-page-1/#comment-33768 Tue, 06 Dec 2011 05:13:07 +0000 http://blogs.reuters.com/felix-salmon/?p=11377#comment-33768 Apple has lots of room for growth – and is growing – in all its sectors. The problem for the markets is that their yardstick is often a PC maker, or a software company, or a digital devices company – there really are no other companies doing what Apple does across all of these markets. In the lack of any similar companies, valuations are lower than they might otherwise be along the lines of, “If we don’t understand it or have something to measure it against, mark its value down”.

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By: KenG_CA http://blogs.reuters.com/felix-salmon/2011/12/05/why-apples-cheap/comment-page-1/#comment-33763 Mon, 05 Dec 2011 23:20:39 +0000 http://blogs.reuters.com/felix-salmon/?p=11377#comment-33763 Felix, don’t confuse gross margin with profit. Apple may well have 45% gross margins on the ipod and iphone, but their operating costs, R&D, marketing, etc., have to be paid out of that margin, so their net profit on the ipod is much less than you suggest.

That being said, your valuation model may very well be a good one, but unfortunately, it is only one of maybe millions of models that people use for valuing stocks like Apple. So it’s worthless to someone who is considering buying or selling Apple stock, because the only thing that matters is what other people will value it at, and most of them don’t use your model. As evidenced by your last post on Apple’ market value, they have many different ways of deciding on what it is worth, so the only real way to decide if it is a buy is to know how people will respond to what you expect their sales will be. Even if you knew they were going to have $150 Billion in revenue and $40B in profit, you still couldn’t say with any accuracy what their share price will be, unless you have a view into the minds (I use that word loosely) of millions of traders.

But I’d rather read about you speculating on Apple than art frauds, so don’t stop writing about it.

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By: Accprof http://blogs.reuters.com/felix-salmon/2011/12/05/why-apples-cheap/comment-page-1/#comment-33762 Mon, 05 Dec 2011 23:12:05 +0000 http://blogs.reuters.com/felix-salmon/?p=11377#comment-33762 Interesting analysis, but I think the point could have been made more simply by noting the market is skeptical that there is much earnings growth to be added given the current level of profits and competitive environment.

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By: SamPenrose http://blogs.reuters.com/felix-salmon/2011/12/05/why-apples-cheap/comment-page-1/#comment-33761 Mon, 05 Dec 2011 23:09:13 +0000 http://blogs.reuters.com/felix-salmon/?p=11377#comment-33761 “On average, megacaps (the S&P 100) trade on a p/e of 18.6; right now, they’re at 12.1. I’m not going to hazard a guess as to why that should be the case”

Translation: “I have identified the key issue — quick, let’s change the subject!”

FWIW, I agree that you have identified the key issue: once a company has grown to a large market cap, the market will penalize it on a per-share basis. Your decision to assume that the market understands something about big companies (&/or Apple in particular) and try to figure out what is wrong with big companies seems to me to be a large logical leap. Shouldn’t you first ask why the market resists letting capitalization grow beyond a certain point without jumping to the conclusion that it must be based on canny judgement?

WRT Apple not having anywhere to go: the world market for cell phones is about 1 per adult. Apple currently sells one per 1,000 adults, give or take. As Horace notes, they sell them profitably as fast as they can make them. There is every reason to expect continued explosive growth until they reach, say 1 per 50 adults.

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