iBuyer, if any of us believed Street “estimates,” none of us would be in the stock
The point is this. Growth has been way underestimated, which means it is hard for the multiple to contract any further strictly due to “worries on the Street” because estimates are going to have to rise, not fall, as the next few years unfold. Kicking and/or screaming, the stock is going to have to rise with them unless growth slows dramatically. The only reason for the multiple to contract would be rising earnings without a corresponding rising stock price. No stock on the planet can be pinned down in the face of 40%+ YoY earnings growth, so US recession or no recession, AAPL is bullet-proof in my opinion unless it makes a terrible strategic error or several of its product lines experience a collapse in unit sales growth simultaneously.
Only a sharp global recession will kill AAPL. And frankly, all stocks will get killed in such an outcome, so the question isn’t so much whether to risk-manage your AAPL position as your entire portfolio, IMO.
AAPL trades with a forward PE of around 25.. or more like 21 if you back out the $16B in cash. For a company growing earnings at 40-60% YoY, that’s about as massive a disconnect as you are ever going to see in the stock market. The stock price is baking in 18-20% growth (courtesy of Wall Street’s finest being unable to add up), not 40-50% for FY08/09, so the multiple has already contracted massively relative to its growth, you see. There’s hardly any room left for any further contraction unless the entire market collapses and drags everything down with it, in which case, as I pointed out, we’re all screwed no matter what we’re invested in anyway.
Here is an initial stab at summarizing the primary risks that AAPL *might*, in theory, confront in coming months / years:
Risk: Economic recession, lower P/E, reduced discretionary spending Potential negative: AAPL shares pulled down with other stocks, fewer people buying Apple products Counter: Growth is the crack of Wall Street and may be rewarded in any market (Gartman said on Wed Fast Money he’s buying tech—specifically AAPL and MSFT right now, Cramer says pay up to double the growth rate on a forward PE for great stocks with good prospects), betting against the consumer is a risky play itself
Risk: iPhone revenue sharing model breaks Potential negative: Restructured earnings projections Counter: Higher prices for non-contract, non-locked iPhones offset losses, rev sharing isn’t yet fully factored into share price at this time anyway
Risk: Future/increased iPod competition Potential negative: Dwindling market share Counter: An old and ongoing fear that has yet to bear fruit, Apple innovation has continued to strengthen the product line and further differentiate it from competitors
Risk: Lack of 3rd party developers for iPhone hamper appeal Potential negative: Growth limited by competing open platforms Counter: Third-party SDK coming in early 2008, web apps may catch on
Risk: Mac unit sales growth could top out Potential negative: Moderating market share growth may signal a top Counter: Available evidence is quite to the contrary
Risk: EU and international store openings too slow Potential negative: Competitors may thrive before Apple gets foothold Counter: More about missed opportunity than short-term risk, stores are indeed opening worldwide at a manageable pace (quality v. quantity)
Risk: Studios, content developers hold back from iTunes Potential negative: Less content = less utility for AppleTV, iPod and iPhone, competing services/models gain momentum in the meantime Counter: Content is not the only consumer consideration, UI, content delivery, hardware integration and existing installed base are key drivers, too
Risk: Steve Jobs may not always lead the company Potential negative: Loss of iconic figure, key leadership, perceived crisis Counter: Apple is developing/grooming future leaders, corp culture of innovation is bigger than one person and this strength will power future Apple products, Jobs is in the defining moment of his career (again) and isn’t going anywhere anytime soon
Risk: Corporate hubris Potential negative: Overlook competitors, consumer desires Counter: Company has evolved, Jobs learned lessons last time around and is unlikely to repeat them, current evidence about customer satisfaction, buzz, demand all indicate Apple continues to foster interest and loyalty
Risk: Apple doesn’t play well with others (partnerships) Potential negative: Isolation, viewed as niche player Counter: AT&T, O2, T Mobile, Orange, Starbucks, Best Buy, etc., once again—Jobs learned this lesson the first time around
Risk: Souring U.S. - China relations Potential negative: Huge potential market closed, production difficulties, etc. Counter: Too much interdependence to allow for such a breakdown between the two countries, even if possible it’s surely not imminent
Risk: International/Asian disrespect for IP, patents, trademarks Potential negative: Innovation unprotected from global copycats Counter: True innovators always a step ahead, Redmond’s photocopiers produced enhancements but still led to Vista
There are some key exceptions (economy, China, legal issues), but most risks identified thus far are largely dependent upon Apple and its execution—which has been quite improved in recent years. That gives me comfort concerning many of these potential pitfalls.
Good stuff. What else?
Note: Edited first Risk comments above concerning what Dennis Gartman said he is buying right now after re-watching Tivo’d Fast Money from Wed
[quote author=“Tommo_UK”]iBuyer, if any of us believed Street “estimates,” none of us would be in the stock
It’s become one of the primary reasons for the AFB - debunking FUD, misinformation and bringing clarity and insight to investors. Street estimates have their own lingo, culture and methods. Here we get the straight analysis so we can position ahead of the Street.
Excellent discussion! I wish I had something to add other than to acknowledge the need to keep up the objective analysis.
These kind of discourses is what sets AFB apart IMO. Way too many stock boards out there full of Uber-pumping-bulls who never attempt to objectively asses the downside risks and Uber-bashing-bears who bash- bash - bash without any acknowledgment of the upside.
Balance indeed! It is in every AAPL investor or trader’s interest not to be blindsided by unexpected events. Keep it up!
[list]
Risk: iPhone revenue sharing model breaks
Risk: Future/increased iPod competition
Risk: Lack of 3rd party developers for iPhone hamper appeal
Risk: Mac unit sales growth could top out
Risk: EU and international store openings too slow
Risk: Studios, content developers hold back from iTunes
Risk: Steve Jobs may not always lead the company
Risk: Corporate hubris
Risk: Apple doesn’t play well with others (partnerships)
Risk: Souring U.S. - China relations
Risk: International/Asian disrespect for IP, patents, trademarks [/list:u]
Yes I know, I know! But when I bought myself into the AAPL I knew these risks would apply to any company. Rule no. 1) I bought AAPL, and I am still buying, because I know the Apple Inc. because I have been drinking the Apple juice for many many years and been watching the company closely for many years - i.e. I bought AAPL because I know Apple as a company, and it’s products. This is the reason, and there can be no other reason for buying any stock on any exchange.
I know Apple has few simple products. This is important. Apple is a company of simple products. They have few (not many) very very simple products. When I say “simple products” I am talking the consumerish language - consumers wont suffer under the “ The Tyranny Of Too Much ” when shopping Apple products. I know these simple products, and I know them very well, but, believe me- these products just works. The fifth Apple you buy as consumer will taste even better than the first Apple you buy. This applies for very very few companies in this sector. This is why the Apple brand name is becoming the World’s most valuable brand name. This is really really hard to duplicate.
The Apple business model is so so simple. They just make great products -> i.e. Apple is a product company. They don’t make anything else but great products. Period. They don’t make alliances or great partnerships and they certainly don’t do acquisitions. They just make great products.
This is the reason I buy AAPL. I would, as an investor, be happy owning AAPL even if the Nasdaq closed down for the next 5 years. I would be absolutely certain that the company would be doing well during all those 5 years. You simply cant shoot Apple down. It’s not doable anymore. Apple is beyond shooting range. It cant be done.
The list of Risks above is mostly about things that are not knowable. The list really applies to all companies on any stock exchange in the world. As an investor these things are totally irrelevant because they don’t matter as they are not knowable. The alternative is keeping the money locked inside a Bank - or buy a slice of everything and achieve close to nothing.
As I said, I mostly buy common shares cash. I am mostly in this for the longer run. But this TMO AFB is teaching me something new every day, so I might take this profitable hobby of mine a bit further. Thanks to all members of this great board for all your great input. Including this thread.
One should really really know why you are buying a share of company X and not in company Y. That’s all that matters. The rest is not knowable, and yes, there will always be bumps on the road. Don’t buy a stock unless you know why you are buying it.
[quote author=“xumbra”]The Apple business model is so so simple. They just make great products -> i.e. Apple is a product company. They don’t make anything else but great products. Period. They don’t make alliances or great partnerships and they certainly don’t do acquisitions. They just make great products.
Apple’s business is building customer relationships. This is what creates “beyond the box” opportunities. The high gross margins are due to yield per customer, not just products sold. The “beyond the box” sales include products such as AppleCare, .Mac, iLife, iWork, etc. and builds on multiple product sales to the same consumer and household. The better and stronger the customer relationship the more products that are sold.
Few enterprises seek to master the art of providing customers with products that answer questions before they are asked. Intuitive design and enhanced yet targeted functionality are a result of market research, product research and a commitment to developing customer relationships as a means of developing sales.
One of the reasons Apple is undervalued and few analysts and investors see the intrinsic revenue and profit potential is because attention is paid more to the sale of products than the development of the customer relationship through the development and sale of those products.
Great topic lumi ... it is always great to discuss any potential downside ... especially for those who have recently boarded the AAPL train.
I have been a supporter of the company since the mid 80’s and started investing in AAPL in 2004 ... the hook for me was once I bought an iPod (3rd gen) ... I thought it was the most amazing device ever created.
I think the biggest positive I have noticed in the past few years is simply the change in sentiment towards Apple ... especially in computer sales, it is no longer considered ‘strange’ to purchase a Mac ... quite the contrary.
My faith in the company simply lies in the fact that they seem to be thinking literally years ahead of everyone else.
With regards to risk, I agree with most of the items noted already ... however, I do offer a slightly different perspective ... I think that those who are investing in AAPL (or considering it) are leagues ahead of most of the population ... for 2 reasons:
1) actually having set aside money for investment purposes
2) actively managing your money
I think that many people face a far larger risk than losing money in AAPL (or any other investment) ... simply that they will not have enough set aside for later in life ... or ‘parking’ whatever they do have aside and not giving it the attention it deserves.
I hope I have not gone on too far of a tangent ... just adding some perspective.
[quote author=“Tommo_UK”]No stock on the planet can be pinned down in the face of 40%+ YoY earnings growth, so US recession or no recession, AAPL is bullet-proof in my opinion unless it makes a terrible strategic error or several of its product lines experience a collapse in unit sales growth simultaneously.
I truly hope, for your and my pocketbook, that you are right!
I remain uber-long even acknowledging the potential downside risk. IMO, “the stuff” out of their control worry me more than “the stuff” in their control.
The next data point will be Black Friday and Cyber Monday sales results… Let’s hope the consumer spends.
Hope the author doesn’t mind me posting his post from the cnn_money “article” on this thread. This is simply beautiful !!
(I am deliberately not using the quote tags this time)
—————————quote—————————-
I’m consistently stunned by this column’s ability to appear balanced and earnestly curious about Apple and yet relentlessly inject FUD into the headlines or simi-conclusions always to poison the public’s understanding of Apple. These latest four reasons to doubt Apple (although quoted from elsewhere) show how little poison is left in the bottle. All but one are vague musings and the one real possibility is an equal threat to every tech company. Before we look at them, let’s add the other wild speculation that Apple faces:
A giant asteroid strike or mega-volcano could kill about a billion people, destroy infrastructure, and drop the demand for all Apple products overnight. A real threat, but affects all Apple competitors equally.
Oil could hit $200 and Apple could no longer afford to ship products in from Asian factories. Ditto, above.
MS could successfully lobby the gummint to simply outlaw ownership of iPods and any non-Windows PCs. Unlikely, since conservatives like Rush Limbaugh are long term Mac users and, I gather, Karl Rove likes his iPhone.
So let’s move on to the BIG THREATS in the article:
The primacy of Steve Jobs. An issue, but Apple’s success lies mostly in the existence of a New Buying Paradigm within the 70+ million Millennial consumers. Jobs understands this and Microsoft doesn’t. Apple’s products, policies and appeal fit what buyers want and most other organizations insist on believing they can rely on traditional advertising to deceive the market.
Apple hubris. The traditional marketing gurus continue to hope for this to become an issue, but hope is not a strategy and while Apple can certainly screw up (anyone can) they have a lot of bounce ability. Apple appeal is not so much a trend soon to die out, but a meme with sufficient appeal to reshape values. iPod anyone?
Inability to build lasting partnerships. Sorry, New World Order and New Buying Paradigm are both happening at once. When traditionalists (like MS) praise partnerships they really mean controllable buffer states around the core of their empires kept in line by Imperial shock troops and a good enough share of local taxes to motivate the puppet leaders to keep the peasants in line.
No partnership of the willing buggy whip manufacturers, horse breeders and cart builders could have kept the personal transportation industry alive in the face of the railroads and auto manufactures. The same kind of shift is going on now. Apple just happens to be in front of the wave.
Traditionalist organizations, both Microsoft, music subscription services, etc., have shifted from a western capitalist business model of competitive selling to an “entitlement†model that picks every customer’s pocket every week. Windows is not an innovative platform or a business tool, it is an involuntary tax on the act of being in business. Both temporarily underemployed Millennials and increasingly self-employed boomers now know that you can “just say no†to the MS Tax and still be happy. Doesn’t Apple do this too? Sort of, but Apple offers a voluntary “club membership dues†approach. Consumers want to be where Apple is, and is going. The Vista experience should clearly show that MS doesn’t get this.
China. This is the real credible threat and the author correctly notes it would whack Apple’s competitors and customers as well. However, it seems that even managers who understand the power of the Chinese factories, don’t really understand. In the New World Order, if something can be built at all, it can be built by the millions within a few weeks. MI5 and the CIA could not have built an iPhone for James Bond and Jack Ryan at any price even ten years ago. Yet anyone with $399 + an AT&T plan can buy an iPhone in ten minutes.
Has anyone noticed that MS Windows versions require new hardware to run at all but OS X releases make older hardware run better? If the supply of new systems was interrupted overnight, virtually no one could consider installing Vista on an old machine, but millions of installed Macs could run recent copies of OS X if they wanted to.
What the doom scenarios miss is that while the buggy whip makers are grouching about the mistakes that Apple is sure to make. there are a zillion other product-function spaces that can enjoy the same lift but no one is looking to fill them.
Consider this. Where is the traffic accident likely to happen? Within the mass of cars swerving to get past the car in front of them so they can then cut another driver off to pass someone else, while talking on their cell phones to keep their lasting partnerships with other drivers alive, or the one car that is in the lead and has an unobstructed view of the road ahead.
Clearly the lead car must fail right? Run out of gas, driver has a heart attack, engine explodes… oh yes, the bridge will be out–any hope will do so we can justify claiming that we can catch up.
Posted By Ashley Grayson Los Angeles, CA : November 22, 2007 11:24 am
I’m very bullish on AAPL, but my biggest concern is with potential iPhone competition in 2008.
Apple never had effective competition with the iPod. The mp3 market leaders were smaller companies that could not match neither the advertising nor product refresh capabilities of Apple. By the time large companies like Microsoft entered the fray, the game was over.
With cell phones, Apple is entering a market with very well financed and powerful companies that were caught flat-footed in 2007 but should be able to respond in 2008.
My concern is that this competition will not only impact iPhone sales, but also become the first damaging blow to the iPod/iTunes hegemony. If Nokia or Motorola comes out with a great phone that plays music, it may divert iTunes users to other music services.
Bottom line: Apple had a near monopoly, and they chose to cannibalize it with a product for which they will be in a dogfight to win market share. The upside is huge, but the risk is also great.
[quote author=“DawnTreader”]macorange, welcome to the AFB!
Alexander Graham Bell didn’t seem to have effective competition, unless you count Western Union
“Well financed and powerful” may lack a little intelligence and resourcefulness.
The phrase “asleep at the switch ” comes to mind, as does “fat , dumb , and happy”
These giants of technology have let a second tier computer manufacturer completely disrupt their market. Maybe the time has come for a changing of the guard.
[quote author=“macorange”]I’m very bullish on AAPL, but my biggest concern is with potential iPhone competition in 2008.
Apple never had effective competition with the iPod. The mp3 market leaders were smaller companies that could not match neither the advertising nor product refresh capabilities of Apple. By the time large companies like Microsoft entered the fray, the game was over.
With cell phones, Apple is entering a market with very well financed and powerful companies that were caught flat-footed in 2007 but should be able to respond in 2008.
My concern is that this competition will not only impact iPhone sales, but also become the first damaging blow to the iPod/iTunes hegemony. If Nokia or Motorola comes out with a great phone that plays music, it may divert iTunes users to other music services.
Bottom line: Apple had a near monopoly, and they chose to cannibalize it with a product for which they will be in a dogfight to win market share. The upside is huge, but the risk is also great.
hello mac-O I suspect that Apple has wrapped so much protected IP into the iPhone and has evoled such an amazing ecosystem around the device that it will truely be 5 years ahead of the likes of Nokia etal.
Competition is good and Apple needs stong vibrant innovative competitors if we as consumers are to have the best.
Wouldn’t it be great if Apple was not the superlative bench mark but just a mediocre run of the mill company making your average innovative, high quality, bring joy to yor life products. Instead 99% of what we consume and are presented with to consume is just schlock, boring wasteful mundane crap…
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I suspect that Apple has wrapped so much protected IP into the iPhone and has evoled such an amazing ecosystem around the device that it will truely be 5 years ahead of the likes of Nokia etal. 
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