The iPhone at three

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    Posted: 14 June 2010 04:36 PM

    The end of June will mark the third anniversary of the market release of the iPhone. When it arrived in June 2007, anticipation for the product was significant with high consumer awareness and expectations?though the 10 million/yr. target for 2008 was met with skepticism by many.

    The iPhone launched on June 29th 2007, with only a few days remaining in the quarter. 270k units were sold in that quarter and that was considered a solid start. When the company reported earnings a few weeks later (July 18th 2007) the company?s stock price jumped to $140 a share.

    As a sign of optimism in the company?s prospects, the P/E ratio showed that the company was expected to reach 35% growth (35 P/E).

    Was this optimism warranted?

    A huge world-wide recession started only six months after the iPhone launched and, by some accounts, it is still lingering today. That meant the company faced decreasing consumer spending and constrained markets world-wide. The recession was expected to challenge Apple?s premium positioning across all its product lines. The optimism from 2007 seemed exuberant. Where do we stand today?

    The table here:
    http://www.asymco.com/2010/06/14/the-iphone-at-three/

    shows the actual values of the iPhone?s 2007 launch quarter vs. the estimated values for Apple?s income statement exactly three years later.

    Free cash flow grew 237% or at a compounded 50%, significantly above the 35% that the P/E of 2007 would have suggested. The exuberance of 2007 turned out to be pessimism.

    Although we don?t know what the share price will be come July, as of today the share price has grown at less than half the rate of FCF growth: 84% or 23% compounded. As a result the P/E dropped from 35 to 22.

    It?s remarkable that growth expectations today are lower than they were at iPhone?s birth even though the company outperformed those expectations through an unforeseen economic crisis.

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    Posted: 14 June 2010 04:50 PM #1

    This question has been bugging me for a while.  It’s the Apple vs AAPL question.  Apple, the company, is exceeding all expectations and any financial measure of any of it’s competitors.  Yet AAPL, the stock, has fallen far behind these numbers.  The company has made record numbers commonplace, in spite of the supposed worst depression since the 1920’s.  Imagine what their numbers would have been if the market/economy was in an average growth phase, or even a high growth phase. 

    But the stock hasn’t followed along.  I just don’t believe that Greece/Turkey/Spain/Euro issues could beat it up this bad.  I can’t believe it’s just because it’s a (very) large market cap company.  I could see that it might be that Wall Street just doesn’t like the fanboys, or the non-professional analysts that make them look utterly foolish.  I could see that they just don’t like the company because Apple has no use for Wall Street and their financing- they have no debt and $25 Billion in the bank.

    But fundamentally, I just can’t wrap my head around why AAPL the stock has not followed the numbers posted by Apple the company.  Some may call it a good opportunity given a decent time length. But it still bothers me that there’s such a disconnect, and worries me about what that means for the stock price in the future. 

    I’d love to hear from someone who has better insight into this disconnect than I do.

         
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    Posted: 14 June 2010 05:29 PM #2

    One explanation is S&P 500. Another is supply and demand.  If the price was at what everyone perceived its value to be they would sell. There are so many reasons why it is not higher, if you want it to go up, just buy more shares.

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    Posted: 14 June 2010 05:59 PM #3

    mbeauch - 14 June 2010 08:29 PM

    One explanation is S&P 500. Another is supply and demand.  If the price was at what everyone perceived its value to be they would sell. There are so many reasons why it is not higher, if you want it to go up, just buy more shares.

    I’m not sure you’re understanding my question.  Yes, it is all about supply & demand.

    *Why* is there a (relatively) low demand for the stock, given the extraordinarily high numbers the company keeps posting?
    Why is the institutional ownership level, according to Google, at 68%?  During my watching of the stock, this is about at the lowest end of the 68-73% range that I’ve seen.  Especially given the new iPad and iPhone hitting earnings in about a month.  And given some of the rumor sites, new Macs as well.

    But I’m not sure what the S&P 500 has to do with it.  Stocks drive the indexes, not the other way around.

         
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    Posted: 14 June 2010 07:12 PM #4

    NatasRevol - 14 June 2010 08:59 PM

    ... Stocks drive the indexes, not the other way around.

    Not anymore.  Many folks trade derivatives for S&P 500 such as SPY, SH, UPRO, SPXU, ES/mini, etc.

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    Posted: 14 June 2010 09:20 PM #5

    Stock per share is too high now for the “punters” { the users } to meaningfully buy a few hundred shares because they LIKE THE PRODUCTS.

    Split the stock 5 for 1, for the psychological impact, and let the punters in on the game.

    It did WONDERS for Berkshire Hathaway B, when they spit and the shares saw an almost immediate rise of 15%+ just on the increased availability of ownership for those formerly price out of the game.

    I KNOW this is mathematically meaningless, but psychologically it is a great way to reshuffle the moribund mental lock that hobbles the stock now.

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    Posted: 14 June 2010 09:41 PM #6

    TanToday - 15 June 2010 12:20 AM

    Split the stock 5 for 1, for the psychological impact, and let the punters in on the game.

    Steve doesn’t want this to happen, because he knows Wall Street will reap more rewards than us little guys.  And he doesn’t need Wall Street.

         
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    Posted: 14 June 2010 11:03 PM #7

    NatasRevol - 14 June 2010 07:50 PM

    This question has been bugging me for a while.  It’s the Apple vs AAPL question.  Apple, the company, is exceeding all expectations and any financial measure of any of it’s competitors.  Yet AAPL, the stock, has fallen far behind these numbers.  The company has made record numbers commonplace, in spite of the supposed worst depression since the 1920’s.  Imagine what their numbers would have been if the market/economy was in an average growth phase, or even a high growth phase. 

    But the stock hasn’t followed along.  I just don’t believe that Greece/Turkey/Spain/Euro issues could beat it up this bad.  I can’t believe it’s just because it’s a (very) large market cap company.  I could see that it might be that Wall Street just doesn’t like the fanboys, or the non-professional analysts that make them look utterly foolish.  I could see that they just don’t like the company because Apple has no use for Wall Street and their financing- they have no debt and $25 Billion in the bank.

    But fundamentally, I just can’t wrap my head around why AAPL the stock has not followed the numbers posted by Apple the company.  Some may call it a good opportunity given a decent time length. But it still bothers me that there’s such a disconnect, and worries me about what that means for the stock price in the future. 

    I’d love to hear from someone who has better insight into this disconnect than I do.

    1. I used to live in Chicago. After I left friends would rave about Michael Jordan and how he was the greatest player ever. I said wait and see if he wins some championships first. They said you don’t get it, he will. It took 7 years before he won his first championship. But they would see him play on a regular basis, and they could see not just a great player but winner who would not be denied.

    I think the people on the AFB see the same thing in Apple. That’s where the energy on the board comes from. If you’re not following Apple closely you see nifty products and great YOY profit increases. We see the subtlety, the determination, the attention to detail, the Relentless Focus. We look for mistakes and rarely find them. If you’re not paying close attention you don’t see it.

    2. Apple has had a long exponential growth curve. After the dotcom and housing busts people have learned that exponential growth curves usually end badly. Sometimes they don’t, but to feel confident that it won’t happen soon you should probably be paying close attention to details. That goes back to point 1,A value stock to people who have been burned is either
    a. an oxymoron or
    b. A company with great strength, many years of continued growth and a low PE. Think Johnson and Johnson or Ford.

    3. Apple is the 2nd largest market cap stock. Stocks this large generally don’t keep growing 40% a year. Apple doesn’t seem as big as Exxon or Walmart. It’s not as ever-present in our lives. It sells 10% of computers, maybe 5% of phones and 17% of smart phones. Its sales and profits are lower than similar large cap stocks. It doesn’t seem that big.

    We at AFB see Apple thru a different lens than others do. Time will tell who’s living in the reality distortion field.

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    Posted: 14 June 2010 11:58 PM #8

    NatasRevol - 14 June 2010 08:59 PM

    But I’m not sure what the S&P 500 has to do with it.  Stocks drive the indexes, not the other way around.

    The reason the S&P matters is that APPL is part of it and all these MM’s have to buy/sell AAPL accordingly. You are right about the institutional investors owning less, think about it, the market has moved lower and they have been selling AAPL to keep their balance. With the 5% drop in ownership you are talking about 45 million shares bringing down the share price, almost acting like a dilution. It is like when the FED sold 1.5 bil shares of C, same thing. When you see the institutional ownership start moving up I will give you a hint as to what will happen to the price of AAPL, Vegas baby. :-D

    Sorry for being vague about the S&P.

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  • Posted: 15 June 2010 02:15 AM #9

    Horace, this is one of several recent good posts.  It deserves a more thoughtful response than I’ve time for tonight.

    You imply that a PEG of 1.0 is what underlies the 35PE predicting the 35% growth.  There is merit to the PEG 1.0 idea, but when stretched beyond the PE range of 8 to 20 or so, the correlation value fades somewhat.  But I quibble.  Your overall thesis is sound.

    The answer to the question of why the PE has faded in the face of performance that exceeded the implied expectations may lie in two macro factors.  It is truly a different world than in 2007.  The upheaval in the financial markets has caused huge damage, and the trouble is far from over.  AAPL has more than tripled since the lows while the S&P has yet to double.  But some institutional money that might go into AAPL and other equities has gone to cash for de-leveraging other places.  Capital flows are unfavorable, too.  Money has been leaving western economies for other homes.  The U.S. has become increasingly unfriendly to capital at a time when Asia is becoming increasing friendly.  Another capital flow was caused by the Fed induced bubble which increased by more than $500B the amount spent buying mideast oil in ‘08 compared to ‘07.  Little of that will end up in U.S. equities.

    Then of course there is the idea among the Wall Street geniuses that companies as big as Apple cannot keep growing.  They look at Microsoft and General Electric as a recent examples.

    There are not many money managers who understand Apple or its markets as much as some of the amateurs who hang out here.  This is an opportunity for long term investors.  Those of us who are confident of Apple’s longer term prospects should be happy that we have an opportunity to buy shares at a discount.  In fact we should be even happier if it goes lower still.  (This sentiment presumes that one’s overall situation allows one to take on the risk of owning more of a single company’s stock, rather than diversifying with index funds or paying off the mortgage.)

    Of course, all bets are off if the political situation is not soon righted.  War in the middle east threatens, perhaps within 6-8 months.  Possible hyperinflation and Eurozone collapse also cause me to lose sleep.

    Apple is a great company is a world that is currently less than great.

         
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    Posted: 15 June 2010 02:37 AM #10

    capablanca - 15 June 2010 05:15 AM

    Horace, this is one of several recent good posts.  It deserves a more thoughtful response than I’ve time for tonight.

    You imply that a PEG of 1.0 is what underlies the 35PE predicting the 35% growth.  There is merit to the PEG 1.0 idea, but when stretched beyond the PE range of 8 to 20 or so, the correlation value fades somewhat.  But I quibble.  Your overall thesis is sound.

    The answer to the question of why the PE has faded in the face of performance that exceeded the implied expectations may lie in two macro factors.  It is truly a different world than in 2007.  The upheaval in the financial markets has caused huge damage, and the trouble is far from over.  AAPL has more than tripled since the lows while the S&P has yet to double.  But some institutional money that might go into AAPL and other equities has gone to cash for de-leveraging other places.  Capital flows are unfavorable, too.  Money has been leaving western economies for other homes.  The U.S. has become increasingly unfriendly to capital at a time when Asia is becoming increasing friendly.  Another capital flow was caused by the Fed induced bubble which increased by more than $500B the amount spent buying mideast oil in ‘08 compared to ‘07.  Little of that will end up in U.S. equities.

    Then of course there is the idea among the Wall Street geniuses that companies as big as Apple cannot keep growing.  They look at Microsoft and General Electric as a recent examples.

    There are not many money managers who understand Apple or its markets as much as some of the amateurs who hang out here.  This is an opportunity for long term investors.  Those of us who are confident of Apple’s longer term prospects should be happy that we have an opportunity to buy shares at a discount.  In fact we should be even happier if it goes lower still.  (This sentiment presumes that one’s overall situation allows one to take on the risk of owning more of a single company’s stock, rather than diversifying with index funds or paying off the mortgage.)

    Of course, all bets are off if the political situation is not soon righted.  War in the middle east threatens, perhaps within 6-8 months.  Possible hyperinflation and Eurozone collapse also cause me to lose sleep.

    Apple is a great company is a world that is currently less than great.

    Great observations.

    One more point is that WS does not like uncertainty.  Apple has over $30 billion in cash with no hint of what they will do with it.  Will they squander it on some risky venture or will they give it back to investors via dividend?  I am not sure Apple knows either.

    In regards to the iPHone, it is doing great three years later.  We all talked about selling 40 million in the third year and we are close to that now.

    I think the iPhone in 4 years will blow us away the same way the iPod touch is a far cry from the original iPad.

         
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    Posted: 15 June 2010 02:47 AM #11

    capablanca - 15 June 2010 05:15 AM

    ... But some institutional money that might go into AAPL and other equities has gone to cash for de-leveraging other places.  Capital flows are unfavorable, too.  Money has been leaving western economies for other homes ... Possible hyperinflation ... cause me to lose sleep ...

    How is hyperinflation possible when money supply is contracting?  De-leveraging leads to contraction of money supply, right?

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  • Posted: 16 June 2010 02:25 AM #12

    Mace - 15 June 2010 05:47 AM
    capablanca - 15 June 2010 05:15 AM

    ... But some institutional money that might go into AAPL and other equities has gone to cash for de-leveraging other places.  Capital flows are unfavorable, too.  Money has been leaving western economies for other homes ... Possible hyperinflation ... cause me to lose sleep ...

    How is hyperinflation possible when money supply is contracting?  De-leveraging leads to contraction of money supply, right?

    The money supply to which you refer is “contracting” because the velocity of money has plummeted.  But the monetary base in not contracting; it is exploding upward.  Ask yourself this question:  With the money supply contracting, why are prices not falling?  And don’t tell me home prices are falling; that is just a bubble that is correcting.  Virtually everything is going up.  And some things like health care, education, food, and energy are going up fast.

    But however you view the present, whether you believe your own eyes or the government numbers, look into the future.  How will the U.S deal with its rapidly increasing obligation to its creditors?  1) borrow increasing amounts from Peter to pay Paul, 2) increase tax revenues faster than spending, 3) default, or 4) pay future interest and principle with deflated dollars?  Reasonable people can disagree, but I am betting on number four.  (Option number one might look appealing, but Peter will tire of this game at some point.)

    It is my belief that the Fed/Treasury/MOTU will attempt to engineer inflation of 6% for the foreseeable future.  At that rate the dollar will lose half its value every twelve years.  Now maybe some people don’t call that hyperinflation, but who out there believes these fools can manage to control events with precision?  And even at 6% inflation, one has to make 9%-10% return on investment pre-tax just to avoid losing money.

    I am very worried.

         
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    Posted: 18 June 2010 05:51 PM #13

    capablanca - 15 June 2010 05:15 AM

    Horace, this is one of several recent good posts.  It deserves a more thoughtful response than I’ve time for tonight.

    AAPL has more than tripled since the lows while the S&P has yet to double.  But some institutional money that might go into AAPL and other equities has gone to cash for de-leveraging other places.

    I completely understand the macro situation, however macro issues affect all equities equally (and, I might add, all markets globally as well).

    My observation about Apple’s P/E is made relative to what is “normalized”.  In February I noted that Apple’s valuation as measured by EV/FCF was lower than the S&P 500.  Why is Apple’s valuation lower than the average largest 500 companies?  I don’t have earnings growth data from S&P500;, but I assume that they are not growing faster than Apple’s.

    http://www.asymco.com/2010/02/15/apples-valuation-dredging-bottom/

    If I may paraphrase your conclusion: Apple may be a great company in a lousy environment, but Apple is valued much worse than the environment itself, making its greatness all the less relevant.

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    Posted: 18 June 2010 06:13 PM #14

    asymco - 18 June 2010 08:51 PM

    ... In February I noted that Apple’s valuation as measured by EV/FCF was lower than the S&P 500.  Why is Apple’s valuation lower than the average largest 500 companies?

    Does this conclusion still stand?

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    Posted: 18 June 2010 06:26 PM #15

    capablanca - 16 June 2010 05:25 AM

    ... It is my belief that the Fed/Treasury/MOTU will attempt to engineer inflation of 6% for the foreseeable future.  At that rate the dollar will lose half its value every twelve years.  Now maybe some people don’t call that hyperinflation, but who out there believes these fools can manage to control events with precision?  And even at 6% inflation, one has to make 9%-10% return on investment pre-tax just to avoid losing money.

    I am very worried.

    Sound like you’re expecting a stagflation.  Are you implying stock market would be in dormant because of stagflation?

    What are you planning to do beside worrying?  How about buying some TIPS?

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