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Pricing Paradox

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.

It shows Apple’s cash/share vs its price per share. First, it should be noted that the company’s cash has been growing reliably on a log scale, increasing by a factor of 10 in five years. As a proxy for retained earnings, the cash trajectory shows exceptionally predictable earnings.

Second, although the share price has grown it has not grown either as reliably or as quickly. It’s as if the reward for reliable earnings is a significant dissent.

Third, if we subtract the cash/share from the price/share we obtain the enterprise value (EV) per share. The EV reflects the future value built into the price. It reflects the expectation of more earnings. In the chart above one can see the shrinking of the gap as a multiple of the cash value. To bring that gap into focus, I prepared this chart showing the percent of the share price allocated to past value (cash) and future value (EV).

One can see the gradual erosion of emphasis of future value. With the exception of the credit crisis induced equities crash, future value as a percent of total value is at a new low. In late 2006 the future was was about 86% of the share price. At the end of last week it had dropped to 79%.

Another way to interpret this is that in 2007 when the iPhone was born nearly 90% of the business value was thought to be in its future. Today only 80% is future value.

To clarify further, if a company reaches a price where 100% of its value is cash then it’s seen as having no future value. Having any significant portion of the price attached to the past is extremely rare for a growing company and I would say unheard of in a company growing as rapidly as Apple is.

This preoccupation with the past and discomfort with the future is, I believe, the key to understanding the valuation paradox for Apple. I have gone over the conventional metrics of P/E and P/E/G(trailing) that illustrate absurd pricing (updated below). But they don’t help explain the mis-pricing.

A disruptive company is inherently unpredictable. Success and growth are unrewarded because there no understanding of the underlying causes of these phenomena and therefore there is no expectation of repetition.

In other words, a five year dead-straight line of logarithmic growth is not a sign of anything resembling reliability if the underlying causes are not understood. Today Apple is still a mystery wrapped in an enigma and without a causal understanding of its suceess its pricing will remain paradoxical.

  • http://www.aaplpain.com Travis Lewis

    Well done article, thanks for all your work.

    Last time I was looking into cash and future value, out of all the large caps, CSCO had the least amount of future value in the stock. (only reason for comment to speed up the research if someone wanted to put AAPL vis-a-vis)

    • Anonymous

      Amusingly, Cisco’s got 20k+ products and thousands of product lines.   They have so completely segmented and resegmented their markets, they have lost any concept of product itself.

  • http://twitter.com/BabakHosseini Babak Hosseini

    Ben Graham stated three basic rules for the “Intelligent Investor” – his acclaimed book on Value Investing:

     – you must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock
     – you must deliberately protect yourself against serious losses;
     – you must aspire to “adequate,” not extraordinary, performance.

    As you noted yourself, to the most of us, Apple is an Enigma. An in the absence of dividend payouts, buying Apple stock is purely based on the (speculative) believe that someone will pay a higher price for the same stock at a later stage. In other words you believe in perpetual growth of that company. However, most people incl. investors don’t believe that the “Apple Hype” (to them it is a hype) will last forever and will probably halt within the next Friedman unit.

    Thus, maybe the share price is not “mis-priced” as you state it. Rather, the simple P/E metric is not valid for a complex, opaque company like Apple.

    • http://twitter.com/fivetonsflax fivetonsflax

      Why do you say Apple is opaque? I feel their business, based as it is largely on selling physical items, is more amenable to analysis than Google’s, for example.

      • http://twitter.com/BabakHosseini Babak Hosseini

        You are right, lokk

      • Anonymous

        No one is asking this same question of “Next bold move?” for Amazon or Google, who have far higher PE ratios than Apple, yet their core products pale in the growth metric compared to the iPhone & iPad growth trajectories.

      • http://twitter.com/BabakHosseini Babak Hosseini

        That’s because it doesn’t matter. Amazon? Come on: They sell stuff, just like Walmart and they will grow as long as internet affinity is growing, which will be the case for the coming years since people get used to buying stuff on the net. Yada yada yada. The main driver here is internet affinity.

        Google? 94% of their revenues are coming thru their search ads. They are still growing in that regard as well. Both examples are “lame”. Well executed, but easy to understand with regards to what drives their business.

        Apple? A cult-like organization that is not playing by any industry rules (a few they obey too, like the distribution of phones thru carrier stores), that just lost their Messiah and heavily relies on new “hits” for continued growth. That’s not my standpoint. That’s how many people view the company. Especially those running around with their blackberries…

      • Wesley Hsu

        Right. The comprehensible variables of Amazon’s models, actual numbers aside, are what make Wall Street comfortable assigning it a valuation (even a stupidly optimistic one). You could sort of say the same for Google. The math follows known Street algebra. 

        Apple’s business model depends on disruption and innovation, and not only can brokers not price that, they are philosophically and (secretly) emotionally against it because it makes them look useless. 

        Anyone who has become a professional expert at anything will by default be opposed (consciously and unconsciously) to anything that suggests that their expertise is obsolete. 

        Think about doctors’ scoffing reaction to alternative medicine. 99% of the time they are right to do so, but even when the 1% actually works they refuse to endorse it because their fear of losing the known allopathic medical model outweighs their desire to see people as healthy as possible. 

      • Anonymous

        Loving your various posts on this article – definitely forcing me to think about each of your points carefully.

        Only nuance I’d add is that while I basically agree “lack of transparency is reflected in their share price”, I don’t think Apple can “fix” that lack of transparency, both because secrecy is such a powerful strategic and marketing advantage, but also because if they *did* explain what they were working on and on what timescales… investors would actually sell the stock shorter!

        Because *very* few outside Apple believe what Apple does is possible and will add as much value as it does until they – not only see a demo, not only try it out a few minutes – but actually see 30M queue up to buy it.

      • http://twitter.com/BabakHosseini Babak Hosseini

        Yap, true! Secrecy is one of their core strenghts ;-)

      • $450AShareIsInvigorating!}:-D

        Does it really make a lot of sense to make a roadmap of future products?  I’m sure that there were a lot of companies that gave three year roadmaps of products and then Apple came along with the iPhone and iPad and those companies had to throw their roadmaps out the window.  Apple needs to keep security tight because there are too many copycats just waiting to find out what Apple is going to do and then simply try to copy the product. I’d say Apple’s secrecy is definitely a core strength.

        Maybe Apple should lie about a roadmap or change it on the fly and then the copycats will really be screwed.  Never tell when or how you are going to throw your punches because the opponent will be looking for them and duck or counterpunch.  I don’t work in a corporate setting so I don’t quite know how much weight a product roadmap carries for those IT people.  However, they seem to be jumping through hoops trying to grab on to Apple products and I’m sure the iPhone and iPad were not on the corporate roadmap until the top executive came to the top IT guy and said “Use this (iPhone/iPad) because I want it for all the employees, now.”

    • Neal

      I believe that many Apple investors simply cannot believe that it can continue this run, especially after the death of Steve Jobs. Aside from the 2008 downturn, the PE compression really started after the reports of Steve Jobs’ liver transplant surfaced in the summer of 2009.  Ever since then, the P/E starts to depress, based on the “fear” that SJ wouldn’t last long.  Now that he’s gone, there’s the “fear” that once his products pipeline is exhausted, Apple will start a slow, and inevitable decline, as so many other companies have done.  Personally, I think this is BS, but is is the only reason I can see that has Apple at a 13 P/E, and Amazon at a >100 P/E!  I mean, that’s dot.com bubble territory for Amazon.  Do people really think Amazon is worth that valuation? Horace, can you comment on this, please?

    • Jon T

      Errr..speak for yourself Babak. Apple is one of the most analysed companies on earth, it isn’t difficult to find analyses most days of the week. And as for hype? Are you ignoring all the analysis that Horace does which is based on facts about real growth and real products…

      As for why, how about that the world is denial the the Windows era is over?

      • http://twitter.com/BabakHosseini Babak Hosseini

        Jon, Horace does a wonderful job. I am talking about people who don’t read his blogs. Also, “Past performance is no guarantee of future results” remains true here. Since Apple isn’t communicating any “strategy” all that people can do is to trust Apple that they will continue to cannibalize their own products by generating new, disrupting things. However, People don’t trust Apple.

  • Anonymous

    In one of his ground-breaking articles last December (see http://seekingalpha.com/author/andy-zaky/articles ), Andy Zaky suggested that a floor might be developing beneath AAPL’s P/E ratio. And if one looks especially at the P/E/tG curve on your last chart, one can see what may be the beginnings of this floor being established. Last quarter, the peak P/E came in at about 15.3. If the peak P/E this quarter matches that, we could infer that P/E compression may have hit that floor. We then could calculate Apple’s future price as being a simple multiple of its earnings.

    So what would Apple’s peak price have to be this quarter to see a return of its peak P/E? Earnings per share were boosted to a phenomenal $35.11, so a peak price at last quarter’s peak P/E would equal (35.11×15.3=) $537/share.

    Can it be done? Of course. The question is, will it be done, or will we continue to see P/E compression? More importantly, where can we reasonably expect to see a floor become established under the compressing P/E ratio?

    • Anonymous

      Just pick Microsoft’s PE as a guesstimate of a floor.  It’s still lower than Apple’s on a trailing twelve month basis. Right?

      Thompson

  • Chris

    I’m fairly resigned to the market failing to recognize Apple’s future growth. My thinking is that since there are no real precedents to Apple’s global growth, analysts are unwilling or cognitively unable to price this growth into their models. 
    Instead the share price will only move ex post, after each quarterly earnings release, as this global growth story is proven quarter after quarter. I think the share price will continue to go higher, it will just take longer to get there–years as opposed to months–which isn’t such a bad thing.

    The opposite story of course is a company like Amazon where most of the future expectations are already priced in. I can’t reconcile why a different kind of analysis is done in this case. 

    • Chris

      Maybe the reason why a different kind of analysis is done for Amazon is that there is a precedence for its growth story.

    • Anonymous

      Look no further than the very different market caps to reconcile the difference in investor attitudes towards the companies.  People look at Apple and they worry, “the bigger they are, the harder they fall”.  They don’t stop to consider that under the current conditions, both in the Apple business and in the AAPL market, it would be very hard to make Apple fall.  The barrier to competition is much larger than what a lucky shot-in-the-dark competitor can muster.
      Thompson

      • Chris

        I agree. If you took all the cash out of the company, it would have no tangible book value, which is incredible. So really any competitor should be able to replace/duplicate the value they create using very little capital needs.
        And yet no one is able to because Apple’s intangibles are where much of the value lie, not in the accounting definition of value.  

        [On a somewhat related note, the 100bln in cash, as previous articles, have noted, is an option. (In my opinion it is just as valuable as the future return they expect to get from it.) It is also a lower bound to the stock price. I think it is somewhat probable that it will go to 200bln in the next two to three if left alone. Therefore it has a lot of value to investors who bought the stock in the company before it reached a market cap of 200bln. It's a safety net for them. Why should they want the company to pay a dividend?]

  • http://twitter.com/decorrelate Robert

    shouldn’t it be “exponential growth” instead of “logarithmic growth”? Since it’s linear on a log scale, it’s exponential on a linear scale. 

  • Phil

    All this assume that the “Market” is rational and that stock prices are a measure of true worth in the market.  It seems to me that there is a great deal of evidence that this is not always true, especially for Apple.

    • Marcos El Malo

      Over the long term the market behaves rationally. Just as, over the long haul a person with untreated bipolar disorder will, on the average, behave normally.

    • Marcos El Malo

      Over the long term the market behaves rationally. Just as, over the long haul a person with untreated bipolar disorder will, on the average, behave normally.

  • Anonymous

    Horace, I think you have done a better job here in defining the market’s hesitation regarding Apple than anyone else. However, that answer has been hiding in plain sight for a long time.

    Dedicated Apple watchers have long noted that Apple just doesn’t operate like conventional companies. This has long been explained as a Steve Jobs personality trait and perhaps that was so. Steve had an enormous talent for ignoring what everybody else knew to be true.

    So here you have a company that merrily cannibalizes its own product lines, opens retail stores when everyone knows they will fail, introduces tablet computers when that market has been shown to not exist, manages itself internally far differently than its peers, keeps prices high in a downturn and basically makes its own rules as it goes along.

    Analysts have no frickin’ idea what to do with this. How do they use analysis tools devised for the General Motors era to predict what the first 21st century megacorporation will do? Apple’s go-it-alone, make-your-own-rules strategy is a two edged sword: It enables Apple to pull ahead of the pack in nearly every area, but it confuses the market when they are confronted with a business model that defies what they know.

    I don’t believe that Apple’s low PE is primarily due to the most oft stated reasons. Those reasons are more the rationalizations of a market that doesn’t know what it is looking at.

    • Wesley Hsu

      Perhaps Apple’s next great innovation will be the disruption of the stock-exchange valuation model. 

  • http://wmilliken.livejournal.com/ Walter Milliken

    “Past performance is no guarantee of future results” — Wall Street says this often, and then promptly winks knowingly and actually ignores this principle most of the time. Strangely, they seem to really believe it with regard to Apple.

    I also find it unreasonable that Wall Street tends to view the performance of key people (e.g. star traders or CEOs) as repeatable, when they’re often just lucky to have been in the right place at the right time (and not screw up) for a few good years in a company before they move on to the next. The sample space for key people is large enough that a few individuals will get lucky just due to statistics — yet Wall Street seems to believe that the top people themselves are responsible for their company’s success. But for Apple, it must be a statistical fluke…. (This mindset may also have something to do with Wall Street’s focus on Jobs as Apple’s only “secret sauce”, though clearly much of Apple’s success *is* attributable to him.)

    On a slightly different, but related, topic, it seems to me that there are people who believe in, and value, disruption as a business model — venture capitalists. From what I’ve seen, while they don’t believe they can reliably predict which specific companies will be major successes, they do believe they can pick enough likely candidates well enough to achieve about a 10% success rate. On the other hand, Google and Microsoft seem to have tried this shotgun approach at the corporate level without much notable success. Though I suppose you could call Android a successful market disruptor of sorts, if not necessarily a profitable one. Apple seems to have a higher success rate, but even they only get a major success about half the time, it seems to me, though their duds tend to be more on the software and services side.

  • http://twitter.com/bennomatic bennomatic

    A mystery wrapped in an enigma indeed, and smothered in secret sauce.  The problem is indeed the fact that Apple have been reborn as a black swan, with such great success in their new products that it has even caused growth in their legacy products.

    Individual investors may look at Apple and say, “Look at the last five years… I think they have at least another five years of great products up their sleeves!”  But institutional investors–especially recently–have to be more conservative.  They want to see a demonstrable model which helps them predict growth.  A series of smash hits is not a pattern if they’re not able to connect the dots.

    And why can’t they connect the dots? Because the rest of the industry is a cargo cult of imitators who, try as they might, can not reproduce Apple’s success.  Not with a free OS, not with suspiciously similar product and packaging design.  Not even by using actors poached from Apple’s own commercials.

    When stodgy institutional investors look at revolutionary innovation, they are like a big movie studio looking at the works of indie writers and directors.  They look askance because they feel that they know what will sell, and while it’s nice to have an occasional twist, they’re really hesitant to go too far afield.  Even when there is a runaway indie hit, say, like El Mariachi, they destroy it with a high-budget sequel.

    • Anonymous

      I have become an increasing fan of blockbuster/megahit mentality similarity between movie industry and Apple.  I agree the investors do not see Apple as a technology business e.g., DELL or HP or even Google and Amazon, but rather as a movie company that depends on blockbuster/megahits to drive the business.  Tim Cook has repeated pointed to the growth opportunities in PCs [Apple has 5+%], iPhones [a world market of 500 Million a year or more], or iPads [disruption of the 100's of Millions of PCs] as providing enormous sustained growth over the next 5-10 years.  So from an objective view Apple has tremendous opportunities that are undervalued with the “Black Swan” surprise every few years [some successful some not] that blow the future away.  But investors do not see or appreciate this view.  

      • http://twitter.com/handleym99 Maynard Handley

        The thing is — viewing Apple as a blockbuster company is just dumb.
        MacBook Air is an obvious example of something that started slow, but grew as Apple refined it. It’s quite likely that Apple TV will follow that same path.
         
        The thing about blockbusters is precisely that they don’t allow for second chances, whereas Apple’s business DOES allow for second chances. Usually the second chance is just the 2.0 rev of a product, but even when a product launch is utterly disastrous, the same tech can be relaunched a year later with a new name and in a new form. 

  • http://twitter.com/bennomatic bennomatic

    One of my favorites was when Jobs said, in no uncertain terms, that they were not interested in making a video iPod, just six weeks before their first video-capable iPod (the 4g?) came out.

    • http://twitter.com/bennomatic bennomatic

      Urk.  This was supposed to be in response to Babak’s comment about Apple’s secrecy.

    • http://twitter.com/handleym99 Maynard Handley

      Likewise for Apple selling books…
      And likewise (as I have said before) for Apple talking about the post-PC world. PostPC is nonsense, and Steve Jobs was well aware of it. But MS, desperate to do something, anything, to compete with Apple, bought it hook line and sinker, and appear headed towards the greatest software disaster of all time. 

  • Ian Ollmann

    Horace wrote:
    “With the exception of the credit crisis induced equities crash, future value as a percent of total value is at a new low. In late 2006 the future was was about 86% of the share price. At the end of last week it had dropped to 79%.”

    This is to some extent predictable as more cash amasses behind the dam. It should be expected that the present value of the cash should build as the cash builds. You only expect future value of the company to keep pace if earnings growth tracks cash on hand — that is  earnings = d(cash)/dt = multiple * cash.  Ergo, to keep the cash valuation in check as a percentage of company value earnings must grow exponentially.  It has been, but the rate of exponential growth does seem to be trending down a bit, so we expect cash to become a larger fraction of a rational valuation of the company.

    We should be able to separate undue market pessimism from expected valuation by looking at cash / share vs. earnings per share and comparing to your Enterprise value chart above.  I think we already know that answer though because of the well documented trend of P/E compression.

    As a would be investor, I’d find that cash discouraging. If I assume that the cash is not generating much value, then I have to pay in  cash/share $$ just to reach fair valuation before I can start to get access to earnings growth.  That is a significant opportunity cost to have so much dead money sitting around. Thus the cash on hand acts to dilute investor ROI.  The stock looks less attractive. 

    • Anonymous

      If you are looking at the cash, then you are failing to see the forest for the trees. The cash is a byproduct of Apple’s explosive growth, period. Anyone investing in Apple with the cash as a primary focus is failing to understand that Apple is hugely undervalued, not because of its cash, but because of its explosive growth.

      • Ian Ollmann

        Oh sure. I don’t disagree with either of you. I think the major factor really is Horace’s thesis du jour. Disruption is almost by definition hard to price.  Perhaps I misunderstood, but it sounded like part of Horace’s argument was the decaying future future value of the company belied pessimism about the companies’ future profits.  I was just pointing out that the decaying relative value of future prospects was calculated vs. cash on hand which goes up. The math works out such that unless you are doing fantastically (accelerating exponential growth, not just exponential growth)  the cash would be expected to become a larger part of the company’s rational value over time, and so this might not be taken as evidence on its own that the market is irrational.

        Just to be clear though, the market is very irrational about AAPL.

    • Anonymous

      I agree that is *a* factor, and a non-trivial one, but it doesn’t explain even a majority of a 13.00 P/E (@456/sh) when earnings over last year have grown 86%.

      Not picking on you (as it is – unlike explanations like those around share price – a “justified” reason for discounting the stock non-trivially), but just weighing in that I think there are at least a small handful of other factors that must be even larger.

    • Sharon Sharalike

      “If I assume that the cash is not generating much value, then I have to pay in  cash/share $$ just to reach fair valuation”

      That’s a good point. Their operating margin is more than 40%, but obviously the cash isn’t producing 40%. But to get in and participate in the 40% you have to first cover the cash, so that’s ~25% “dead weight” for the investment.

      • Anonymous

        That’s only true if you believe that some part of the value of Apple’s stock is in its cash – which quickly then makes this a circular argument. I contend that zero of its cash is valued into its stock, because even if there were zero cash Apple stock would still be seriously undervalued. It would only become “dead weight” relative to the higher margin earnings if Apple became overvalued because of its cash.

  • mysterio

    I don’t disagree that AAPL is undervalued, but the metrics you use are taking too short a timeline.  The vast majority of Apple’s EV comes from cash flows generated more than 5 years from today – their so-called terminal value. Thus, being a bull on Apple means not only do you believe in growing profits from iPhone, Mac, and iPad, you also believe in great profits from whatever products Apple will make in 5 years.  Since Apple is disruptive/unpredictable, it’s hard to know what those products will be. We know almost exactly what Coke, Monsanto, and JetBlue will be making in 5, even 20 years, so they’re easier to value and the market gives them more credit for their future cash flows.
    Bears just don’t see how one company can continue to create one disruptive product after another indefinitely. They don’t believe that failure or competitive pressure is imminent, they just believe that failure is eventually inevitable.  Bears aren’t afraid of the Xoom 3 tablet or the next Blackberry beating the iPad and iPhone, they’re afraid that in 2017 Google or Samsung or some startup will develop a wearable computer that disrupts mobile handsets and tablets entirely and Apple will be left out in the cold. To bears, Apple is like the old Sony that dominated in the 90’s with the WalkMan and PlayStation, and is now struggling to stay relevant.Bulls see Apple as a hit factory (like Pixar) rather than the hits themselves. Apple is a unique organization capable of generating a constant stream of world-beating products. For as long as bulls can see, Apple will make great stuff, and we’ll buy it at a high margin.  Bulls probably see Apple most like a pharmaceutical company or maybe a well thought-of private equity firm like Blackstone where the hit drugs/deals just keep coming.So is Apple a collection of great products or the factory that makes them?  The market is valuing it as the products, predicting that Apple’s next releases will be flops,  the 21st century Lisa and Newton. You and the readers of this blog value the factory.  

    The market can stay irrational longer than you can stay solvent :-)

    • mysterio

      PS – I’m not surprised by Apple’s low valuation, but I’m surprised by the low volatility.  Bears should see Apple as being worth $300, and bulls should see it as $1,200.  With that much divergence, I’d expect prices to be all over the place.

      • Chris

        That’s a lot of market cap for institutions to move, even collectively. In a deleveraging environment your just not going to see that.

      • mysterio

        Good point. Also, given how many indexes they’re in, the majority of AAPL trading is probably done through ETFs rather than direct investment.

        Still, there are days when the markets vaporize or create trillions in market cap, so it’s definitely possible.

    • Anonymous

      What you say might well be the thought process of many, but that just serves to show how misled they are. It’s easy to show how, even in the absence of any new disruptions, Apple is leading the way in the larger disrupting arena of mobile computing. That will clearly continue for years to come, and is the reason Apple’s earnings will continue to grow like Topsy.

      • mysterio

        “In the absence of any new disruptions…” is the key flaw there. There will always be new disruptions. The relevant question is, will Apple disrupt itself successfully next time, as it has with iPod/iPhone and Mac/iPad?

      • Anonymous

        “There will always be new disruptions…” Granted, but as I pointed out, there is a larger disruption going on that is lifting all boats higher. It is inconceivable that Apple would fail to be one of the handful of companies to benefit handsomely from this groundswell. Ergo, their earnings are going to grow for years to come.

      • mysterio

        These types of cycles tend to last ~10 years. We’re at least 5 years into smartphones. Investors should already be thinking about what’s next. When you pay 30x a company’s forward profits, you’re betting on a lot of growth for a lot of years.

      • Anonymous

        Wow. That’s a lot of guesswork on your part. So the Graphical User Interface only lasted until 1994? Who’d have thunk it? And Apple’s EPS yoy equals $35.11. Let’s see: divide that into $456.66 and you get – huh. Not 30x but only 13x NON-forward profits. Wow. That’s some crystal ball you’ve got. It actually sees Apple not growing at all!

  • Anonymous

    A $50 billion dollar annual dividend would do the trick on setting an appropriate share price.

    One trillion dollar market cap anyone?

    • Onafunjourney

      2014

  • Ko2300

    what is amazing about that first graph is it clearly shows you how many years it took aapl to accumulate as much cash as the market cap for that year.  In other words in March of 2009 aapl had a market cap of just under 100 billion… Less than 3 years later, it has just under 100 bln of cash… Granted that was the credit crisis, but even if we move back 3 years to March 2007 when aapl was on its climb to just under $90/share…  Less than 5 years later it has that much money in cash….  In less than 5 years will aapl have 450 bln in cash or equivalent after div/buy back..??  possible right..??  Unbelievable…  and if the stock price does go up 4-5X like it did since 2007 I will a happy man.. It doesnt need to happen overnight, slow but steady, and it is looking good so far.. I have one question… If we are all under predicting what happen can be or is, and a 450 billion market cap is so cheap, where in your wildest dreams do you see then finally peaking or slowing in growth..??  I think a headline of the first 1 trillion dollar company are possible, and actually likely in the next 5 years.  But from there, where do we go? Is aapl a 4 trillion dollar company in 2020?  Im seriously asking this, cause then thats a 10-bagger and I would be on the right side of a great call here in 2012……  thoughts……

    • Ko2300

      sorry, typo, 2 years back from 2009 into 2007 not “3 years to March 2007″…. haha
      Anyway, great article man…  I love your work….

    • Anonymous

      I did a rough calculation recently that looked at revenue. Apple’s been growing revenue at over 50%/year for the last few years. If that continues, how much would Apple’s revenue be worth by 2020? Apple’s present yoy revenue came to $127.84 billion. Eight years from now, assuming 50% growth in revenue per year, that revenue would grow to $3.28 trillion/year, or more than 25 times what it is today.

      Is that a reasonable projection? No. But it’s also not completely out of the realm of possibility either.

  • Anonymous

    Apple’s customers are loyal because they love the products and believe in the company. iOS customers are pretty much locked in because of the ecosystem (software they own, iTunes, and iCloud). 

    Computers have about a five year life cycle. Smartphones maybe two years. With 95% customer satisfaction, a couple hundred million customers are going to be upgrading their devices every two years. They’re not going to switch to Android or Windows Phone. This means the base business is renewable. Apple is not just a factory producing hits.The customers are repeat customers.

    There are close to a billion shares of Apple stock outstanding with 70% owned by institutions. Apple’s customers, many of whom literally love the company, would also love to own the stock but consider it too expensive at $450 per share. At that price, the typical young customer might not even be able to afford ten shares. Apple should consider a ten for one stock split.

    • Anonymous

      I think a part of having such a high stock price is it prices the dumb money out trading your stock. While there are fewer people in the market to buy your stock, the people you are selling to are a lot less susceptible to what Jim Kramer and CBS Marketwatch say, selling on rumors, buying on hype, and generally making your stock price a volatile slave to media blabbermouths and fashion.  Viz. Berkshire Hathaway.

      • Anonymous

        No, that’s BS. The ‘dumb money’ was dumping Apple stock last Tuesday leading into the earnings call. Those were big institutional dumpers by the way. 

      • Z Kariv

        Agree!

      • Walt French

        Last Tuesday’s volume was in line with the average daily volume from the second half of last year, little more than half the post-announcement trading. About 2% of all shares outstanding. Some people just gotta trade.

        And did I mention that the number of shares sold by fearful sheep was exactly the same as the number of shares bought by greedy opportunists — what a coincidence, eh? Yes, savvy analysis of tick-by-tick trades can make good guesses as to whether a buyer or seller initiated a trade. But claims ought to be backed with data, not the crap rumors that always fly around.

        I can speculate that short-term traders got worried that a relatively tight consensus indicated that “the market” was paying insufficient attention to the risk of a miss. That would seem equally well supported by the data (I.e., not very much.)

      • Tatil

        Berkshire is $75,000 per share, very few retail investors can afford to buy one share. Apple is about $450 per share. Very few people invest in increments less than $500 when they buy and sell shares. Whether they put in an order 10 or 100 shares, it hardly makes a difference. 

      • Anonymous

        I agree. I think splitting the stock would increase volatility – higher highs and lower lows. But I also think it could bring a fresh influx of buyers into the stock. I remain ambivalent about the wisdom of splitting. However, I am far less ambivalent about the continued diluting of the stock. IMHO, that should cease. If Apple Inc wants to reward its employees with stock options, then it should buy those shares off the open market.

  • http://twitter.com/snackroyd Stephen Ackroyd

    What is the downside risk in AAPL?

    When there is a serious macro-economic retrenchment, it is frequently the fastest grower, the highest flyer, that suffers the most.

    Imagine a huge new AAPL product launch – that failed. 

    Or imagine a product defect that caused the recall and replacement of 30M units of iPhone.

    Or a MSFT that got it sh*t together and enabled Asian manufacturers to ship competitive products at around half the price.

    Or imagine that a macro-economic event takes place that really disrupts the economy, like Europe and California failing, or like oil being cut off from the Middle East.

    We can imagine events where the demand for AAPL’s products might be cut in half.

    Could AAPL effectively respond to that type of shock?

    Supplier Costs: AAPL likely has long term contracts, where they may not be able to put the brakes on.  The AAPL supplier costs may still go up based upon forward commitments, commitments made based upon predicted growth.

    Retail Costs:  AAPL has high costs inside its retail channel, again costs that it cannot turn off easily.

    I could easily envision an AAPL business where the presumption of growth was not properly hedged and the result was a very hard crash in value.

    It is frequently the highest flyer that gets hurt the most in a crash, and there are significant risks out there.

    • Link

      Im just curious what you mean by “high flyer”..??  If you mean a stock that has an extremely high PE ratio which factors in a lot of growth into their valuation for the current stock price, then aapl is most certainly not that.  If you mean that aapl sells a ton of merchandise that people buy which equates to massive sales, then yes, I guess apple is a “high flyer”.  In my mind the analogy of flying high means you are high above the “ground” no..??  So lets take a stock like AMZN, which I would consider a high flyer.  they are flying extremely high above their ground, EPS of 1.90 and PE of over 100.. However appl has an EPS of 35.11 and a PE of 13. My point being the ground is much closer is the case of aapl than it is in amzn, so sure, what if the world gets hit by an asteroid (1 in 1,410 chance for the year 2182) then we are all screwed and aapl goes down. So I say, go ahead and live your life in fear, meanwhile, our ship will continue to sail further and further away from your lonely island of disbelief…..

      • Anonymous

        Beyond that, Apple is insulated by one remarkable fact; customer loyalty. It’s rare for an Apple customer to jump ship. Why? Because they can count on being on the cutting edge. Yes, Microsoft might get its act together. But building brand loyalty takes years, and for Microsoft that’s exactly what they would need to do (take years) just to compete in the Brave New Paradigm of Mobile Computing, where Apple already has the reputation, the ecosystem, and the products to beat.

    • Twitterguy

      Fortunately Apple is ridiculously undervalued (see P/E of 13) so you don’t need to worry.

    • Anonymous

      Stephen Ackroyd,

      Twitterguy & Link are both right (see their comments below)

      Apple is so undervalued, its growth potential so discounted, its PE compression so extreme, that it seems Mr Market has taken all your negative assumptions, and more, on board!

      If you really did your research and got to properly understand Apple and its enduring competitive advantages in the markets it operates, you would realise that your negative  assumptions are extremely unlikely.

      Does one invest on the basis of the extremely unlikely or the much more probable, predictable growth?

      • Z Kariv

        So,
        Amazon has the same real estate commitment, workforce identical to apple with wallmart and , possibly, Google ready to compeat directly with them, with much smaller reveneu and no profit and margins to talk about and…
         a 106 PE (10X of Apple). How that fit your theory?

      • Anonymous

        Z Kariv,

        I think you are addressing your comment to Stephen Ackroyd?

        I agree with you that Amazon is overvalued and Apple undervalued

    • Anonymous

      With such massive profit margins on all products Apple could, by reducing prices on their products, kill any competition over night. Apple would still have far higher margins than the rest of the industry. You simply fail to understand this, Apple is untouchable. How is that for predictability?

    • Gregg Thurman

      “Could AAPL effectively respond to that type of shock?”

      It’s called ‘cash’.

    • Onafunjourney

      Stephen,

      Do you own a house? What is the downside risk in your house?

      It could burn down. An earthquake could crumble it.

      A negative economic environment could cause it to tumble another 50% in value.

      Could you withstand a shock like that?

      Perhaps you would be wise to sell your house.

    • Onafunjourney

      You have to evaluate probabilities, not just possibilities.

      You ascertain probabilities based on insights into a company’s products, profitability, branding, innovation, success, customer satisfaction, sustainability and many other factors.

      If you confuse what could happen with what is likely to happen, you will end up selling your house out of fear, or getting tshirts made up that say President Gingrich.

  • http://www.facebook.com/people/Charlie-Potatoes/100001513283669 Charlie Potatoes

    I like this.
    Listening to the constant chatter about the law of large numbers is Infuriating . The talking heads completely misinterpret what it is all about. This law is only appropriate if you completely dominate the market that you are in. Back in the other eras Cisco and Microsoft achieved this in their respective markets. Apple is in at least five or six markets with less than twenty percent penetration. Consequently one must calculate that the asymptotic number for the law of large numbers to apply is at least twenty-five times bigger than it is now. For the law to apply to Apple their market cap will have to approach ten trillion dollars ($10,000,000,000,000). For those that believe, enjoy the ride.Brought to you by Siri and Air Dictate in the able hands of Charlie

    • http://www.facebook.com/james.scariati James Scariati

      “Listening to the constant chatter about the law of large numbers is Infuriating . The talking heads completely misinterpret what it is all about. This law is only appropriate if you completely dominate the market that you are in…Apple is in at least five or six markets with less than twenty percent penetration.”

      Exactly. Everyone seems to think that Apple’s on the verge of faltering, but the truth is they’re still a minority player in basically every market they’re in. The Mac is clearly a minority in PCs; the iPhone is a minority of all total cellphones; and the iPad (while currently the dominant player) is part of a brand new market that basically didn’t exist 2 years ago. The only Apple product that’s in a matured/receding market is the iPod in portable music players, which is very quickly being replaced by the iPhone.

      So really, despite the success Apple has already achieved, they really have nowhere to go but up. Which is why the claims that they’re “about to” fail have been continually wrong for about 10 years.

  • http://twitter.com/JessiDarko Jessica Darko

    In the EPS graph, the lowest PE multiple you show is 15X.  Apple has been often trading around 12X and sometimes less than 10X expected earnings.

    Would you update the graph in the future to show the 10X number?  This is the number I use for my valuation of Apple. (I think it would be a crime for it to trade only at 10X, but I use it as a guide for the price at which I will buy AAPL.) 

  • http://twitter.com/kumar_amit amit kumar

    Nice article and really good view points . Myself being from India(with 640 million mobile connections – NO TYPO) I would like to put in some perspectives which might be a bit different . The price of iPhone 4 and iPhone 4S for average Indian(who is engg n probably working in a outsourcing company) is beyond reach/believable(simple terms iPhone 4 8GB is priced at around 30% higher than Galaxy S2 while iPhone 4S is priced at almost 60% of S2) .

    iPad , iPods and Macbook is almost same price as in US (may be just 10% than US dollar converted Rupee price)

    While iPhone(whichever model you take) is again priced ridiculously high(almost 35% higher than USD converted price) .

    iPhone is what Apple’s real cash cow (of course iPad as well) but its sales in India and China are very very low compared to its overall Worldwide sales primarily due to premium pricing . Mind you dont underestimate the amount of ‘RICH’ people who are ready to jump in iOS (iPhone ,iPad) if  the prices go down by say 20% to 25% . I guess in India there would be a minimum of 10 million people who would buy iPhone if it gets pricing exactly at Galaxy S2 (INR
     28000 approx . $600)

    Why am I saying this – Its simple . Assume something bad happens to Apple and it decides well let me cut prices , reduce my margin and see the fun .

    Tablets- With blackberry , HP , blah blah all have been reduced to dust trying to compete imagine  situation Apple has lowered its iPad price by 20% . The competition will be decimated. They will not know what to do and rather close shop (as HP realized earliest)

    Smartphones – You have to believe but there are number of my friends who picked up smartphones like S2 or sensation purely because the iPhone 4 (30$ higher) and iPhone 4S(almost 60% higher) . And I bet there are millions of such consumers in India , China and worldwide .  Apple has huge margin on iPhone and people love iPhone . The day there is problem with apple in some dept and it reduces iPhone price by say 20% particularly in the HUGE developing country the volumes are going to skyrocket .
    A simple question if S2 and iPhone 4S were priced exactly same what would millions of people would prefer ?

    iPod- Less said the better it is .

    Macbook – Again Apple has great margins here and competitors are actually askign Intel to give subsidy for them to compete with Apple .Even in next 10 years Linux or any other OS will NOT become a threat to Mac OS or Windows Period. Imagine if Macbook price is reduced by say 20% at $800 . The volumes are again going to skyrocket .

    Absolutely no analysis i have read anywhere has taken this aspect that courtesy of such high margin and still such huge sales Apple has so much room to cut margins if push comes to shove . Competitors Know it and they dread it . I mean with almost $5 billions sales of iPads in last quarter and gross margins anywhere between 25% to 35% Apple can literally kill everybody with lower prices .

    If a business is operating on razor thin margins like Amazon or retailers or normal Dells n HPs is there is absolutely no room to cut prices and still be profitable .

    Opposite is true for Apple .

    If I am a Samsung/RIM/HP/Dell/HTC CEO and read about Apple cutting prices I would rather resign and run away than to try and compete .

    • berult

      Apple relies on the Indian, Chinese, Brazilian, etc middle classes to grow at relatively the same rate as Apple’s capacity to supply them with iPhones, iPads, etc …at their branded, universally set price points. A leap of faith with respect to fast emerging economies, a state of equilibrium with conditions for Apple business model ‘high margin’ sustainability.

      Amazon, Walmart, Google, etc, are essentially low-margin, volume Disruptors. Apple is some other kind of beast altogether; qualitative disruptions are particularly capital intensive, thus require the means to generate funds on a business cycle’s notice. High margins are liquidity generators for the sole purpose of Apple’s standard practice of innovations; they are a core element of their business model.

      I think you should apprehend Apple’s India strategy as a mark of respect for, and solidarity with India’s socio-economic development; the latter links up so very well with Apple’s own spectacular development.

    • Gregg Thurman

      Amit, it’s quite possible that Apple is managing its unit sales volume with variable pricing.  Consider that Apple sold every single iPhone 4S it manufactured during the December quarter.  What possible good would have come from lowering the price of the iPhone in a market of 640 million connections?  Answer: None whatsoever, as Apple doesn’t have the production capacity to satisfy current demand.  Increasing demand would not increase sales without an increase in production capacity.  Think Brazil and western China production facilities.

      • Anonymous

        Gregg, I think Amit knows that. He’s simply pointing out that, once Apple is able to exceed demand with production, it will drop its margin and decimate the competitors who are relying on razor thin margins to compete. I think it’s a great point!

      • http://www.asymco.com Horace Dediu

        You can see Apple’s pricing strategy here: http://www.asymco.com/2012/01/26/price-competition/
        In a nutshell, Apple does not change prices. Ever.

    • Anonymous

      I think that’s a great point! Once Apple has built up its distribution, it will be able to satisfy demand, and it will drop its margins to compete. At that point, those who presently compete with razor-thin margins will be decimated.

  • Wesley Hsu

    The business of disruption relies on the presence (and acceptance) of uncertainty. Apple embraces the uncertainty of the tech future; in fact it thrives in the uncertainty of the fast-moving tech market. With every stunning success, Apple reinforces both the uncertainty of the market and the uncertainty of investing in it. 

    Isn’t this the real reason that Wall Street and large-scale investors are disdainful of Apple? Not out of an evil conspiracy to fight innovation, but out of an almost unconscious repulsion to a culture that’s pro-uncertainty? Apple says “uncertainty is reality, and it is good.” Wall Street says “Fear Uncertainty and Doubt are poisonous and evil.” 

    This isn’t a conflict of interest? 

    Wall Street loves whoever makes their math both easy and validated: dividends, announced 5-year roadmaps, commodity products like petroleum, predictable consumption like Windows upgrades. Apple’s model not only denies them the numbers to plug into their ancient algebra, Apple’s success actually spites their methodology.  

    Unconsciously or otherwise, Wall Street wants Apple to fail, because it ends the threat of disruption to their own pricing models, predictive algorithms, and so-called expertise. 

    It’s personal, though they’d never admit it. 

    • Anonymous

      Good point!

  • BenN

    Has anyone looked at this the other way around? That it’s not Apple that is undervalued, but rather other Technology companies (I’m looking at you Google) that are overvalued?
    It seems to me that Apple’s P/E of 13 is comparable to Microsoft’s P/E of 11. Meanwhile, Google trades on a P/E of almost 20, and even Yahoo (a company circling the drain) trades at a P/E of 19. Perhaps rather than seeking a higher P/E for Apple, we should be looking at a lower P/E for Google/Yahoo?

    • Anonymous

      It’s probable that there is P/E compression across the board, mainly due to insecurity about the future of the economy. But Apple’s is in a class by itself.

    • Wesley Hsu

      Historically P/E of 20 isn’t that high for tech companies with good revenue streams. It’s generally lower for non-tech companies because they lack the possibility of sudden windfalls (note that pharmaceutical companies get high P/E for the opposite reason). I remember tracking Robert Mondavi wineries for a while because they had a P/E of less than 4. There’s just not that much potential upside for selling booze. 
      Google’s price is a balance between bear sentiment that its adwords-model is disruptible and the bull sentiment that its long project of integrating Search/Mail/Plus/Maps/Docs/Pics/Wallet/News/Blogs will eventually rule Web 2.0. Microsoft’s lower P/E comes from Windows looking more dinosaur with every Apple launch, and a lack of faith in their roadmap.  Yahoo’s 19 comes from, um, the fact that the share price is 19X a very, very small E? You got me there.    

    • http://www.asymco.com Horace Dediu

      Forget technology, look at the S&P 500 P/E ratio of 16. There is no right or wrong P/E. It’s a rule of thumb index that suggests long-term confidence.

  • http://ARMdevices.net/ Charbax

    Apple has nothing other than the iPhone to make up 70% of its profits. The Smartphone business is the most disrupted market in the world. The iPhone is being totally out-disrupted by cheaper/better Android choices worldwide. There is no way Apple can keep the same amount of profits coming in for more than a few months at the most. AAPL is way over-valued. Sell your AAPL stock now.

    • http://www.facebook.com/james.scariati James Scariati

      More than a few months at the most? Apple’s already been pulling in the majority of the industry’s profits for years.

      • http://ARMdevices.net/ Charbax

        Compariong smartphone profits with feature phone and dumb phone profits is stupid. All the Android smartphone makers are very profitable also (at least compared with their times before they started really using Android in the past 2 years). And profits are going away from all high-end Smartphone makers, that is a basic logic and people investing $417 billion in a continued smartphone profit margin stream, be it Apple or any other smartphone maker, are completely moronic.

      • http://www.facebook.com/christian.peel Christian Peel

        I admire your chutzpah, and hope you stick around on asymco!

        It would be interesting to have your perspective after future earnings calls.

      • Simon

        I’ve seen Charbax everywhere for a while now and I am still amazed someone can be so enthusiastic about Archos in this day and age. I mean…Archos!

      • davel

        This is not true. Just look at Horace’s previous posts on this subject.

        Samsung, HTC and RIMM make money. Everyone else loses. Some have been sold or merged or in other ways leaving the market.

        Motorola, an early Android provider, was bought out because it cannot stand on its own. In fact that manufacturer was the original basis for Verizon’s Droid advertising campaign.

      • http://ARMdevices.net/ Charbax

        Every Android maker is winning. All of Sony-Ericsson, Motorola, LG, Samsung, HTC, Huawei, ZTE, Asus, Acer, all were pretty much dead in 2008, all painfully loosing against iPhone1, now they are all 10x more successful, all grabbing market shares that they couldn’t even hope for before using Android, they have all been saved by Android and they are all dominating the Smartphone market thanks to Android.

    • Martin KK

      Money where mouth is please. How short have you been ??

      • http://ARMdevices.net/ Charbax

        Sell while you’re on top. Don’t short. Morons worldwide can always buy a failed stock for months longer than reasonable.

      • Onafunjourney

        I’ve heard that some short sellers get on boards and make loud mouth lies and claims, also saying they are not short.  I am glad you are not that kind of CHAR-latan BAX-stabber. 

      • http://ARMdevices.net/ Charbax

        Yeah cause I can convince the thousands of Apple fanboys all by myself. Right. If I can save a few AAPL shareholders from not taking their profit selling while they’re on top, that’s be good for them. But I can also care less what AAPL shareholders here on this AAPL fanboy blog comment thread do.

      • Onafunjourney

        For the record…You are saying sell at $450-ish

        When it hits $500 and then $550 will you at least post an “I was wrong!” comment?

        You are free to follow it with paragraphs and paragraphs of doomsaying and distorted analysis if you wish.  I wouldn’t not want to ask you to break long ingrained habits.

        Also, for the record just how long now have you been wrong on your predictions… It appears your previous post contain similar bashings, claims and errors all the while the stock has climbed.  To say you are credibility would be hmmmmm….Truly Overvalued!

      • http://ARMdevices.net/ Charbax

        The stock can go to $550, that’s not the point. The point is you do not value a company above $100 billion for making more than 70% of its profits on a smartphone. It does not matter if someone claims it’s the best smartphone in the world (which I don’t think it is), the plain simple fact that Apple makes 70% of its profits only from the iPhone is the pure fact that should warn anyone strong of AAPL shares to be very very careful, the collapse can be imminent. In less than a month, some Chinese megabrand can announce an excellent Android phone to be sold at $99 unlocked, AAPL shareholders can read in some NYT or WSJ article that 70% of AAPL profits comes only from the iPhone, the AAPL share can then collapse. From $450 to $250 in a few short weeks. $200 billion in AAPL market cap can disappear in such short time. There are many other worthless tech stocks likely to collapse soon, Intel, Microsoft, HP, Facebook, Twitter, Groupon, Zynga, all those are worthless, have fun in your bubble.

      • jawbroken

        They have $100b in cash, why would you value them below $100b? You have a very “interesting” grasp of finance.

    • Kizedek

      Oh. The smartphone business was disrupted in 1997. Has it really been disrupted since? I hadn’t noticed. All the OEMs in the world selling more units than Apple sells iPhones is hardly a disruption. I’d be worried if they didn’t sell more. Their relationship with a software giant and with the carriers and with the retailers has not changed, no disruption there. They have copied Apple superficially, but can’t pull off software, ecosystem or quality of engineering innovations, so, nope, no disruptions there.

      Well, evenso, good thing that Apple isn’t really into making smartphones, then, isn’t it? Shhhh, don’t tell anyone, but the i”Phone” isn’t really a smartphone… It’s a Mac in disguise ;)

      So let me correct that for you… “Apple is currently making 70% of its profits on the second to last iteration of its Mac, while the latest iteration (the iPad) is rising far faster.”

      • http://ARMdevices.net/ Charbax

        Apple made 99% of its fortune on the ARM Powered iPod (2002-2006) and iPhone (2007-2011). It’s got nothing to do with Mac. With the Mac alone and no iPod, Apple would have been near-bankruptcy about 10 years ago. You just go on and dream that carriers and Apple are going to continue this scam for a long time.

        France just got a new carrier Free Mobile, it’s 4x cheaper than every other carrier. It only works with unlocked phones. Consumers on that carrier can choose a Huawei or ZTE 3.5″ capacitive Android phone for 100 Euros or a 3.5″ capacitive iPhone 4S for 650 Euros. Yeah sure man, you just dream on that the iPhone still is going to be popular in countries like France in a few months from now.

        In the whole world, most mobile phone users are on pre-paid plans, fewer and fewer sign up for ridiculously expensive contracts. Only in the USA is the contract still dominant among consumers, because US consumers are completely duped. But even in the USA, the Android high-end phones are way more popular on contract than the iPhone. And even in the USA, you’ve got about 20 new pre-paid MVNO carriers coming with more and more disruptive pre-paid services that are not subscriptions, and with unlocked contract free mobile phones likely becoming the default way to get a new smartphone in the USA within a year from now.

      • Kizedek

        Nobody’s dreaming, except perhaps Apple competitors trying to make a profit.

        You make my point for me: the iPod is not now the main profit center for Apple. Why is the iPhone the end of the line? The iPad has already come along and is set to rise faster.

        Incidentally, there is talk of a disruption in TV by some kind of new Apple TV product that moves its current “hobby” (still profitable, by the way) into something that may rival the iPod, who knows?

        Unlike the iPod and Apple TV (current Apple TV), the iPhone and iPad are intimately related to the Mac, as general purpose computing tools, and as evolutionary descendants. There is more to come. That is why I relate them… If there is doubt about the future of “smartphones”, what is it to Apple? Apple will evolve its products to meet new circumstances — if it doesn’t create those circumstances itself.

        Meanwhile, the traditional Mac is selling more than ever.. Increasing into a vast market once owned by MS and where people are looking for change and know that MS is no longer the only real choice for staying “compatible”. Regardless of whether Apple was once near bankruptcy or not, there are makers now out of business who would love to have sold 5million PCs per quarter with the margins Apple makes. HP almost sold off its division. HP tried their version of the iPod. Netbooks? Nope. Ultra books? Hard to do. What do you propose HP do? They have Palm, maybe they should make smartphones. What do you say?

        So, even with no iPhone, what would Apple have today — a business twice as big as HP or Dell, instead of 10 times? You see one product, the i”Phone”, and you smell danger. But us dreamers see solid business in at least 4 markets — all-in-ones, laptops, ultra books, tablets, mobile devices, personal music players, and Iiving room set top boxes. But that only gives part of the pictures, since all of these are strengthened and given value by software, ecosystem, OS, cloud services, support, etc. And ALL of these products are profitable, there isn’t a dud or loss maker among them.

      • http://ARMdevices.net/ Charbax

        You should look at the numbers before speaking so confidently.  The Mac business is less than 10% of Apple’s current profits. Meaning as the iPhone can die, near 90% of Apple’s profits is under serious threat.

        iPad has been overtaken by Android tablets already, regardless how many clueless bloggers keep saying that Android tablets are loosing. iPad generates 2x less profit per sale than the iPhone today. That number will keep going down as consumers are disgusted to have to pay as much as $499 for a tablet. Consumers want to pay $199 for a Tablet now. The Tablet profits are also under serious threat.

        Apple TV? You must be joking. Go to your local Costco, the 42″ Vizio HDTV with perfectly fine 1080p resolution is for sale there for $299. There is ABSOLUTELY no profits to be made in the TV business, none, nada. It’s finished. Only maybe 4K HDTVs can make a bit of profit if seriously mass produced and sold below $2000. But even that is a much smaller profit amount compared to the current Smartphone market profit.

        The PC business is a finished business. Sure Apple sells a few Macs, but it’s not worthy of a $417 billion company. Of a $30 billion company maybe, about the size of Dell, considering Dell has a quite profitable income from huge amounts of enterprises worldwide which a few overpriced thin Macbooks can’t be worth much more.

        The truth is Apple can only look forward to their profits disappearing, there is no other way. You can hope Apple invents some amazing wearable computing that is also overpriced with also about 400% profit margins like the iPhone and that somehow everyone in the world will want one. I don’t believe it’s possible. Sell your AAPL stock now while you are ahead, that is the only intelligent thing to do.

      • jawbroken

        Wow, this would all be of great concern if it wasn’t completely unsupported by reality.

      • http://ARMdevices.net/ Charbax

        Ya sure. I think even on asymco you can find the articles showing how iPhone represents 70% of Apple’s current profits, iPad less than 20% and Mac less than 10%. Yea, no reality you think.

      • Kizedek

        The reality is that people said about the iPod what you are saying about the iPhone.

        The reality is that you are presenting a one-sided snapshot of today alongside your assumptions for the future.

        The reality is that Apple thinks in 10 – 25 year time frames and lays foundations for its future. So far, it isn’t Apple that has failed to adapt.

        Apple should watch out for cheap internet in everyone’s pocket? How about Google watching out for what the internet is even going to look like? Facebook could eat its lunch tomorrow.

        The reality is that Apple products are appealing to more and more consumers who are tired of the lack of value they are receiving with cheaper alternatives.

        You sound bitter.

      • http://ARMdevices.net/ Charbax

        Haha, Apple went from a $1 billion company to a $150 billion company with iPod between 2000 and 2006. And went from a $150 billion company to a 400 billion company with the iPhone between 2007 and 2011. And you are telling me that Apple is thinking 10-25 years ahead? Yea, man, keep dreaming. Apple was lucky to be the first and for a while only big consumer electronics brand to massively invest in the Mp3 player and smartphone. But now they are not anymore.

        Facebook is totally worthless. But I wish Apple spend its $100 billion cash to buy up Facebook. That would be a spectacular way for Apple to loose all of its cash in a second.

        The only consumers buying Apple still are the ones who do not yet know that there are cheaper and better Android alternatives. Anyone who knows about Android would never consider buying Apple.

      • Kizedek

        And MS went into gaming and social and phones and encyclopedias and look where it has gotten them; Amazon went into tablets and look where it has gotten them (more revenue, less profit); Google has gotten into OS and phones and look where it has gottent them (one big hole)… so, what’s your point?

        Yes, Apple does make extended plans, and they are patient as they get lots of pieces in place in order to take calculated steps forward with a good chance of succeeding. It is stated they think of 10 and 25 year horizons.
        Apple migrated to a new OS more than 10 years ago now. Their vision for it was to be CPU agnostic. It runs successfully on PowerPC, Intel, ARM. (we’ll perhaps see how MS are doing in that regard at the end of this year).iPad and iOS was in the works well before the iPhone. The iPhone is not so much a major re-invention of the company (as you would have it), so much as a logical application of their continued vision for better and better personal computing devices. They had the Newton, but were content to can it until technology caught up with their vision. Siri is a step in this direction.The iTunes and MacApp Stores and iCloud are examples of NeXt’s WebObjects coming to fruition. I had to mess around in Google Apps again today — just doesn’t compare, it’s a shambles. Any Google app stuff I want to do I can do in any number of great iOS apps with a lot less faffing about with multiple browser tabs opening all over the place.

        Lots of retailers are rushing to copy Apple’s personal check out methods.

        What do people who *know* about Android know about Android? How “open” it is? Do share what you think we should *know* about it. I use OpenSource stuff all the time to build projects. I thank God for OpenSource. Doesn’t mean I want my personal computing devices to be one big OpenSource project. I might also have a dream to build my own house one day — doesn’t mean I want to live in it while I am building it.

        And, no, Apple wasn’t the first to invest heavily in either the MP3 player or smartphone markets. Therefore, luck has nothing to do with it. They re-envisioned and produced superior products people could relate to. Perhaps there is a reason all subsequent products are modelled after them? Yet what makes the product what it is, is hard to duplicate.

        And BTW, Apple haven’t lost the MP3 player market to another entrant, they still dominate it — it just happens to be the one market that Apple is in that they have reached saturation levels. In fact, this same iPod now has new legs and life as a personal handheld gaming device that is set to dominate THAT market.

      • http://ARMdevices.net/ Charbax

        Apple stole the hard drive mp3 player idea from Archos, Apple was the FIRST to invest $1 billion into mass manufacturing of that type of device which is the only reason iPod was a success. Which gave them an exclusive on one hardware component, the click wheel. They didn’t invent it, they paid for the exclusive.

        Apple stole the smartphone idea from Archos and several actual smartphone makers of the time. Apple was the first to invest $15 billion in the mass manufacturing of a smartphone, which got them exclusive on a hardware component the 3.5″ capacitive screen. Apple did not invent it. They paid for the exclusive.

        The only reason iPod and iPhone were successful was ONLY about cash. It’s all about cash. It has nothing to do with design, nothing to do with long term visions, nothing to do with the CEO. It has all to do with the smart decisions to massively invest in the mass manufacturing of good ideas that other companies have been showing a trade shows at the time.

        Again that Siri thing is a piece of shit. It’s a startup Apple bought and repackaged into a marketing speech for the gigantic failure of a launch of the iPhone 4S (sad for Steve Jobs that the last thing he saw was how revoltingly bad the iPhone 4S launch was with all Apple fanboys in the world being totally dissapointed).

      • jawbroken

        So disappointed that they bought them in record numbers.

      • http://ARMdevices.net/ Charbax

        The smartphone market is growing much faster than iPhone growth, and that is not even considering the growth of the share of cheap smartphones over the expensive ones.

      • http://www.asymco.com Horace Dediu

        During the last quarter the smartphone market grew at 59.4%. The iPhone grew at 128%.

      • http://ARMdevices.net/ Charbax

        You don’t count Q/Q, you must count Y/Y, otherwise it makes no sense. It’s really smart of you to compare Apple sales pre iPhone 4S launch and post iPhone 4S launch. As you know, Apple fanboys queue up for the new release. A last quarter of year consumer electronics sales does not prove anything.

      • http://www.asymco.com Horace Dediu

        The growth cited is y/y.

      • Martin KK

        Interesting perspective … dead wrong on the facts. Truly astounding how someone can look at the underlying drivers to Apple’s business and declare their future to be at great risk. Strongly suggests another motive for these thoughts … it’s certainly not to inform the rest of us.

      • http://ARMdevices.net/ Charbax

        My motive? I want to see $25 Android phones in every hand sooner rather than later, that’s 5 billion more people who need equal access to Internet technology. $650 smartphones are a dying breed. Regardless how many bells and whistless you put on it. 2 years from now, even if the iPhone 7 has a feature that lets it levitate, become transparent and be bendable with zero bezel, even then people will not accept paying $650 for it unlocked or pay $2500 for it on contract. Why, simply because 2 years from now, $50 Android phones, no contracts, potentially even free VOIP calls on White Spaces, are going to be better than Galaxy Nexus in performance and form factor, everything else does not matter.

      • Jeff G

        Char box,

        “everything else does not matter”

        Mmmmm…. share price matters.

        How do you suppose Apple fanboy tech bloggers and the like have done on their long AAPL holdings?

        Have you ever been right?

      • http://ARMdevices.net/ Charbax

        I have always been right. You can look back at all my posts since 2000, everything I say comes true. AAPL stock value will be halved within 6-12 months, reply here by then and tell me I was right.

      • Jeff G

        I only had to go back 5 weeks to find this:

        “Apple will still remain successful but they cannot remain a $376 Billion
        company….”  – Charbax

        Good call…cuz now they are a $424 Billion dollar company.

        I can see them going to a Trillion market cap, then getting cut in half to $500 Billion and you saying…”See, I was right told you they would get cut in half.”

        Your definition of right is very nebulous, error-filled and from an investment standpoint…costly. 

        I hope you stick around…I have literally laughed out loud reading some of your nonsense. 

        (Source:  http://armdevices.net/2011/12/31/2012-predictions-by-armdevices-net/)

      • http://www.facebook.com/james.scariati James Scariati

        “iPad has been overtaken by Android tablets already, regardless how many clueless bloggers keep saying that Android tablets are loosing.”

        What?? Where are you getting this from? “Overtaken” in what sense? Not unit sales, not profits…

      • http://ARMdevices.net/ Charbax

        Oh yes in terms of unit sales Android Tablets have overtaken the iPad. It’s ridiculous to compare October and November when Kindle Fire and a dozen other of the latest most popular worldwide Android tablets were released in December. When you look at daily activations, which is the ONLY metric that counts, since some day in December, Android Tablets have now overtaken the iPad.

      • jawbroken

        Where are you getting these figures from? You never cite any sources for your data and it never seems to agree with any information I’ve seen.

      • http://ARMdevices.net/ Charbax

        Using ones brain is not common among many Apple fanboy tech bloggers.

        Source 1: the Q4 2011 estimations
        Source 2: The fact Kindle Fire, Nook Tablet, Archos G9, dozen other “latest best” Android tablets released not before December 2011
        Source 3: Amazon’s official Kindle Fire numbers
        Source 4: Supplier sourcing numbers for Kindle Fire and other Android tablet components shipments before end of 2011
        Source 5: Apple’s Q4 2011 numbers include iPad shipments/sales in October/November

        All those numbers make it nearly mathematically impossible for Android tablets not to have overtaken iPad daily activations in December 2011, that is unless Apple somehow didn’t sell any tablets in October and November and only sold in December.

      • jawbroken

        Well, if it’s so simple then do the calculation with links to your sources. I already know this is a complete lie, though, because Amazon haven’t provided Kindle Fire numbers in any form.

      • Ph Zero

        “nearly mathematically impossible”: I like that. Fuzzy logic maybe?

    • Anonymous

      Huh. So you totally discount future growth of the iPad? And you see a reversal of the pattern of worldwide growth in smartphones? In short, you think the mobile computer revolution is overblown?

      Well, you’re cerainly entitled to your opinion….

      • http://ARMdevices.net/ Charbax

        Do you realize iPad represents less than 20% of Apple’s current profits? iPhone is 70% of Apple’s current profits. Even if iPad grows a lot, which I don’t think it can, Apple would need to sell 3.5x more iPads than now and not sell them any cheaper than now to be able to make up the potential lack of profits that I am sure is inevitably imminent on the iPhone. Profit margins on both iPhone and iPad are going to go down rapidly.

      • Anonymous

        Do YOU realize that, if you add iPads as PC’s, then Apple is now the largest PC manufacturer in the world, edging out HP? And that it’s just getting started?

        Here’s another one: Do you realize that the reason iPhone is 70% of Apple’s current profits is because of the phenomenal growth of a product it didn’t even have a few years ago? That it has entered into a mature market (cellphones) from scratch and last quarter produced more smartphones than Samsung, which has been in the cellphone market far, far longer? Do you realize that customer loyalty for the iPhone is unmatched and phenomenally high? Do you realize that practically every customer that switches to an iPhone never switches to anything else? Do you realize that even now Apple has barely 5% of the total worldwide market, and has nowhere to go but up?

        Do you realize that your sad reliance on a pirated OS is doomed?

        And finally, do you realize that the words “I am sure” make your comments nothing more than an individual’s opinion backed by a veritable cornucopia of hot air?

        I suggest you go find a place where people aren’t required to think to post your opinions. You’ll feel so much more at home….

      • http://ARMdevices.net/ Charbax

        That logic is just moronic. Yeah and if you count cookies as pizzas, pepperidge farm is the biggest pizza maker in the world.

        Since 2002, 70% of Apple’s profits has always ONLY been the iPod and then the iPhone. NOTHING ELSE BRINGS APPLE ANY MONEY.

        A dog is loyal to its master. Apple fanboys tend to be as dumb as dogs and they idealize the brand as their master. Of course you’ll see some bogus polls say that Apple owners are more loyal than independent Android users worldwide.

        Do you realize that upwards 70% of iPhone buyers already bought Apple products before? Do you realize that means that Apple does not gain new customers as much as it’s only able to feed on the same few million Apple fanboys buying every new Apple device because they don’t know any better? Do you realize that once those few million Apple fanboys wake up and realize there are alternatives that are upwards 7x cheaper and much much better value, that it will be absolutely catastrophic for Apple sales, you will see AAPL collapse at record breaking speed. Even the $100 billion in cash won’t be able to keep open the 500 Apple stores for long.

        Yeah right, Android is pirated. Yeah right, based on open source free software Linux, that means it’s pirated. It’s pathetic to see these desperate M$/AAPL/Oracle whine about Linux and sue as they do. So disgusting that anyone would seriously want to support that kind mentality. A few years ago it was thought of as a joke that M$/AAPL or anyone else would sue Linux companies for software patents, but now it’s really happening. Pathetic fricken joke, M$/AAPL deserve to die.

      • Anonymous

        Wow the pump and dump firms would love to see you and your logic come through their doors.  They would make a mint.

        Eric in Austin

      • jawbroken

        How could they possibly sustain ~100% year over year growth if they are not gaining new customers? Perhaps all of your “apple fanboys” are buying 2 iPhones a year, then 4 iPhones a year, etc?

      • http://twitter.com/zzbar Joe Zou

        just ignore the troll. 

    • Horstman

      There you go again. The famous “Friedman unit” at play… ;-) Just wait another 4-6 months and it will be over. What a joke…

    • Onafunjourney

      Charb ox,

      I clicked Like, for the entertainment value. Thank you very much for the laugh!

  • Anonymous

    If any analysts really want to understand Apple’s success, here is what they should do:

    Pick a product, any product, MacBook Air for example. Like most Apple products, there was much speculation before its release and much disappointment afterwards. Some people realised that this is the future of computing, others did not. Go back to see what they said then about the newly released MacBook Air, then see what they have said later. You will find many people who said this Apple product would fail who are now explaining why the PC industry is producing copies of the MacBook Air, without any mea culpa or explanation of why they changed their view.

    Ignore everything these people say. Then look for people who said, when the MacBook Air or the iPad were introduced, this is the future of computing. I know I did. This means they have a track record. 

    The next time Apple introduces a new product, look at these people with a track record and see what they say about the new product. Ignore the people who were wrong before. This is so easy, it’s hard to see why so many people continue to hold down jobs and make wrong predictions about Apple’s future.

    Oh, they have a track record too ……..

  • Walt French

    Heh: “Actual [S&P 500] earnings growth for [Q4] stands today at 9.4%… but drops to a paltrier 3.7% if Apple is excluded from the mix.” today’s WSJ

  • Martin KK

    Apple’s most endearing and most enduring feature is it’s non-stop disruption … market after market, and more to come. The one downside of this is that Apple also disrupts those folks whose job is to keep retail investors coming back to their shop … financial analysts. Analysts either don’t know how to view and analyze the underlying drivers to Apple’s business … or they don’t want to put in the time.

    Horace has provided one roadmap of the dliemna of analysts. He has not yet provided a simple template for how to really evaluate the future in quarters and years of Apple’s business. Having founded a mobile content company, I have one which works for me … I’m sure Horace has one which is even better.

    Maybe a gang of us should compare notes and create such a template ??

  • berult

    If in painting the future’s depth …one’s hand is at a loss for numbers, one then should draw its breath with the hand yet untapped for its craft.

  • http://www.siliconvalleywatcher.com/ Tom Foremski

    Predicting the future of markets that don’t yet exist is the analyst’s problem and that’s what has been happening with Apple: creating unique product categories. Such as the iPad: is it a PC, a mobile computer, or a new computing device? Market research companies have been struggling to define iPad and how it fits into their projections of future markets and seem very confused.

    It would seem that the long term trend for a hardware company is not neccesarily one of shrinking margins but shrinking total price and more gets integrated into the chipsets and manufacturing costs decline per unit. But with emerging buying classes in emerging economies, this trend means Apple can find hundreds of millions of new customers at the lower price points and thus still maintain its margins and momentum. Also, Apple is not like other hardware companies, it tied together a very sweet ecosystem of OS/Apps/Hardware that competitors cannot match simply by creating comparable hardware. Even if Samsung or HP produced a tablet, say, that matched the iPad, it doesn’t have the control over the other two legs of the stool, and thus the user experience will be poorer, despite hardware specs that are the same or even superior. Hardware is just a plastic box with wiring–it’s all the rest,  the software, services, and products that make it ‘magical.’

    Like its products, Apple cannot be measured in comparison with other hardware companies because it’s a system, an ecosystem, it’s greater than the sum of its parts. Apple to oranges: which is why the charts don’t make sense and why investors haven’t been able to make sense of Apple’s future.

    However, if an analyst can come up with a great explanation for Apple’s business model and one that predicts trends better than our current understanding, it could set off another jump in Apple’s share price.

    • Anonymous

      Well put! I’d only add that the heart of Apple is service to its customers. Apple is on the cutting edge, and Apple’s customers appreciate that. So not only would a potential competitor to Apple have to create a matching ecosystem, they’d have to spend the years acquiring the customer loyalty. And even then, they’d only become competitive!

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  • Stefan Sidahmed

    I like the log graph with share price and cash. It illustrates the ~5x nature of their relationship very well since constant multiples show as parallel lines when graphed on a log scale.

    I know you have written about this relationship before and I’ve never been able to wrap my head around it as a valuation metric, but there it is. I still don’t think it is causal, but that doesn’t mean there isn’t an underlying explaination.

    Thanks for the graphs

  • davel

    These graphs are great in showing the dissonance in Apple’s financial performance vs the value the market places on the company.

    I think the standard reasons for the underperformance are all true. However, I have come to believe the root of it all is, as you have pointed out before, that they just do not believe Apple can do it again.

    It is as simple as that. The defense is always reasonable: more competition for product x, technology is a fluid thing with new leaders all the time, etc.

    The fact that Apple has 10 years of leading its markets with new products is irrelevant. The fact that Apple is increasingly taking its growth from non western markets is ignored. It’s last quarter is taken as an aberration. Yes the 4S has done well and seems to have taken market share from the market, but Samsung, HTC, etc will come out with a new phone soon and take share from Apple. Microsoft will take share from everyone with WIndows Phone 8 and 7.5 because Forrester says so.

    Apple will continue to surprise quarter after quarter and the market will realize its mistake with a 6% pop in the stock price and keep its multiple in line with a company like US Steel which is losing money.

  • IOP

    ” They don’t explain why reliable growth is not valuable. And reliability is indeed what Apple offers in spades.”

    No they don’t, no one is saying that Apple will make, say 30% more money in 2012 vs 2011. They are a victim of their success as it becomes harder to beat their best year. People are betting that one day astronomical growth will end, and maybe even go into negative territory. Imagine making $40 Billion in profit and having zero growth, horrible problem to have :) but markets want xx% growth each year.

    And downside IMO is greater than any upside….although Apple might have $200 billion in cash by the end of the year.

    • http://www.asymco.com Horace Dediu

      By this logic if Apple continues to grow its value should reach zero.

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