As Apple’s extraordinarily low valuation is being more widely noted, explanatory hypotheses are proliferating. Everyone seems to have an opinion. Some explanations come in and out of fashion. Others are reliable old clichés. We’ve seen liquidity issues with large funds forced to sell, “too much cash”, management transitions, an impending loss of mojo, share price too high to afford, “law of large numbers”, and that old chestnut, competition. None of these satisfy. They don’t explain why reliable growth is not valuable. And reliability is indeed what Apple offers in spades. Consider the following chart:
Note that the scale is logarithmic so that the growth patterns can be seen clearly.
In a previous series of articles we discussed the capital Apple expends on equipment, real estate, leasehold improvements and data centers. Cost structure analysis reveals subtle shifts in strategy and the CapEx analysis demonstrates Apple’s increasing integration into its supplier network and integration into the distribution and service infrastructure that sustains its ecosystems.
Another form of investing (spending now, reaping benefits later) is the spending on research and development (R&D). Let’s have a look at Apple’s R&D expenses by quarter since Q1/2006.
Apples R&D expenses as percentage of sales have been declining from almost 4% to close to 2% in the last six years as shown in the following chart:
While Apple’s absolute R&D expenses have grown at an annual rate of 33% they have not kept up with the far higher sales growth rate. Apple’s current rate of R&D expenditure is compared to a peer group  below.
After the transitional third quarter, Apple’s earnings growth returned to an exceptional level. As the following chart shows, earnings growth has maintained above 50% growth since 2009.
Q3 turned out to be a transitional quarter with
Horace talks to Prof. Bill Torgerson from St. John’s University about the writing process and how it survives and/or thrives as a commercial enterprise. We touch on writing for movies and compare the collaborative process of “content creation” vs. the “single voice” of an author.
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The iPad and Mac businesses both grew well in the last quarter. Tim Cook said they are observing some cannibalization of Mac from the iPad but much more switching to iPad is coming from the Windows PC market.
The evidence is still hard to pin down directly but the fact that PC sales (excluding the Mac) are down gives credence to the claim. Mac growth, in contrast, is largely unaffected. The following chart shows the the iPad volumes vis-a-vis Mac volumes and the Mac growth through recent history.
The iPad has out-sold the Mac since inception and is now about three times the volume. However, the growth rate in the Mac has not changed much.
The impact on the PC market has been discussed recently and the data in the following chart is an update given more precision on the units from Apple: