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Thinking over Apple's value

In intra-day trading Apple’s stock price traded at a P/E ratio below 15. That threshold is now at a price of about $315/share. Excluding cash the P/E is under 12. On a forward basis, there is widespread agreement that Apple has the reward (yield) profile of a bond without the risk of inflation.

The history of the P/E ratio and the share price is shown in the following chart:

As the chart shows, Apple traded in a range of P/E between 35 and 45 until late 2008 and has been trading between a range of 15 and 25 since about spring 2009. It might seem that the price is rewarding growth, but it’s not.

When adjusting for the growth the company has maintained, the company is at a similar P/E/tG (Price/Earnings/trailing Growth) to the depths of the recession.

At the trough shown above, the company was growing earnings at high 30% rates and sales in the teens. Today the company is growing earnings at 92% and sales at 83%. the following chart shows P/E ratio vs. growth.

From a historic perspective, Apple is as cheap as it was at the bottom of the recession. At the time there were many reasons given for why the company would suffer ‘headwinds’. Most commonly cited was that the company was a maker of “luxury” products and luxury does not sell in a recession.

Today reasons being given for why the company will not prosper are far more nuanced. I won’t re-iterate them but they deal with competition, platform issues, production issues, sympathy with companies that are failing, and saturation of markets.

The trouble is that these arguments are easier to refute than the luxury vs. economy argument.  Exactly because the arguments are more precise, there is data that can be used to counter pessimism.

And yet, with or without data, markets sometimes decide that profits are not reliable indicators of value created or potential for value creation.

  • Eoin

    The other problem is that the second and most terrible part of our long recession is about to begin, and the Market is pricing that in. See Greece.

  • Travis Lewis

    I love the PE-TG, when you start to use that to compare other companies, it puts all other metrics to shame. Your buying AAPL for 20 cents to get $1 of growth.

  • sdasg

    The first chart for AAPL ex-cash would be nice to see.

  • Walt French

    Woops, credit to Wikipedia

  • Walt French

    Yes, one believes in the Efficient Market Hypothesis at one's peril. But unlike the Great Financial Crisis, the fact that many of Europe's banks do not have capital to cover likely losses on Greek, Irish and Spanish debt, has been all over newspapers for many months.

    There is another side to this story though: shortly after the onset of the Dot-bomb collapse, I happened to fly next to a Sun exec who reiterated Sun's plans to ramp up their production on a new line; the eventual growth of the 'net would absorb the capacity. As subsequent events proved, it was the beginning of the end for Sun, long a Wall Street darling.

    Apple fortuitously shifted into consumer electronics in 2001, and did not suffer the collapse in revenues that many of its PC competitors did. Incredibly, Apple repeated this trick in 2007, introducing a high-price personal electronics product in the face of a sharp recession that has hurt consumers' wallets, watching it run away wildly. And then they dared to repeat the trick last year.

    I have nothing but respect for Apple's business, technical and design acumen, but there ARE macro constraints, not to mention some very hungry competitors who can exploit the rumored $30/device subsidies that Google throws at Android.

    • huxley

      Hungry doesn't make you smart.

      And if Apple is unlikely to overcome macro constraints, Google is even less likely to do so, given that their core business is very indirectly related to the devices being subsidized. The moment Google feels like the subsidies aren't in its interests, it won't care that the manufacturers are dependent, blammo, the party is over.

      Apple has margins it can eat into, most of the hungry competitors don't.

      • Walt French

        I wouldn't disagree, but let's try a though experiment:

        Suppose that Oracle wins summary judgement against Google tomorrow, and Google withdraws its open source versions of Android, and announces that it'll turn over the Android project entirely to its OHA members, exiting the business itself. OHA members will soldier on but without the Google organization & management, falls apart. Samsung does its own thing; MMI dies; HTC announces a slew of new WP7 phones; etc.

        Apple then competes only with WP7, WebOS and the Not Elsewhere Categorized. But it is slow to ramp up its productive capacity. What is the stock worth when its only constraint is its own ability to satisfy customer demand?

      • PatrickG

        That is assuming that Apple would target rapid growth into the market Walt. As a part of you thought experiment let's also add into it that Apple factors in profitability at a very low threshold – much lower than pundits give credit for – so that now, each and every device in each product class that hits the bricks is cream, not milk. Let's add in further that Apple is not in classical cellphones for the long-haul, but as a means to establish presence in the marketplace for the next disruption. Instead marketshare is needed only so much as it gives Apple the expanding foundational customer base (which is more well-established and stable than just about any other company's) to provide the reception for the next disruption. Look at the uptake for the iPad – it was nearly instantaneous compared to most of the other product lines. Even the iPhone had a decent slope that then rapidly increased. And there wasn't the usual momentary drop-off in sales of the 1st gen iPad either – it held strong until the iPad2 was introduced, and still is selling strongly in the secondary market. I think the market simply doesn't like companies that disrupt the marketplace, hedge fund and retirement fund managers in particular – since they are holding so much of the Apple stock.

      • Tyler

        "…which is more well-established and stable than just about any other company's…"

        This is interesting. I wonder what Apple's customer churn rate is (by segment and on the whole) vs. segment and industry competitors?

        Customer lock-in via UX and increasingly by integration of services/offerings is an impressive feat. Google tries this, but ultimately cant offer it because carriers/handset makers are imposing their own "take" on Android prior to it ever getting into customers' hands. Microsoft is trying this but adoption rates for Windows Phone 7 have been slow. RIM and Nokia essentially failed to react as the market shifted around them.

  • Pingback: Successor to Steve Uncertainty Hurting AAPL Share Price? | Geek Tech TV

  • asymco

    I'll take a look at the cash vs. value question again, however with the stock dropping and cash (undoubtedly) increasing, the relationship may be breaking down. So, whereas value is not indexed to earnings, it seems to be also de-coupling from assets.

  • http://twitter.com/PatrickIgoe @PatrickIgoe

    Horace,

    What are your thoughts on how a split would affect valuation? Would a lower share price bring back retail investors and drive the stock to a more sensible P/E?

    Besides splits, I think another common call in undervaluations is for the company to be broken up to "unlock shareholder value." Do you see any opportunity for something like that? Integration seems so important to Apple's success, I don't see what could be spun out that would have significant enough value.

    • asymco

      Let me put this way: do you think that a reverse split would lower valuation? If it would lower it, then what split would make the company worth less than cash? If we can figure that out, then we can create a great private equity strategy for taking the company private–maybe at less than book value.

      • shashnanda

        and how would the private equity fund initiate / execute a reverse split before taking it private?

      • http://twitter.com/PatrickIgoe @PatrickIgoe

        I understand that it -shouldn't- affect valuation under nearly any rational model, and your reductio ad absurdum in the other direction is a clever reminder of that. However, something irrational seems to be affecting share price, and I am just wondering if you think that irrationality would be impacted by a split in some way.

      • asymco

        You're right that the stock seems to be irrationally priced. But that's not uncommon. Prices are only the reflection of the votes of many people, each of whom may act for a reason rational to them but when counted in the aggregate may not make sense.

        Which is why it's not possible to predict how 'mobs' will behave. The best bet is not to try to affect behavior of stock traders but to delight customers.

      • davel

        it is psychological no?

        at $300 a share many non institutions look and say it is expensive.

        at $30 a share it does not look expensive.

        then there is the issue that all institutions hold it.

      • asymco

        Again I need to ask what would happen psychologically if Apple did a reverse split of 10:1 pricing each share at $3000. Would the company become psychologically less valuable? If so, then what about a 100:1 or 1000:1 reverse split. Is there a number for the reverse split where the company becomes psychologically cheaper than book value and thus susceptible to a clever management leveraged buy-out.

        If the market can be psychologically manipulated, then perhaps CEOs and CFOs should be recruited from the best Psychology PhD programs.

    • Walt French

      A split is a great way of signaling management's belief that the stock is poised for growth; investors should take note. That's the CW, anyway. It's not exactly as if Apple is dying from retail inattention. Guys like Horace who are wedded to notions of “fundamental value” mostly see a split as a momentary distraction. And the days of fixed commissions — pre-1980, trading 100 shares of anything could generate $150 or more commission, while odd-lots were pricier — are fortunately long gone.

      Apple has almost a billion shares outstanding, so one-billionth of Apple Inc will set you back $291 or so (Mkt value approx $291 bil). Post-split, whether 2-, 5- or 10-for-1, one billionth would still cost about $291. Yes, there are framing issues that confuse people, but splits don't change the cold hard facts.

      I'll prefer for Apple's management to focus on markets, competitors, etc. Not tweaks to its share price that'll affect 1960s mentality stock pickers.

  • Childermass

    Well, let's leave aside Graham's maxim that in the short term the market is a voting machine and in the long term a weighing machine, and look at right now why the voting is as it is.

    There are several 'explanations' for this low p/e. 1. Apple has outgrown norms to the extent no-one knows how to value it anymore. 2. Everyone (not you and me but the big mutuals) already has enough AAPL and cannot buy no matter what the value. 3. No-one understands disruptive businesses, only me-too businesses.

    None of those are ultimately sensible but any of them (please add your own) could tell us why AAPL is fundamentally 'undervalued'.

    In the meantime perhaps it is worthwhile to look at ROCE (or ROI if you prefer) against price?

    • davel

      i read an article where they were positing that the recent downdraft is money being pulled out of apple to raise cash.

      nothing to do with apple. a lot to do with liquidity, locking in profits, etc.

  • sve

    You are ignoring the big elephant in the room. A big reason for Apple's stock price resistance is the worrying about Steve Job's health.

    • Brenden

      I think Steve's health is the biggest reason for the current low valuation. When Apple announced that Steve would be presenting at WWDC, the stock darted up, but when people saw that he was still looking thin and frail, it took a dive. I don't think the dive can be explained by investors thinking that iCloud, iOS 5 or Lion was going to ruin their winning streak, nor did they expect a new iPhone announcement, but I think at this point a lot of people expect Steve to step down soon, and expect the stock to plunge when that happens. It's now trading at mid-December 2010 levels, before they announced the Verizon iPhone and iPad 2, and I don't think anybody would consider those products disasters–despite the short lines for the Verizon iPhone on opening day! We have also seen a slowing in Android's market-share gains since then. Apart from Steve's health, the news has been consistently great.

      At this point, it seems like Steve stepping down could actually be a good thing for the share price (after an initial dip), because it would eliminate what many investors seem to see as a big uncertainty. I think if and when he does leave Apple, (whether it's soon or decades from now), he'll be missed but the company will continue to do very well.

      • Ian Ollmann

        I hope that isn't a factor.

        I think it is more likely that the market has looked at factors limiting AAPL's earnings growth and decided that rapid exponential growth can't continue for much longer. It is not a difficult conclusion to reach. AAPL's smartphone marketshare is reasonably flat. iPhone profts rise with the ascendance of smartphones over phones in general, not because it is growing relative to other smartphones. On that mark we are up to 37% smartphone vs. all phone market share domestically, and Horace is predicting >50% within a year, which seems right to me. After that, new smartphone converts get increasingly hard to find and we can expect smartphone share growth to markedly slow. AAPL's phone earnings growth will have to slow down to match. Globally, the curve is similar, but maybe a year or three behind.

        The story is similar in other core markets. I don't believe mac profits are likely to grow at the same rate the company overall has. iPad is a great story, but it too is likely limited to some fraction of the size of the PC market. New hit products? Because markets are only so large and cannot support indefinite large exponential growth, we would have to suppose an exponentially increasing number of exponentially growing hit products to keep up a sustained 90% growth rate like we've seen recently well into the future. That is a lot of exponentials! That seems quite implausible no matter who is at the helm. Even if AAPL could succeed at that game for a little while, it would mean Apple would lose its focus.

        In short, the market appears to believe that the AAPL growth story is over or soon will be, and after that we can expect more subdued growth common to a megacap stock. As an investor, if I believed that and wasn't quite sure whether the brakes go on this year, or next or the one after that, I'd probably price the stock for a 7% return and make it improve its valuation on trailing earnings alone. That is pretty much what the market has done since 2008.

      • asymco

        Everything that you say is reasonable but would have been foreseeable (except for iPad) two years ago when the stock was one third the price.

  • RobDK

    Very well stated, Walt! This must be the crux of the matter:

    'But it also creates incredible economies of scale. In a business where gross margins are fat, and net earnings of competitors are skinny, the ability to leverage your design, engineering and business insights across many millions of devices is a competitive advantage of huge magnitude, the fortress itself'

    Apple's genius has been this economy of scale where few components are used on many products. Laser sharp, strategic focus.

  • Michael Dance

    Apple need to shake the market in a corporate sense although the current Board seem to be at sea on this issue. Three things would help; first the long touted split 10/1 to bring the stock within greater reach; second, and this is rather unconventional for a high growth stock, a dividend of c.3% yield as this would chime with the curent trend towards defensive yielding stocks and would attract a new (defensive) constituency reassured by the cash pile; last, given the exponential growth in China, a secondary listing on the local market of a small amount if stock. Together these could GRAS form the stock and shake it out of it's current reverie. Sadly, good as the Aplenty Board are at running the business, there seems to be a poverty of ideas on the corporate finance front. This could be remedied by buttressing the Board with some Wall Street veterans who understand these matters. Failure means that the stock may remain caught in current trading range subject to multiple compression which will offset the growth in earnings.

  • Michael Dance

    Sorry about some of the typos – iPad to blame. GRAS form = transform, Aplenty = Apple

    • http://twitter.com/Marcos_El_Malo @Marcos_El_Malo

      G-ddamned predictive typing!

  • Michael Dance

    One further point about the secondary listing; I failed to clarify I would look to the Hong Kong market. Prada and others have gone this route and it could have the opposite of a plowback effect. I am aware of the cash pile so suggest a small amount of stock a la Linkedin issue to see if that could drag the price up.

  • Michael Dance

    Plowback = flowback. Flowback usually occurs with a dual Listing where stock from the secondary foreign market flows back to the Main domestic market and depresses the price

  • yet another steve

    At this point the seller's have real momentum and there is going to be follow through. That's how any security behaves. And in the case of AAPL a lot of investors and institutions have a lot of profits to protect.

    I've been contemplating why AAPLs price action has been so weak of late and I think the simple answer is: uncertainty. Uncertainty about leadership, uncertainty about share vs. Android, uncertainty about growth. (No one has ANY idea what growth will be except that it is very unlikely to sustain its recent rate. I'm not saying that there's doubt profit and earnings will grow… just that it isn't predictable. The Street loves its predictable 20% EPS growers. Apple isn't one of them.)

    I also think the sheer size of the market cap is an issue… the amount of ownership required is a real headwind.

    One thing that history has shown us is that the market is ridiculously able to discount AAPL in the short run.

    My scenario for how the stock gets to $500 or even $1000 is a bit unsavory. But at some point I don't see any way the stock reaches its real value without some of the cash being used to buy back shares. I've thought that before however and it got to $360 without it.

    Still if you're short a serious buyback is your nightmare scenario… so far Apple has given the shorts a free ride.

    Imagine if at a conference call Apple merely said they were "evaluating best use of its cash to benefit the shareholders." Immediate, violent short covering rally.

    Personally I'm prepared to hold through a very disappointing downleg… and to buy more when I think the sellers are running out of gas. I mean when else in my lifetime will I own such a beautiful business so cheaply?

    • yet another steve

      Sorry I really need to learn to proofread.
      1. Not elaborating on the unsavory part of my scenario.
      2. And I should have said "BUT I've thought that before and it got to $360 without it."

    • Sam doji

      Overall Aapl is a dream stock for a knowlegable buyer to paraphrase Graham at least fundamentally.

      Problème is the secrecy surrowding the way Apple does business winch keeps wall street at bay. This creates uncertainty winch impacts the stock price.

      Only Apple knows what to do to rescue the stock not Wall Street. To me, Apple is the référence point against winch you should evaluate any sourd investment. Wall street wants gadgets (iphone5,ipad3..) at high speed but only Apple knows what Its target consumer Will likly want to pay for. Maybe something new like the iPad a year ago.

      • chandra2

        >Imagine if at a conference call Apple merely said they were "evaluating best use of its cash
        >to benefit the shareholders." Immediate, violent short covering rally.

        I would love Cook to say that. Just to see the violent short covering rally. He does not have to buy back shares.. Anything Apple does with its cash is a benefit to the shareholders including buying more manufacturing capacity..ha..ha…

  • http://twitter.com/AlephBlog @AlephBlog

    When your market cap is near $300 billion, it becomes difficult to move the needle. The level of incremental good ideas needed to justify a market cap at that level is large — thus multiples sag.

    • asymco

      It's very difficult to move the needle but Apple has moved it. Off the scale in fact. Repeatedly.

  • asymco

    There is nothing mature about Apple.

  • asymco

    That's the problem, the company is considered less valuable than a basket of companies that don't grow much at all i.e. the S&P 500.

  • berult

    Governments regulate the flow of liquidity throughout the economy. They can print bank notes at will through either the printing press or modulation of the interest rate. But inflationary pressure put a damper on monetary policy so institutional wisdom and prudence are called for in turning over economic management to perfunctory liquidity management. Too much liquidity and the system leaks value through the inflation rate. 

    Apple has become a generator of liquidity. Just as governments are. Instead of printing bank notes, they carve iOS/OSX devices. No sooner a device enters the market that it is bought and paid for through debt management. It grows the monetary mass just as an inflow of bank notes would, and it empowers a corporation to mimic the behavior of government and untether management policies from outsiders' capital oversight.

    The dynamics of government-like liquidity generation decouple Apple from shareholders equity, from the fluctuations of the stock market induced by worrisome inflationary pressure on real in situ Apple value. Apple creates a value bubble through its unfettered generation of liquid assets. It is simply as-synchronic to the suffocating gasps of the world economy, and the smart money, being understandably cast aside by management just as it is by current monetary policy, leans towards circumspection and pay-as-you-go sort of investment policies and port-folio management.

    An iPhone has become just as liquid as cash-on-hand for Apple. The difference being felt by the consumer as it pops up as a short term debt on his or her monthly account. In this case, success breeds contempt through perceived unseasonal contentment.

  • Walt French

    The market has been shifting of late to a more defensive posture. Growth stocks in general are under a bit of pressure (the IT sector being one of the lousier performers) as the consensus grows that we are looking at a much slower GDP growth rate.

    Apple, which represents transformation of old ways more than most, has slowed down. Stocks like Motorola Mobility, RIM, Nokia, even Google are in distress or slowing at least as much.

  • http://twitter.com/akarpo @akarpo

    @Walt

    the argument you've put forth is spot on. AAPL has reached its' ceiling.

    Markets are irrational, and can stay irrational longer than you can stay liquid. But AAPL's market cap will not exceed XOM. I will go on the record for that.

    Horace, you are very spot on in your analysis – Apple's growth is just beginning. Again though, it cannot and will not exceed XOM's market cap.

    • Walt French

      I don't know the basis for your argument and don't think that anything I said supports it.

      I think Apple's market cap is limited only by its ability to pull of the IN-FUCKING-CREDIBLE market disruptions it has done. When somebody suggests they buy Facebook, they go out and invent a whole new paradigm for your mobile devices always knowing your status, your documents, your friends' doings.

      They do NOT walk on water but they are otherwise limited only by their imagination, which seems near-limitless. The comparison to XOM means nothing, economically.

      They may not succeed — I've been a Mac user since the first months of the Mac and gone thru hard times because the Apple “our way or the highway” approach is not always friendly to everybody else's intentions. But their destiny is utterly in their own hands. I love it.

      • http://twitter.com/akarpo @akarpo

        I can't see the market propelling a consumer device manufacturer into having the largest market cap. There is a logical disconnect with that, as wildly profitable as they may (berult makes a good point on growth being propelled by consumer debt)

        World runs on energy, followed by information.

      • asymco

        In 1999, 2003 Microsoft held the highest market cap. Is your argument therefore that the world ran on operating system software, followed by energy and then followed by information?

        In January 1998, 2001, 2002 General Electric had the highest market cap. Since it's a conglomerate it's difficult to draw conclusions about what the world ran in 1998.
        http://en.wikipedia.org/wiki/List_of_corporations

      • http://twitter.com/Marcos_El_Malo @Marcos_El_Malo

        Presumably the world ran on "good things" that G.E. brought to life.

  • Cadillac88

    I think Walt French nails it when he asks ‘what is a company worth when it is constrained by it’s own production capacity?’. Apple did a huge favor to all it’s competitors during the prolonged period of iPhone 4 production being way to low. Carriers want to sell phones as customers walk in. They will sell what they have – not what they don’t have. It’s simple. If Apple can double iPhone production each year and iPhone is 50% of the company then you have only 25% growth if all else is steady. If Apple can demonstrate better than double capacity increases along with continued demand then P/E will move upwards.

  • Xian

    Horace,

    I'm afraid to ask, but you may recall that a while back you guessed at a $443 share price by Nov 1 2011.

    In light of recent price action, do you stick to that guess?

    Thanks very much

    • asymco

      I don't like to make guesses on stock prices. I think I did once because someone asked me, but I think it gives a false implication of knowledge. I have been taking earnings forecasts and multiplying them by the prevailing P/E ratio to get to a price forecast. As the P/E ratio is compressing, this is getting harder.

      How about we compromise and I provide earnings forecasts and you can then multiply them by random numbers (also known as multiples) to get to the stock price? It reduces the uncertainty to a single number.

      • Xian

        Horace,

        Yes, that would be greatly appreciated. Right now, like most, I'm between $27-$28 for fiscal 2011.

        The PE is certainly the hardest part these days.

        I welcome any input you have.

        Thanks very much

  • chandra2

    Horace wrote "On a forward basis, there is widespread agreement that Apple has the reward (yield) profile of a bond without the risk of inflation."

    I was trying to figure out the implications of this. I think one way to think about this is, theoretically, someone can borrow 300 billion at 5%-8% and buy Apple out right. That is going to cost them 15 to 24 billion a year. They can fund that through the net cash flow Apple has and still have something to spare. And the entire accumulated cash pile which may still grow is for them to keep. Sounds like a great arbitrage play! ( or is it LBO? Whatever.. ).

    The intriguing thing is, one can not buy the company right out at the current market cap.. Current shareholders would not sell their shares, they will demand a premium. What is that premium? 100 Billion? Well, if so,, that is how much it is undervalued now.

    Why can not Apple do that by itself? Borrow billions and billions of dollars and buy massive quantities of shares back. All these sellers who are selling to other buyers will simply sell it at these levels to Apple. The shares will tend towards its true buy out value then. If later on, Apple does not want to have that much debt, it can re-issue those shares at the higher price and pay off the debt.

    • Walt French

      @chandra2, your idea is so good that investors have ALREADY executed it!

      They took some cash they scraped together (some from savings, some from selling other stocks, some from borrowing), and bought all almost-1-billion shares of AAPL. Because they did it share by share, and without obvious coordination, there were no control documents or control premia required.

      Yes, every now and then a company takes itself private; employee buy-out or leveraged buy out. The experience is that the genius investment banker makes a hefty fee and his buddies receive huge profits and leaves a shell of a company behind. Sometimes it survives, tho.

      What's the fascination with a company that makes great widgets turning away from the capital markets when it is NOT guaranteed of being independent of future capital needs?

      • chandra2

        Walt: :) I get your point. Of course, mine is a thought experiment just to understand at what point the earnings/cash flow and P/E ratio reach ridiculously cheap levels and also to better relate to what Horace talks about it becoming like a bond cash flow without inflation risks.

        Private Equity tried this with Avaya and seemed to have executed it well. We will see what happens when they float the IPO again.

        In an indirect way, the phenomenon of closed end mutual funds trading at a premium or discount to the NAV is related to this kind of market phenomenon. That has been widely discussed in academic circles since it is a puzzling phenomenon given the academia's fascination with EMH. I remember reading a paper from Harward ( I think ) which provided a convincing theory as to why that happens. One thing that is commonly seen in closed end mutual fund is, when the closed end fund announces that it is going to go open or wind-down, the price comes close to the NAV, the discount or premium disappears. In other words the voting price comes close to the weighing price. . I am just making a mental comparision to that situation and a stock like Apple that seems to be too far away from its Discounted Cash Flow Price and thinking what is the equivalent of a closed end mutual fund winding down.. That seems to be this 'buying the stock back' or 'taking it private'.. Then the stock price comes close towards the price control premium ( similar to the closed mutual fund coming close to its NAV )…

      • Walt French

        @chandra2 — Part of my work is as a PM on a couple CEFs so I shouldn't comment here. But I'm aware of many more studies about the discount problem. I will throw out some topics for you to research:
        - liquidity risk (can't be sure of selling shares near NAV in bad markets)
        - negative control premium (unsure sure of manager's quality)
        These are not themes that apply especially to AAPL.

        And I'll offer some caution about “mark to model” mentality: Apple is a powerhouse of a company and many firms would be the better for understanding what makes it tick. If anything, it should get positive points for its corporate culture; it shows up in earnings growth etc.

        But I haven't seen anybody on this board utter a peep about what I think is the main hold-back to the share price: the fear that Google is disrupting Apple the same way that Apple disrupted Microsoft and the other incumbents. Overstating it (as an Android partisan would): that GOOG's business model sucks all the profitability out of Apple by commoditizing access to the internet. See my link on an earlier post that remarkably drew no thumbs or replies. Or, that Apple's own arrogance will prevent them from recognizing how it is already happening.

        These points are NOT my positions, but as Horace's frequent reminders of his modesty is good at reminding us, we don't always recognize things as they are happening.

      • chandra2

        Walt. Thanks. For whatever it is worth, I think I did surf to the link you posted. Forgot to click on the thumb. The Google issue is worth a consideration.. my main fear about Apple is indeed the 50% tipping point. When the 50%+ people have smart phones, a big percentage of these folks are high ARPU folks and so the carriers do not mind paying the higher price to Apple. But after that tipping point is reached, the carriers may start focusing on the cheaper Android phones to convert the lower ARPU folks into smartphonedom. That only makes financial sense. That is the risk to Apple's iPhone growth strategy. May be Apple has something up its sleeve to counteract/deal with that. If I can think of this, I am sure there are many brains at Apple have been thinking about this for a while. If that is announced, then the stock can jump to the next trading band, say 380-400.

        So you are a PM (product/project manager?) for a closed end fund? I do not know what that means, on the financial side or on the IT support side? If it is on the finance side, what does a PM do? Just curious, no worries if you do not want to answer. The paper I referred to above is "Anamolies: Closed End Mutual Funds" by Charles M.C. Lee, Andrei Shleifer and Richard H. Thaler, Journal of Economic Perspectives, Volume 4, Number 4, Fall 1990 – Pages 153-164

      • Walt French

        “Portfolio Manager” I'm part of the team that makes the investment decisions. Note: mostly quantitative implementations; the very interesting stuff here unfortunately doesn't feed into my portfolios directly, if at all.

      • chandra2

        Thanks for the info Walt.

      • Talltrash

        Maybe (and I'll take your word for it) the comments section of Horace's blog has not "uttered a peep" about Google/Android disrupting Apple, but hundreds of such comments are all over the internet. As a hypothesis, it is not new.

        But if this is an explanation for the performance of AAPL, how then does one explain that in the last five years for virtually any period AAPL has significantly outperformed GOOG? For example in the last 12 month period, AAPL is up 21% and GOOG is unchanged or in the last 90 days AAPL is down 5% and GOOG is down 19%.

      • Walt French

        Google as a suicide bomber. ;^)

        Really, Google HAD to do Android and HAS to do ChromeBook and HAS to do Chrome browser to try to get its DNA into the mix.

        I personally am so much in awe of what they do right that I practically weep at the junk they put out, or the lowest-common-denominator ads that they put their genius in the service of. But that's the way they've decided to be the (paid) host of the internet party. Horace has observed that they may be cutting themselves off from opportunities as much as they are creating them; I think that's right. But game theory tells you that if Google let Apple run the table on smartphones — which they threatened to, and could still sorta do — it would not work out all that well for Google, either.

        But I put the thesis out there to be debated. As you say, it's taken for granted so many places. But I haven't managed to find more than the sketchiest hint of logic behind it, and generally find HD and other commenters much savvier about business issues, even if most of us drink the Kool-Aid.

      • asymco

        If I were to score Android as a disruption it gets strong marks as a low-end disruption. But the problem with the Apple-disrupted thesis is that Android is mostly aimed at non-consumption or older, modular voice phone (oriented) platforms. Apple is a new market disruptor in its own right rushing to meet vast demand for a product that is still not good enough as a primary computer.

        It's not a clear cut case of Android vs. Apple just as it's not a clear cut case of Android being sustaining to Google.

      • asymco

        This is what I think most people should be focusing on, but the reason why I don't think the market is looking at this is because the market has never valued (or discounted) disruption. Disruption is unforeseeable by definition. Nor did the market anticipate Apple's rise (reacting after the fact). Nor did the market anticipate RIM's demise.

        Note that if we believe the Android disruption thesis, then we should be buying GOOG–something nobody is doing–while selling Apple. Google (the great disruptor) has been dormant as a stock since before Android was even a hint.

    • chandra2

      Google is not a strategy oriented company. Many things they do arise from bottom up. Maps ( amazing ), Scanning books, translation tools ( which are just amazing even though they are not perfect ), driverless cars and even ChromeOS were initiatives that were not born out of some grand thinking. On the scanning books, I have read the inside story that it was a personal vision thing of the founders, that world's knowledge should not be lost and should be easily accessible and not really to make money by putting ads ( though outside people always attribute a money motive ).. ChromeOS probably got into the strategic thinking later on, even if misguided. Apple may have such bottom up projects, but before customers see them, they have to fit into the vision that Apple has laid out. We perceive this as 'Apple is on the message' and 'Google is scattered'.

      But like you said about weeping, I weep for other reasons. They seem to disrupt businesses for the sake of disrupting businesses even if it does not fit into any strategic vision. The outside pundits cast all their actions in terms of some strategic vision which may or may not exist. Google Talk, free phone calls within the U.S., etc. are great services. We do not see it making money for Google but it destroys many small businesses. Similarly, they offer interesting services but then shut it down. Like Goog 411. I know why they did it — to collect millions of voice samples. Since they collected it from us, it is only fair if they open that up for everyone to use. I have not seen that announcement yet.

      How does it all disrupt Apple? Since Google takes a 'Throw things out and see what sticks approach', one or two may stick and disrupt Apple. Problem is the uncertainty. What is Google going to put out there next and will it succeed? And none of what Google offers comes with any kind of Service Level Agreement for the general public. Since it is free, they get away with it. Apple does not operate that way, and many times it is hard to compete with some thing that is good enough and free.

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  • http://twitter.com/quotingstu @quotingstu

    I think the under-valuing of Apple's stock price is essentially an emotional reaction based on the fear that Apple's innovation will stagnate when Steve Jobs is no longer the CEO. Given his health issues, this seems more imminent than it might otherwise.

    This is an entirely un-sophisticated take on what is a very complicated ball of wax… but, I think that even sharp analysts are ultimately emotional decision makers.

    Thank goodness Apple's #2 is Cook and not Ballmer.

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  • Chris

    Horace,

    What do you think about Apple in the context of the work of Geoffrey Moore. That is, as the market perceives competitive gap of Apple to be shrinking, the growth in the market cap will decelerate. In such cases, even YOY growth in earnings as we have seen in the past few quarters will not dramatically push the price.

    Clearly, Apple has crossed the chasm, clearly it has entered main street to use Moore's wording, but the perhaps market doesn't see Main Street as that being that big or that Apple has advanced as far into Main Street as it could.

    Thanks

    • c.c.

      geoffey moore is the guy who was praising circuit city and fannie mae. i wonder he can even read the financial statements. he also seems to think how apple's demise in the 90's was unavoidable based on his crossing the chasm fantasy. you are simply far better off just reading the asymco blog or clayton christensen.

    • asymco

      I wonder if the theory covers a broadening (or lengthening) of the main street into China Brazil and India. There are billions of under-served buyers. I think market-framed theories are limited to the market definitions. Innovation theories seem better suited for markets which respond to innovation.

  • http://twitter.com/Marcos_El_Malo @Marcos_El_Malo

    There is uncertainty about who will eventually succeed Jobs. It's "priced in" but no one knows what long term impacts we'll see on the bottom line when Jobs eventually leaves, nor what impact his unknown successor will have on he direction of the company.

    One positive about Ron Johnson leaving for Monkey Wards is that it narrows the field of candidates by one!

    • http://twitter.com/Marcos_El_Malo @Marcos_El_Malo

      Excuse me, J.C. Penny. Montgomery Ward is long defunct as a department store.

  • http://twitter.com/PaulMaxime @PaulMaxime

    BTW, the "Law of large numbers" has nothing to do with growth. It's all about if you repeat an experiment enough times, the results will tend towards the expected value. For example, you might get 10 heads in a row, but if you flip a coin a million times you are going to get close to 50/50.
    http://en.wikipedia.org/wiki/Law_of_large_numbers

  • jam

    I am relieved by this multiplicity of opinions. I had thought Apple's stock price was flagging because it is cutting itself off from users who don't want to embrace iTunes and its ApStores as an essential part of their computing lives.

    I am a user of Apple equipment. As such a user, I for one resent the system's increasing intrusiveness, its insistence on my agreeing to a surrender of personal and financial privacy in order to obtain maintenance releases, EVEN FOR 3rd Party Software, and regret what I see as Apple's focus shift, from computing aficionados to mainstream auto-updated candy for the masses. Wave of the future, I suppose.

    As an Apple investor, I really cannot complain.

  • Kris

    "Apple makes more money from the sale of one Mac than HP does from selling seven PCs."
    http://mattrichman.tumblr.com/post/6844151919/a-c

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  • tfd2

    would love to see an update of these charts.