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Month September 2010

Apple's growth vs. top ten largest tech companies

In the last article I described growth vs. P/E and price change for the largest “ultra-large cap” companies, of which Apple features prominent.

In this article I take the same analysis to the top ten largest technology companies (by market cap, see table at bottom).

In this comparison, Apple no longer has the largest P/E ratio. Qualcomm, Google and Oracle are all at similar levels of valuation relative to earnings, however Apple’s growth outstrips them, only with Google in the same quadrant.

Note the “Wintel” cohort consisting of Intel, Microsoft, HP clustered around the Low growth, low valuation quadrant in the lower left (coincidentally co-located with IBM). Oracle, Qualcomm and Siemens show high valuation with low long-term EPS growth. Cisco is somewhat on the fence.

When comparing how the market has rewarded growth through share price appreciation, the correlation to growth is much better. Google seems under-rewarded.

Data follows:

Apple's growth vs. top 10 largest market caps

Apple’s stock price has been rising. Although it’s still priced at a P/E of 22 while facing near term EPS growth well above 50%, this is belated recognition of the potential of the iPad and the iPhone.

However, as it has grown, Apple’s valuation is now not only higher than any other technology company but it’s nearly the most valuable company on the planet. There is a theory that ultra-large market caps are reserved for companies that are past their prime. Sometimes this is attributed to the law of large numbers: that conclusion that big numbers cannot grow much bigger because compounding growth is exponential whereas markets are limited and become quickly saturated.

The trouble with this theory is that “large” is relative; large is often simply “the largest”. Large market caps are not what they used to be. During past booms, large caps touched a trillion dollars. Today, the largest market cap is merely $314 billion.

So I don’t put much faith in large number “laws”. The real question of under/over-valuation rests on whether the company is growing or not. Valuation is simply the net present value of future free cash flows (plus assets). So the most important determinant of current value is growth in cash flows.

It’s fairly easy to assess this: compare P/E which is a proxy for valuation with EPS growth. The following chart does this for the top ten largest market caps traded on US exchanges (as listed by finance.google.com).

One should see some correlation between the two variables, but given the 5 year time frame, many of these companies showed large volatility. There are outliers like HSBC which has a rapidly rising value even though it was badly affected by the credit crunch.

The other outlier is Apple. The company showed 93 percent EPS growth over a five year period and has a P/E of 22. The company with the next highest total value (Exxon Mobil) had 0.5% growth with a P/E of 12. The company with the next lowest total value (Microsoft) had 13.3 percent growth with a P/E of 12.

For an ultra-large cap, Apple’s growth is unprecedented and extraordinary. It’s in fact off the scale. The average growth of the other 9 top caps is 3.6 percent!

Apple’s growth is a factor of 25x higher. The P/E is only 1.6x higher.

The result has been a much higher appreciation in the stock price as shown in the following chart.

So it’s clear that Apple, in this peer group, is far from ordinary.

Data follows:

Ten Years

TenYears.jpg. credit: http://www.flickr.com/photos/x1brett/

The one on the right also includes a battery and cellular radios. Some still argue that the PC will never be replaced.

Will Nokia build Windows phones?

Will Nokia build Windows phones? | VentureBeat.

The chances are extremely small. There are three scenarios where this would make sense:

  1. If there was a specific market that required it. It would also need to be a large opportunity since developing a new platform and diluting existing platforms need significant upside. The only such market is the US, but there are better options available, namely Android that have better potential and Android is treated as a toxin by Nokia (see metaphor).
  2. Specific users. Windows Mobile used to be justified for business users, but Windows Phone is not targeting business users.
  3. The last option would be “strategic” i.e. Microsoft paying Nokia for using the OS (directly or indirectly through marketing co-spend or other symbolisms). I don’t think Nokia is desperate enough yet.

Although it’s never prudent to say never, I just don’t see any logic for Nokia to add to its bill of materials for phones while facing price pressure.

Hewlett-Packard is bundling a tablet with a $399 printer

The bottom line: HP’s decision to bundle a tablet computer with its new $399 printer could make trouble for competitors.

HP’s New Tablet Could Be an iPad Spoiler – BusinessWeek

HP took the control panel display from a printer and made it detachable. The idea, according to the manager in charge, is that this will encourage printing. Printing is a good business for HP because they manage to charge $7500 per gallon of ink.

I suppose there can be some sense to this idea but I don’t use inkjet printers so I can’t judge how popular this can be. But the headline suggestion that the new display panel cum web pad is “an iPad Spoiler” calls into question the author’s motivations. Maybe he did it for a bet.

But the real gem is a quote from Richard Shim an IDC PC analyst who says “Everyone is trying to figure out the opportunity for these types of devices, how to position media tablets in a way that they don’t cannibalize other businesses.”

That’s an interesting comment coming from a PC analyst. It says that the vendors in the industry are already feeling that the iPad is substituting regular PCs (and hence the need for a response that is sustaining not disruptive).

This acknowledgment means it’s only a matter of time before the idea of iPad as PC morphs from crazy talk to conventional wisdom.

Facebook to Enter Mobile Phone Market in 2011

Despite being based on Android, a Facebook phone would be competition for Google as much as it is for Apple. Google benefits from ad revenue tied to their search and other services which would likely be supplanted by Facebook services on a Facebook-based phone.

Facebook to Enter Mobile Phone Market in 2011 – Mac Rumors.
I wonder if Facebook devices, or Verizon Bing devices will be counted by Google as Android activations.

See also: asymco | Is a Facebook phone destined to be a Vanity smartphone?

Asymco: the existential theory

Much of what I write is structured around theories of strategy and management. The word theory gets a bad reputation among managers because it’s associated with the word “theoretical” which connotes impractical. But a theory is a very practical thing because it’s a statement of causality. Causality means you don’t have to collect experimental evidence on whether when you jump out of a window you fall or not. There is a theory about gravity which you can use to your advantage.

So even though they scorn talk of theory, managers use theory all the time. Whenever a rational manager takes any action, it’s predicated on a theory already in their head. Whenever they put forward a business plan they are employing a theory that if they do these things they will be successful.

The problem is that much of what passes for business debate is the stacking of theories on either side of an argument. Unfortunately most of these theories are not much more than anecdotes. To say that “open always wins” is a theory but it’s usually backed only by one or two examples without a list of counter-examples. That’s not to pick on “open” as there are many more deeply flawed theories (e.g. the stupid manager theory of business failure) which have no evidence whatsoever to support them and all the evidence in the world to disprove them and yet they retain the highest popularity.

So the problem with management “science” is that most managers are not aware of what theories they are employing, treating them more like intuition or some God-given insight. They also don’t know whether or to what extent their theories are good or bad. They also don’t have access to a body of data that supports or challenges their theories. Business data is often locked away even from employees of the company producing such data. It’s buried so effectively that it’s often forgotten and has to be re-generated every time a new management team takes over. Corporations effectively kill self-knowledge and lack any institutional memory.

To illustrate the effect I can offer personal testimony. When working at my last job I spent a great deal of salaried time collecting data and presenting it. Much like what is presented in this unsalaried blog. The difference is that when a “work product” was done (almost always in the form of Powerpoint slideware), it would be released to the audience which requested it. This audience could be as small as one person or as large at a few dozen. But once consumed by the audience, the product had a half-life of about a week. It would be literally forgotten in a month. Now this could be used to one’s advantage as every few months a smart analyst could dust off some old product and re-release it to the amazement of another audience or even to the same audience who had forgotten. Taken to extremes, you can envision a Dilbert-like scenario where the analyst is like Wally who has a perpetual salary for repeating ancient knowledge.

The reason this model for analysis fails is because information is rationed in corporations. The transmission, dissemination, storage and consumption of information is intentionally constrained. This makes the work of an analyst nearly useless. I finally became disillusioned with the process when, at one point in time, having worked on one piece of analysis for two weeks on the premise that it would be presented at a high-level meeting, my time slot got bumped off the agenda due to scheduling issues. My work was never presented to anyone.

It was at that time that I realized that my “work product” was non-essential to the meeting anyway. It was, for the lack of a better word, executive entertainment. So, naturally, realizing that I was really an entertainer I resolved to become better at it. That led me to target not those who request the work, but the largest audience possible because they would give me better feedback. I began to blog internally.

Calling analysis entertainment may sound flippant, but at a more core level, it’s actually an enlightened way to see the process. Steve Jobs is an executive but his skill at entertaining an audience is what makes him an effective communicator with huge consequences to his firm. In olden days CEOs were lauded for their problem solving skills, then for their sales skills, but now they need to be “charismatic” and therefore entertaining.

This blog is an experiment in the opening of business theory and the open exchange of insights. In doing so I take a look at keeping the work relevant by making it approachable, illuminating and, yes, entertaining. So I went from a salaried producer of analysis for a small and forgetful audience to an unsalaried producer of analysis for a large audience in a format that encourages memory. A company was paying a lot of money for something that it ignored. I now receive no income for work that is (hopefully) ravenously consumed. I rather like this more.

When I started this blog I chose a word “asymco” which did not exist and had exactly zero hits on Google search. Now I’m glad to see that “asymco” has 77,300 results on Google search. I am grateful to all who have helped in making this possible and I’m looking forward to further collaboration.

Forecasting iPhone production and sales

Analyst Jeffrey Fidacaro with Susquehanna Financial Group in a note to investors:

  1. Apple to build 3 million CDMA iPhones in December
  2. That would put total GSM and CDMA iPhone production for the quarter at between 21 million and 22 million.
  3. For the current quarter, Apple is set to build between 18.2 million and 18.4 million GSM-only iPhones.
  4. Expects Apple to sell a record 11.6 million iPhones in the fourth quarter of the company’s fiscal 2010. 39 percent q/q increase[1][see UPDATE below]
  5. As for the iPad, suppliers were said to have plans to build 7 million units for the current quarter, a 56 percent increase from the previous three-month frame.
  6. Expects Apple to ship 4.75 million units into the current quarter, 45 percent growth q/q, to a total of 13.4 million units in calendar 2010.

via AppleInsider | Suppliers say Apple will build first 3M CDMA iPhones in December.

What I don’t get from these numbers:

  • current quarter production: 18.2 million
  • current quarter units sold: 11.6 million
    • inventory at end of Q: 6.6 m units [I am assuming minimal inventory at start as iPhone 4 was just launched]
  • next quarter production: 21 million
  • next quarter units sold: ?
    • inventory at start + production = 27.6 million

My own estimate is for more than 12 (and up to 13) million units will be sold this quarter. I think inventory of more than half of production is too high for Apple. They usually carry only about 10% inventory.

My December quarter units sold may need revision but now stand at 14 million. If I substitute 14 million in the “?” above  then the inventory at end of December would be 13.6 million which would be nearly 100% of units sold–clearly unacceptable. Either production is too high or sales are too low.

I am at 4.7 million iPads for the quarter an 13.9 million for the year. No major difference in opinion.

[1] This forecast for 39% growth would make this quarter the second lowest growth quarter for the product. This makes is hard to believe because every launch quarter has usually been breaking records for growth. The 3G launch saw 516% growth and the 3GS saw 644%. To see 39% for the iPhone 4 makes me wonder especially as the comparable year ago quarter was not a launch quarter so growth should be off a low base. Last quarter, when the iPhone 4 was leaked and the channel was drained the product had 61% growth.

Compare also to the Mac which had 33% growth last quarter. Are we to believe that launch quarter iPhone growth is barely higher than Mac growth?

The figure of 11.6 million is also in-line with other analysts which seems to indicate another forecasting failure for the cohort.

[UPDATE] I checked the figures and 11.6 million iPhones is equivalent to 58% growth y/y. The (now corrected) article was citing q/q growth. However, 58% growth is still the second lowest growth quarter for the product.

Android vs. Windows Phone: Extending the urination metaphor

CE-Oh no he didn’t!: Anssi Vanjoki says using Android is like peeing in your pants for warmth — Engadget.

A quick follow-up on Anssi Vanjoki’s observation on Android. When he suggested that Android would be just a short-term solution for phone providers the metaphor he used was that it was equivalent to peeing in your pants for warmth in winter.

I wanted to point out that strategically, using Windows Phone is the same thing, except that vendors have to pay for the urine.

The joint mobile operating system: A risible idea | Mobile Industry Review

And then it all went wrong. Mobile utility providers became mobile operators. They decided they knew what their customers wanted. They turned into the electricity company trying to sell us toasters.

via The joint mobile operating system: A risible idea | Mobile Industry Review.

Great reading.