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How many years does Apple have?

The graph below shows the Revenue and Operating Income for a select group of companies. The large numbers represent the share price to earnings (trailing twelve months) ratio (P/E or PE ratio).

Screen Shot 2013-11-06 at 11-6-2.56.25 PM

Of course the P/E ratio hides a lot of subtlety. It mostly fails to account for the fact that earnings are largely a matter of opinion. A company can defer income (as Apple and Microsoft do), it can invest earnings (as Amazon does) and can otherwise avoid declaring it since it’s taxable.

A better measure is the Enterprise Value to Free Cash Flow ratio (EV/FCF). It reflects a “harder” measure of performance in the form of free cash flow. It is not a matter of opinion but a fact. Enterprise Value also excludes cash which is a measure of past performance.

Nominally both P/E and EV/FCF measure the valuation of a company. They give what amounts to the number of years that current performance can be expected to last. For example a P/E or EV/FCF of 10 can be read as “If I purchase a share today, I should expect the company to pay me back in earnings in 10 years.” Any earnings after 10 years are essentially “profit” for the investor.

Inverted these ratios are a measure of Yield or how much of the total investment is paid back in a given year. In the example above, the Yield would be 10% or “If I purchase a share today, the company will pay me back 10% a year in earnings.”

Relying on P/E is troublesome since, as mentioned above, it’s deceptive. We get into difficulty when P/E and EV/FCF differ greatly. If a company has minimal cash and declares all free cash flow as earnings then the ratios are the same. However, consider how different these two ratios are for Apple:

Screen Shot 2013-11-06 at 11-6-3.11.50 PM

The P/E ratio is 13 while the EV/FCF is 7.5.[1]

This means the investment horizon is nearly half of what P/E suggests. (The cash flow yield should give pause). Put another way, the market suggests that Apple has 7 more years of current profitability and not 13. Note that the P/E ratio for the S&P 500 is above 19.

As Apple’s deferrals are increasing investors should look again at what the company’s worth. We had similar confusion when the company was deferring most of its iPhone revenue.

Notes:
  1. It would be very interesting to have both ratios available for all the companies in the graph above. []
  • markwilcox

    Whilst EV/FCF is clearly a better measure of how the company is performing now than P/E, inverting it to give a yield doesn’t make a lot of sense to me. If I could buy a share of the operational bit of Apple without also buying a share of the giant cash pile that is very conservatively invested then I would. Since I can’t surely there’s no way to get that 13.3% yield.

    • Walt French

      I first saw the inverted ratios over 30 years ago and have never understood why they didn’t catch on.

      In the chart above, compare the 1270 P/E to the 13.3. A couple dozen points — maybe, a few hundred — one way or the other is really irrelevant, while the same uncertainty (or even rounding) would take Apple from fairly speculative to deep value to unprofitable.

      Whereas a 0% “earnings yield” pretty well tells you Amazon’s earnings policy (without, as many note, how they divert FCF to new markets), and a 7% yield for Apple pretty well catches the current state of their printing presses.

      • markwilcox

        I specifically meant inverting the EV/FCF, inverting the P/E and even P/FCF is very familiar to me too. Subtracting the cash pile and then calculating a yield seems misleading, since the cash pile clearly produces a significant drag on earnings as investors see them.

      • ptmmac

        I agree that this is how investors see things, but I do not think that the investment community is correct here. In the past, investors have seen arrogant managers spend huge amounts of money on frivolous investments, so they see large balance sheets as risky over the long run. The problem here is that Apple uses it’s balance sheet as a long lever to make the impossible doable. When Apple uses Its capital to pay for assets used by other producers so they can lock up strategic assets, they are not simply making money. They are making the business possible. No other company has the assets to put toward buying the building and equipment for their suppliers on the same scale as Apple. Apple has shown a willingness to bring forward the yield curve by making these investments. Also it is worth noting that Apple has not added any risk to investors beyond what the underlying business is making. I don’t ever expect a London whale type problem because that is just not what Apple does with it’s money.

      • gottaUseTheCash

        I agree that cook and team have been making some great investments. The problem is all those investments taken together absorb only a small fraction of the tsunami of cash that keeps coming in every quarter. So assuming that they remain profitable going forward, that same situation will lead to simply ever more ridiculous levels of cash sitting by idly earning less than one percent. Unless, someone begins to “a Think Different”.

        Part of the problem is that they need to get over this ridiculous notion that they simply cannot repatriate the overseas cash because they’ll have to pay tax on it. For less they plan to NEVER bring it home, they’re going to pay the tax someday anyway, and they might as will get it working for them now. Time is money. (And if they truly plan to never bring the money home, so as to avoid taxes, then it is worth precisely zero).

      • markwilcox

        I wonder if they wait long enough and the amount gets big enough they might be able to do a deal with the government on the tax. Surely that much tax in one lump is going to start to be impossible to resist and the likelihood of someone else being able to accumulate enough to do a similar bulk deal seems low. Essentially the government needs the tax more than they need the money back in the US.

      • GottaUseTheCash

        If 1) the cash pile continues to very rapidly accumulate, and 2) the market continues to place virtually zero value on it, it won’t be that many years before the cash starts to approach the market cap. If that happened, I wonder if there is some way that a group of insiders could take the company private?? Maybe that’s why they are building up cash far, far in excess of any reasonable business needs? Conspiracy theory for sure, but not necessarily wrong because of that.

      • Chris

        I agree; the cash creates all kinds of optionality for the company. Having choices, is a good problem to have. (I know one thing, if the company were taken private, the last public shareholders would benefit a great deal, Autozone being a good example of this.)

      • GottaUseTheCash

        What are you referring to with Autozone? They’re a publicly traded firm, not private, right? And while they’ve been very aggressively repurchasing shares, their stock has done very well. Ditto IBM.

      • drx1

        Time is money and wasting it on a stupid Android dream would not be good. Maybe Apple could rebuild its prosumer/pro/enterprise unit?

      • markwilcox

        I don’t think many are concerned about the risk of Apple spending the money recklessly (although that is often a worry with giant cash piles) – it’s simply that they keep far more than they can (probably ever) use in cash or similar ultra-low risk, low return investments. So when you buy Apple shares you essentially put about 2/3 of your investment into a superbly run tech company that may or may not be going ex-growth very soon (essentially because it is saturating the most profitable part of the biggest computing hardware market on the planet) and 1/3 into cash. Unless they change policies the fraction held as cash will grow and thus future returns will be increasingly limited whether they can keep growing the hardware business or not.

        None of that says it’s a bad investment (might be a fantastic one) but it’s probably not a big growth story any more – it’s not an income stock… does it fit many funds or managers tastes/styles?

      • dividend

        Maybe you should think of it as 1/3 cash that you get 7-8% return on and 2/3rds speculative investment in a tech company that doesn’t pay dividends.

      • markwilcox

        That view only holds if you also view the speculative tech company as having $150 billion debt at ~5-6% interest, since your 7-8% return on the cash is mostly being paid from the tech company’s profits.

      • GottaUseTheCash

        The cash is a drag ONLY if it is not being properly allocated. Which appears to be the case with Apple. For anyone buying the stock, the earnings yield for that large portion of the investment is less than one percent…not even keeping pace with inflation. So unless they change their “don’t use the cash” policy, I don’t even count it anymore. I value the stock without it, and simply view the cash as a margin of safety. I got burned big time in 2012 buy “counting” the huge pile of cash in determining the value of AAPL, and I suspect I’m not alone.

        Buffett rightly points out that a huge factor in determine the intrinsic value of a business is the skill with which management allocates all the FUTURE earnings, which will greatly exceed the past earnings. While I have no doubts Apple will continue to be highly profitable, I have major doubts that they’ll put the majority of the profits to any worthwhile use. And so they deserve a lower valuation based on that.

      • chris

        “I have major doubts that they’ll put the majority of the profits to any worthwhile use….”
        Why do you think this? To allocate large amounts of capital don’t you have to wait for major opportunities.

      • GottaUseTheCash

        By the end if this year, their cash hoard will be approaching $200,000,000,000. Other than a massive stock buy back, how could they possibly spend all of that. Other than a monstrous acquisition (which would almost certainly destroy their culture), I suspect no business has EVER put that kind of capital to use. Actually, no business has ever had that kind of cash.

      • drx1

        so Apple is being punished for its success, excess or lack of “vision” dealing with its excessive success?

      • Sacto_Joe

        Nah. It’s all about growth. The conventional “wisdom” is that Apple has stopped growing. The cash isn’t valued one way or another.

        Except it is, sort of. It’s valued as a source for dividends, now worth some $12/share/year. And it’s valued as a source for stock buybacks, having dropped the shares outstanding by over 5% in the last two quarters. That’s why Apple is at $520/share, and not $400/share….

      • Chris

        Since the amount of cash is unprecedented, no one is in a position to say what is possible or impossible based on their experience. Markets are crazy/volatile enough that one day there may the opportunity to use some of the 200B. (Here’s just one such crazy example–in 2008 Google was trading for much less than 200B.) As someone who cites Buffett, you must appreciate this.

      • drx1

        or build major opportunities .. what has Microsoft done lately? For that matter what has Oracle or Google done lately?

      • Walt French

        I’m not the best person to expound on these valuation theories, but at least to some extent, investors have an easy time dealing with the “cash drag” on Apple’s balance sheet: but the stock on margin so that you are borrowing to hold the cash.

        If the interest you pay is about what Apple gets (and of course, while for you it’s not, but for institutions it’s very close), there’s no drag at all.

        So the ratio Horace is using is a good indication of the cash coming in compared to the company’s liabilities (the common and the debt). Given all the shenanigans with companies committing all its cash flow to employee stock options, or the misleading comparisons of companies that are loaded up with debt—wasn’t there somebody who suggested Apple substantially lever up that way?—that would seem like a good measure of the company’s productivity.

      • Sacto_Joe

        “…that would seem like a good measure of the company’s productivity.” Exactly. And that’s what I think Horace is casting around for; some way to take deferred earnings out of the picture.

        If it only has given us another way of seeing how horribly Apple is valued relative to other companies, that would be depressing. Fortunately, it also promises to help us determine what we can realistically expect by way of future productivity.

      • drx1

        You were burned because you sold … you may have been forced had you bought on margin – pitty.

      • GottaUseTheCash

        Pitty you don’t use reason before replying. I didn’t sell at $700/share in large part because I valued all the cash at par. And I didn’t sell at the bottom either, because the shares were absurdly cheap. I still think they’re below intrinsic value…IF (and only if) management starts to make better use of all the cash that keeps pouring in.

      • iObserver

        So in what world does the largest share repurchase program in American corporate history equal a “don’t use the cash” policy.

      • GottaUseTheCash

        Thing is, they’re not even using all of the unused cash that is pouring in, much less putting to work all the idle cash. If you hadn’t noticed, idle cash is still GROWING. Why??

      • iObserver

        Because they’re a ludicrously successful company making fistfuls of money every second, much of which is overseas. They, being a responsible company, are biding their time for another tax holiday to repatriate their foreign earnings and save 20%.

      • Viking

        For those invested in Apple in 2013, one could argue that the biggest announcements to come out of Apple all year were those related to capital management. What was Apple going to do with all that cash ($140 billion and growing)? If they use the cash wisely then the stock is crazy cheap; however, if they waste the cash then the stock is not nearly as cheap. We also have to remember that Apple has only entered the earnings ‘big leagues’ just in the past 24 months or so; it should not surprise anyone that it would take them a little time to map out and execute a strategy on this extremely important topic.
        Many companies spend free cash flow on large expensive aquisitions (look at Cisco, Oracle, Dell, HP etc over the years). Microsoft bought Skype for $8 billion; Google bought Motorolla for $12 billion. Time will tell how these purchases work out. Apple is clearly NOT following this model.
        One part of capital management involved returning excess cash to shareholders. On this topic what has Apple announced in the last 18 months or so?
        Step 1 = re-institute modest dividend
        Step 2 = begin modest share buy back (offset dilution)
        Step 3 = increase in dividend (15%)
        Step 4 = large increase size of share buback ($60 billion)
        Step 5 = accelerate share repurchase
        Step 6 = to be announced in 1H 2014
        Buffett likes IBM largely due to their long term capital allocation skills: retained earnings are paid out as dividends, or used for share buybacks or on small aquisitions to build their moat.
        It looks to me like Apple is following in IBM’s capital management footsteps, which makes me very happy as a shareholder. This answers a big question (and concern) I had as an Apple investor at the start of the year.

      • charly

        IBM is a targeting Business with a lot of long term legacy stuff. Apple is targeting consumers. IBM & Apple are totally different

      • Viking

        charly, of course, IBM & Apple have completely different businesses. My point relates only to decisions around how to use free cash flow; if you look at Apple’s decisions the past 18 months they look alot more like IBM than Microsoft (who is also purchasing Nokia, and tried to purchase Yahoo a few of years back), Google (no dividend) etc. Apple is being VERY disciplined.

  • Merckel

    Nice charts.

    Amazon is continuing to build its infrastructure, but these are capital improvements not direct expenses that absorb earnings. To say Amazon invests its earnings suggests they’re profitable on the scale of other companies, which is a great cover to conceal the fact that it takes Apple 30 days of operations to make the profit it has taken Amazon 19 years to earn.

  • don108

    “Apple is doomed!” article number 2,303. Who will write number 2,304?

    (BTW, your logic assumes a “steady state” [i.e., nothing changes] model. Reality shows that such states don’t exist, especially over a period of 7-13 years.)

    • markwilcox

      If you think this is an “Apple is doomed!” article then you clearly don’t read Asymco much. :)

      Also, the expected payback time on an investment is not really assuming a steady state, should probably read as “equivalent of X more years at current profitability” – the lower the number the less likely the market thinks the company can sustain current profitability.

      • http://twitter.com/matthewwanderer matthew

        @markwilcox, I believe you are correct. This article is speaking just one of many ways Apple is misunderstood. Misunderstood by critics, by many tech journalists and by many on Wall Street.

        For HD to come out and state this bluntly would, in my opinion, erode his well-earned credibility (besides, that’s not HD’s style). Hence the analysis and the understated narrative.

    • normm

      It’s true that Horace’s point is *seriously* understated! I think that saying that the market is valuing Apple as if it only has 7 years left is a comment on the irrationality of the market.

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

      You must be new here.

  • Tatil_S

    If revenue is increasing at a good rate and if the difference between average time duration to settle accounts receivables and accounts payables is more than a few weeks, a company can create free cash flow without actually adding any value, as defined by the ability to make a profit out of its transactions.

    There certainly are accounting tricks to hide or inflate profits, by categorizing expenses as investments, deferring income, marking assets to market, buying a building rather than leasing it or through the cost calculations of options and RSUs used for employee compensation, but that does not mean “free cash flow” is a more accurate measure of the value of a company. Companies already report GAAP and non-GAAP incomes and I doubt any company understates its non-GAAP income. Why don’t you use that as the “real” profits?

  • jdechols

    “Eanings Yield”

  • silverlining

    This dovetails nicely with the previous article on diffusion. U.S. smartphone diffusion looks to have 2-3 yrs left before the curve flattens. What does the world smartphone diffusion look like? I would assume it is not as clean as the U.S; so harder to draw conclusions from. My next question would be what the U.S. (or developed world)/World diffusion curve look like for tablets? Again, probably not as clean as for smartphones which probably is part of the reason for last year’s drop in Apple stock. That leads to the following four (4) questions in determining “fair” value for Apple- in order of certainty (IMO)- 1) What will be Apple’s share of world smartphone diffusion? 2) Is the diffusion curve for tablets predictive? 3) Can Apple maintain market share of world table diffusion? 4) Has Apple truly developed a business structure that allows for continuous disruptive innovation?

    • normm

      The diffusion graph is P/(1-P) and so it doesn’t flatten. Logistic behavior (an S-curve) is a straight line on this plot! The linear prediction is relevant indefinitely.

  • Matt C

    The average S&P 500 co. has a debt to equity ratio of 1:1 whereas Apple is less than .05:1, which markedly effects EV/FCF yield.

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

      Is there a public source for EV/FCF data for S&P 500?

      • Matt C

        Not that I could find.

      • Sacto_Joe

        Just as a thought experiment, what if Apple used all its cash to serve as collateral for debt, say to buy back its own stock? Would one then subtract the cash AND the debt from the stock price? In Apple’s case, that would leave us with an EV of [$520 – (2x$161) =] $198/share. EV/FCF would then drop to ($198/$50=) ~4. Or in your parlance, “If I purchase a share today, I should expect the company to pay me back in earnings in 4 years.”

        At least it’s one way to estimate in the potential effect of the cash….

    • charly

      Apple is in the software/computer/phone business. Their debt to equity isn’t that unusual in that sector

      • Kizedek

        Actually, Apple’s lack of debt is unusual and remarkable. The last few articles have been dealing with the structures of companies and how Apple has a single Profit/Loss column. Others, like MS, have numerous ways to hide or distract from their debts or expenses — such as having other cost centers in which to place things like Google’s 12 Billion for Motorola or several billions for MS’ Nokia and XBox.

      • charly

        You name Google and Microsoft. Both have also very low debt rates.

      • Kizedek

        Of course. Because they have creatively accounted for their expenses in other ways. Which was my point. MS and Google declare themselves “profitable” and debtless …but they don’t have 100B in the bank and they do yet have large acquisitions somewhere on their books.

        Perhaps they don’t have current “debt” because of the ongoing goodwill and confidence of their shareholders — who obviously seem to think that sticking with Google or MS is a better bet than Apple. Which is the question raised by the article.

      • charly

        Microsoft has also a lot of money in the bank and debt is difficult to hide. This is a pure money in the bank question and can’t be hidden so well as profit rate.

  • Merckel

    EV for Enterprise Value is a made up number just as P/E ratios are. They’re both built on where the stock trades, a spin-the-wheel number influenced by sentiment and groupthink.

    A building whose foundation is built on quicksand is no building…

    • David V.

      True, but I believe part of Mr. Dediu’s point is that the P/E ratio is not purely a product of “sentiment and group-think” (and therefore not a useful measure of it), but also of a company’s approach to counting its earnings.

      • Sacto_Joe

        The P part of the equation is in fact purely a product of sentiment and group-think, and so therefore is P/E.

        Hmm. Maybe we need to look at these companies by this formula:

        P/FCF

        It would also be purely a product of sentiment and group-think, but at least then we’d be able to meaningfully compare the denominators of the various companies.

        In fact, it would actually be a MEASURE of sentiment and group-think!

      • drx1

        group think for the INSANE, but then again, this is an insane world.

      • azazello

        The world is not insane, the world is irrational and masquerading in linear, logical rationality as the uncertainty of knowing is unbearable, but try we must.

      • drx1

        the Word, our World is certainly insane. Just look around… I am sure there are pockets of sanity here and there, yet for whatever reason, there is nothing that makes sense – on the whole.

        How do I know? Well if you look long enough, you may realize the World is heading off a giant cliff – never to return. only the trees and animals may survive, but then again maybe they make more sense?

        Then again, maybe there is time to avoid the cliff – the fiscal cliff, the peak oil cliff or peak phosphorous cliff … or acidification of the seas and oceans. Just look at NYC during hurricane Sandy, or previously hurricane Katrina … or other disasters around the World, man made, man made worse and otherwise.

      • azazello

        None of this is insane. Maybe of concern: we will not avoid any of it but live with it. The world is what it is and declaring it insane will not help to accommodate it—calling it insane signifies your not liking it, as you feel you deserve better and that YOU are better (Durkheim). Peak oil is real buddy, get ready.

      • drx1

        Maybe we do deserve better. The parts that are natural make more sense. The parts that are man made worse, make no sense – so it is insane, wether you like it or not. Sme do suffer from insanity

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

      My observation is about what the market thinks the company is worth not whether the market is right.

      • drx1

        Then your observation is useless – unless it is to point out how out of whack “markets” are.

      • Sacto_Joe

        It is.

      • Padova44

        It is.

  • Disqus11111

    What’s deceptive about this article is the misleading headline. To the average reader, the headline says Apple will collapse and be out of business in the not so distant future. It’s not what the article says and therein lies the problem when this article is picked up elsewhere.

    • stefnagel

      Guess we need an emoticon for irony. But if you know Horace’s writing, you know he does not put out stink bait.

      • stefnagel

        We all suffer from the consequences of literal education.

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

      The headline is true if the market is to be believed. And the market is the collective wisdom of millions making their votes heard through billions of dollars. They must be right. Mustn’t they?

      • John Price

        Horace, really! You do know better, don’t you? The collective wisdom of the market said Apple was worth $7.50 a share in 2003. Were they right then?

      • Sacto_Joe

        Perhaps he should have included the /s descriptor, but it was pretty clearly sarcasm to me.

        Or are you being sarcastic?

      • Sergej Knez

        Efficient markets theory believer, Horace??? OMG!

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

        Incapable of reading between the lines, Sergej??? OMG!

      • Sergej Knez

        My bad then, Horace, I apologize! I was in fact just trying to provoke you into lambasting the market’s “always rigth” company valuation wisdom, not to insunuate you could ever fall victim to the mentioned grand self-delusion of the “Ivory tower” economists.
        But to keep this exchange in tune with the OMG! acronym, I’ll say (and emphasize: in a very positive sense) that reading (and immensly enjoying) your analyses (not just of Apple, but also of other IT giants, so I here’s to hope that you’ll keep expanding your reach to include more of MS and Google as the main ecosys comepetitors) I oftentimes feel like observing Asimov’s “psychohistory” in action. And since your analyses and then extrapolation of group behavior (consumers) seems to produce some very (sometimes quite uncanny) accurate predictions of their future behavior and turns of events, well… OMG! :-)

      • Padova44

        I have a suspicion you were belching matjes herring when you typed that.

  • Chaka10

    “[PE and EV/FCF ratios] give what amounts to the number of years that current performance can be expected to last. For example a P/E or EV/FCF of 10 can be read as ‘If I purchase a share today, I should expect the company to pay me back in earnings in 10 years.'” I’m not sure this is a good way to look at it. It appears to ignore growth. A company with higher PE can “pay back” the purchase price in earnings in the same or even fewer number of years as a company with lower PE if the former has higher earnings growth.

  • A.S.

    Horace, please write an article comparing AAPL to all others on gaap vs. non gaap, I don’t get it why AAPL reports and guides on gaap while all others do non gaap, why does yahoo finance and all analyst estimates are based on non gaap for all other companies but it’s based on gaap for AAPL, this is very unfair and does not show the true value,we should bring this out and push mgt to change it and get analyst used to base estimates on non gaap.

  • dicklacara

    Looking at those charts it is interesting to note:

    1) we are approaching 7 years of iPhone
    2) we are approaching 4 years of iPad

    It is apparent that Apple (and to a lesser extent, Samsung) is in a completely different business than it was 7 years ago.

    If we posit what if it “never happened” and that Apple and Samsung would never have realized the explosive mobile growth in revenue and operating income.

    Visualize the Apple charts without the gray and [iPad] blue, and the Samsung charts without the gray. Both Apple and Samsung would be quite average (or below) performers for the companies shown.

    Now, ask yourself: what “business” will Apple be in 10 years from now?

    Based on the way Apple is banking cash and investing in R&D, IP and infrastructure… I suspect the iPhone and iPad will be as distant memories as the Apple ][ is today.

    I have been following Apple for over 35 years — and we ain’t seen nothin’ yet!

    • charly

      If you are very successful in one market than that leads often to a situation that other markets get less attention, see for example Apple’s pc market

      • dicklacara

        1) Apple’s personal computer market is growing faster (declining slower) than the competitive Wintel market.

        2) Apple has just released OSX Mavericks, which is a major rewrite and makes older Macs appear like new machines (faster, more responsive, use less power/battery)

        3) Apple will release the new Mac Pro in December — a major re-imaginagination of a “pro” computer. Likely, Final Cut Pro X 1 will be released concurrently.

        4) Apple has released upgrades, within the last 12 months, for all their Macs except the Mac Mini (supposedly coming soon).

        5) Apple has re-implemented its iWork office suite so it runs with feature compatibility, collaboration and consistent UI on iOS devices, Macs, iCloud — this includes Wintel PCs and any platform with a browser. (Some features were removed from iWork OSX because they were not implemented, yet, in iOS or the iCloud. They will be added back within 6 months).

        6) Apple rewrote GarageBand and iMovie for OSX. GarageBand includes AI capabilities. It appears that iMovie 13 shares common code with Final Cut X 1 — and that “pro” editors will be able to collaborate and exchange files with non-pro directors, producers…

        That’s just 6 that come to mind… I hardly think that apple is neglecting their other markets!

      • dorkus_maximus

        But Samsung seems to be doing quite well making refrigerators, TVs, smartphones, tablets, and a jillion other products. Microsoft has Windows and Office and the XBox and a billion more. Maybe what really happens is that a company moves to a new market if it sees declining prospects in the one it’s in. That would explain Apple’s attention to the iPhone and perhaps less to the iMac. It isn’t Apple abandoning one market so much as pursuing another.

      • drx1

        I agree charly – Apple has neglected its pro, prosumer and ‘enterprise’ level endeavors and i have no idea why.

        There is the fact that Apple would not miss the profit or gross from these categories, yet I think they do a disservice to themselves and their ecosystem by neglecting certain niche areas …

        Apple did build up OS X Server hardware over a 10 year period – it was not perfect, but it was pretty damn good – depending on your needs and not all that expensive – for enterprise hardware… RAID arrays, NAS (or was it SAN?) … and i suppose a tower or a mini can do wonders, but some data centers love the rack mounts from the manufacturer … even if this is simply a VM for whatever is needed.

        Who else competes with Active Directory? Sun?/Oracle? Novell? Nobody? Maybe RedHat…

        A traditional mini tower/prosumer/workstation class system would be awesome. I think the new Mac Pro’s have a ton of potential, but they are probably overkill for many (unless you edit 4K video? … or simply dig the new design and can utilize the new hardware)…

        I could go on, but maybe Apple misses the trees for the forest? This most likely wont hurt them in the short term – probably not even in the long term, but it is alway nice to have the bragging rights. Volkswagen has the Bugatti Veyron … sure it wont sell much, but it shows potential. Even GM has the Vette…

        Apple is undervalued. I love how everyone uses statistics for their own retarded vision … (I am being generous here). I suppose that is one reason why the World is broken, but then, I guess we are only human.

      • http://twitter.com/LunaticSX Lun Esex

        The new Mac Pro will fit inside the case of an original 128K Macintosh. It’s already a “mini tower.” Its price will be starting at $2,999. That’s not an unreasonable cost for a “prosumer” machine.

        As for enterprise, one problem Apple has with that is that enterprise customers want announcements of things well in advance, which is antithetical to Apple’s way of doing business. Another problem is that they’ll want guaranteed support longer than Apple is willing to promise for a particular product. (Apple’s consumer product support is longer than most, but enterprise support is a different animal.) Finally, enterprise customers want interchangeable, commodity solutions. They don’t want to have to rely on a single vendor, and they want to be able to make vendors bid against each other to get the best price. These things are also antithetical to Apple’s way of doing business.

        Apple is actually very smart to have gotten out of chasing enterprise sales when they discontinued their Xserve and Xserve RAID products. For a consumer-focused company like Apple it’s more trouble than it’s worth.

      • drx1

        The real name of the product is the Mini Mac Pro. Sure it has a ton of bandwidth and what not, yet it has nothing to add internally – except RAM and maybe a SDD …

        It is not a bad design, yet it is bad it is the only pro design.

        I think many would love a Mac “Pro” Tower about half the size of the previous one (not 1/5 the size) and having the option to configure for i5 or i7 – since those work pretty good for most people’s needs.

        Hell, even the old 2009 Mac Pro is pretty damn fast by today’s standards – depending on what you are doing and it has a lot of nice options – even though it so old. TB2 and USB3 native would be nice … an iMac Pro with a real screen would be even better.

      • http://twitter.com/LunaticSX Lun Esex

        Desktop PC sales are dropping. The number of people who would want what you describe is not increasing, and it’s probably decreasing. It’s definitely shrinking as a (small) fraction of Apple’s total sales. It’s not worth Apple’s efforts to try to cater to such a small market as the products you describe would address. Apple enthusiasts are lucky to have gotten the new Mac Pro.

      • charly

        This is mostly work stuff PCs. Have you any numbers that their numbers are dropping

      • Jessica Darko

        Sure, look at enterprise PC sales. Also, you miss the point that the mac pro does what you want. It’s just not internal, which for many reasons is less optimal.

        Your complaint is that the Mac pro is too good.

      • charly

        That is sales but have you numbers that the use is dropping?

      • Jessica Darko

        The issue is sales.

      • charly

        The issuer is not sales. More years of use cost sales but it means that after some contraction the business is still strong. The same can’t be said if lower sales is due to less use

      • Jessica Darko

        And Thunderbolt provides more of what he claims to want than the solution he’s describing would. (effectively 36 expansion slots)

      • Jessica Darko

        There’s literally nothing you could want to put into a Mac Pro tower that you can’t put on thunderbolt.

        The way for “professionals” to look at it is that thunderbolt is literally the same technology as those internal slots would be, only allowing you to daisy chain- and have 6 unites of expansion per slot.

        An equivalent tower for all the expansion capacity of the new Mac Pro would have 36 slots! (6 TB ports at 6 slots per port.)

        The complaints about lack of expansion are purely the result of ignorance about the technology.

      • charly

        Thunderbolt is not clean like a tower and Thunderbolt is known for one thing. Apple users find it expensive.

      • Jessica Darko

        If you’re going to disagree, please attempt to construct an argument that is responsive to the point being made. And coherent. And honest.

      • charly

        Enterprise has legacy systems, consumers don’t. They switch much easier. Also if you are a big enough prosumer you end up in enterprise. Apple will loose those

      • obarthelemy

        That’s an overlooked but direct consequence of Apple’s structure: no divisions means less bandwidth for maintaining existing, important but not priority, product lines.

  • StevenDrost

    I’ve heard of companies manipulating their stock price to go up, but this appears to be the reverse. They are deliberately using conservative accounting practices to keep the stock down. This is a different kind of company.

    • Sacto_Joe

      That’s an opinion, not a fact. You have zero proof for your contention.

      • marcoselmalo

        You’ve never seen the Hudsucker Proxy? The parallels here are uncanny. :D

      • drx1

        oye – the light is lost on you – Sacto_Joe – I am impressed!

      • drx1

        Maybe the ISSUE is that Apple is focused on their BUSINESS – whatever that may be – in the past, in the present and in the future and because they pay attention to their business – they succeed, where other’s – “experts” wonder why? how? magic!

      • StevenDrost

        Business and accounting practices are separate matters. They keep making their accounting practices more conservative. My take is they are trying to smooth out earnings, rather than let earnings pop which could create a bubble. For the long term investor it won’t matter much. But this must be maddening for the Carl Icahns of the world and the traders.

      • drx1

        Well I do agree, but my take is that for whatever reason Wall Street does not like the way Apple does their “accounting practices” or whatever … so they assume the worst, but then they also mis out on a real opportunity because of this.

        Of course short selling is often a gamble and Wall Street is the biggest casino in the world… and it is hard to tell who has the real advantage in the “Street”.

        So it basically comes down to – Wall Street is run by a lot of greedy, short sighted, ignorant, crazy, pathological, egotistical, vermin … though I’m sure some are OK.

        Many of these “industrialist” or “corporate traders” probably think it’s a bad when when you only make a few mil $$. Carl Icahn is a kid in a candy store with nearly unlimited funds … did you read Michael Dell’s take on him? It was interesting and Carl appears to be putting his feet in every pie (Apple, Dell, solar, wind, electric vehicles, etc…) and he really has no idea about anything -except -MAYBE- money.

  • highr0llerr

    It’s clear that the market is pricing Apple for contraction, not just lack of growth. Just look at the utility companies- most of them have higher P/Es, while barely growing. I think if the market participants were sure Apple would be able to just maintain the same cash flow for the next 10-15 years, there’s no way it would trade at the price it trades at today. What I find difficult to comprehend is why Apple traded at a much higher valuation in 2005-2006 (P/E 35-50), following the success of the iPod, but before the introduction of the iPhone. It seems that the market was pricing in new blockbuster products back then, while it’s not anticipating any successful new products today. Why else would anyone pay 35-50 times earnings for a company whose main product was a music player (albeit highly successful and dominant) and pay only 13 times earnings for a company with a whole range of successful products and a much more powerful ecosystem than 8 years ago.

    • charly

      Utilities barely grow but that growth or profit is reliable. Apple or Google could be gone in 10 year. This leads to a better P/Es.

      If i look at Nokia, Blackberry or Palm than i have to say that it wouldn’t surprise me if Apple didn’t exist in 10 years

      • highr0llerr

        That was my point exactly. However, that doesn’t explain why Google enjoys a significantly higher P/E than Apple, or why Apple itself was trading at a much higher multiple only a few years ago, when its chances of long term survival weren’t any higher than they are today.

      • charly

        Apple is at the peak iphone (atleast sold at this price) so there is no way to go up without a new rabbit out of the hat. And don’t see what that could be unlike with the iphone were everybody knew years in advance that Apple would try to enter that market.

        ps. For those that say TV’s. The market for living room TV is probably smaller than the iphone market

      • KirkBurgess

        1. There is no evidence whatsoever that Apple is at “peak iPhone”.
        2. IPad is still a baby, there is plenty of runway left in that product line, and it could end up eclipsing the iPhone.
        3. Apple is the worlds largest retailer of music, online video,
        Apps, and is the 2nd largest Ebook retailer. There is a lot of room for growth in all these content stores, and if these stores were a standalone company it could easily be valued at a $100 billion market cap.
        4. The TV hardware market is 300 million units a year – Apple could carve out a very profitable share in a market that size, which is essentially the same size as the PC Market but with a higher ASP.
        5. Unlike its current competitors, Apple has proven it can release successful products across different industries, and Apple has already stated it is working on entering new product categories, the odds of it not succeeding a slim. Not only are there obvious existing markets that they can enter, but there are also likely multiple new markets yet to emerge that advances on software/mobile hardware & cloud computing that app,e will be uniquely positioned to take advantage of.

      • obarthelemy

        iPhone needs subsidies to thrive; the US might have passed peak subsidies, other market certainly have.

      • Sacto_Joe

        “Whatever iPhone wants, iPhone gets. And little user, little iPhone – wants you!”

        (Sung to the tune of “Whatever Lola Wants” from “Damn Yankees”)

      • KirkBurgess

        @obathelemy Increasing subsidies in India & China contradict your theory of “peak subsidies”.

        Intact the amount of people on mobile contracts in the USA also continue to increase as smartphone marketshare increases.

      • Walt French

        I take it that you’re no great fan of subsidies, and that you believe they’ve helped Apple grow. If that were your whole point, then I’d be in full agreement with you.

        But those subsidies exist for a reason, which as Horace has repeated until he’s hoarse, is that the carriers benefit by encouraging customer good will at the very ones most likely to be most profitable. If somehow it became illegal to bundle the costs that way, the carriers would still have the incentive to promote a phone that customers see as an affordable luxury.

        Especially in Europe, where carrier profitability is much lower than in the US—and a disproportionately large share of the populace is suffering from the recession—carriers are competing primarily on price and as a result have much lower margins than their peers in the US. (One analyst has told AT&T shareholders to sell their stock if they buy Vodaphone.) Necessarily, consumers will favor lower-cost phones to go with their more limited data plans.

        But Apple is attempting to maintain consumers’ perceptions of it as the most capable and speedy device, so that as the economics of the technology change (e.g., as CPU costs keep plummeting as they’ve done since the first iPhone), the customers will want to move up to an iPhone.

        Personally, that works fine for me — I’m at a place where I can enjoy some luxuries. As a tech enthusiast, I like broader adoption AND innovation, so have to hope that they keep their focus on the stream of consumer delights.

      • obarthelemy

        First, a specific issue: “Necessarily, consumers will favor lower-cost phones to go with their more limited data plans.”
        1- What “more limited” ? My $20/mo plan includes unlimited voice (national, 100 countries landline, 20 countries mobile), unlimited national texts/MMS, tethering/VOIP/torrent/RDP (any protocol really), unlimited 3G data (throttled after 3GB), national wifi hotspots.
        2- I’ve got wifi about 90% of the time I’ve got 3G (ie, at work, at home, and inbetween; and when I’m moving fast -train/plane/metro- I got neither), so limited or even no data plan doesn’t really diminish the use value of a smartphone by much, especially with local media and apps still available when offline.

        More generally: I’m not against subsidies per se, if they were an actual way to reward my commitment with lower monthly prices and my carrier’s bulk prices on phones instead of retail. But they’re not: they’re a marketing gimmick to abuse the fact that people weigh the initial outlay several times more than the monthly rate or total cost over period when intuitively assessing prices, thus getting screwed for 2 yrs but with a free phone… Beats a box of chocolate I guess (depending on the -locked- phone and the chocolate :-p)

        What I’m really not a fan of is taking the extremely specific US market, and generalizing it in time and space as something the whole world is moving towards. Many governments think high barriers to entry and scarce spectrum justify/require more regulation (esp. on interoperability and lock-in). Carriers are intrinsically utilities, a low-margin, stable business. Even consumers are starting to “get” the concept of TCO (I can buy an GN3 -sorry, an iPhone- every 6 months with what I’m saving over my brother’s $110/mo subsidized plan, *and* resell my old phone to anyone in my country, not just customers of my specific carrier… so, make that 3 months). Even in the US, T-Mobile seem successful with their uncarrier gig.

        Regarding the iPhone, its price and focus on design instead of features make it a luxury item, with a 15%-ish market share except where (waning) subsidies and price distortions erase the difference between luxury and workaday. The brand vs features question is interesting, I wouldn’t see an iPhone as “moving up”, but I agree most would, though fewer than 1-2 yrs ago.

      • StevenDrost

        What is interesting about the U.S. market is that subsidies are putting high-end phones in the majority of users hands. Because the average user has a high-end phone, they tend to use the devices more, increases the need for faster (LTE) networks, increased app development, etc. Of course the downside is it pulls more money from our pockets.

      • obarthelemy

        I’m not sure, but I think video is driving LTE, because while the few seconds’ worth of difference for HTML/text is perceivable and mildly annoying, it’s not a dealbreaker. I personally started enjoying video on my phone once its screen reached 6.1″, so I’d argue screen size, not low/high end (screen size end high-endishness are not really related) is driving LTE ?

      • charly

        Don’t say that you need a big screen for video or you get the Church of Jobs after you. Or wait till Apple releases a big screen and then they will say you’re right

      • twilightmoon

        Church of Jobs? Stop trolling.

      • drx1

        Apple has a big screen ‘phone’ … This tablet would be called TE big iPhone – OR the iPad.

        Yet for actual 1080 or higher resolution I would recommender a larger screen – say 37″ + and a good sound system to make it real … Either way, you could do this with just about any of Apple’s portables

      • twilightmoon

        The size and video theory makes sense, but it is not backed up by the data. iPhones have smaller screens that giant screen Android sets and use multiples more data.

      • obarthelemy

        I know, that’s weird. Apart from the “iOS gets used more”, I’ve got 2 side bets:

        1- People on Android could use more local content. I know I do, because I seem to go to “dark” areas, or move too fast for 3G, a lot. I’ve got 30 GB of music/abooks/podcasts and 30GB of series/movies, and FM radio, so I barely ever stream anything. Also, copying stuff to the phone is drag-and-drop in Windows Explorer on Windows + USB, or from ES Explorer on my phone over Wifi. Or transparent directory sync with BitTorrent Sync, that way I don’t even have to think about grabbing new audio issues of The Economist ^^

        2- There might be very different usage patterns between some users and others, resulting in a low average usage while the high-end/technoid segment does have high usage. I’ve been handing out $250-ish Android phones and tablets to kids and oldies. Most don’t have a data contract (including phones). The oldies do texts/mail/phone/games/Skype/GPS/pics, the youngins do games and movies (and education stuff, shuuuure). Both do use their hardware quite a lot, cost me a bit to outfit in software ($10 for Big Launcher for the seniors, $20 for Funamo for the kids, plus some for games), but generate basically 0 web/net traffic, even over wifi.

      • loading

        People might be enjoying pirating content and loading it on to their phones but that doesn’t seem relevant to the discussion about LTE, or interesting for people producing media, etc.

      • charly

        There is a more competitive market in Europe than in the US so carriers make less profit. Also the data plans are not that much more limited. Consumers want the cheapest device that works. With the dropping prices of chips this means that phones that work become cheaper and thus the step to Iphone becomes bigger because Apple keeps its prices stead.

        Apple is luxury, that is their problem and advantage

      • charly

        1. The American market is nearly saturated and Apple is not such a success in the Rest of the World. Peak gross near now and peak numbers (without a much cheaper iPhone) in two years

        2. Ipad is twice as expensive as a good Android tablet. I don’t see a glorious future for it

        3.The total world retail consumer market for Books, video, music, games & apps is surprisingly small

        4 That is all TV’s. Apple is only interested in TV’s sold in the developed world and bigger than 32″. Carving out a share of that market can be very lucrative but is for Apple not a new big market. Also finding a TV set that is more expensive than an Apple notebook is getting hard. ASP of TV’s have plummeted

        5 See the success of Apple TV (or their 90’s game console) and i woulds argue that Apple hasn’t shown that enter new industries. Apple only non defensive move into a new market was the ipod and they were the first big company to do so

      • Padova44

        You are the best barometer in this thread, way better than French, so long as we take what you say and then assume the precise and total opposite is true.

      • Walt French

        If my company produced these types of analyses I would resign to prevent being embarrassed.

        Anybody who’s been to this site very much has seen Horace highlight how Jobs’s greatest product was a company that is engineered to discover where tech is going, and marry that to a solid understanding of consumers. Projects get started YEARS before they’re technologically or cost-wise feasible, and the integration into a system, often years in the undertaking, only shows up at the introduction of some new gizmo, seemingly as if by magic.

        This is not “rabbit out of a hat” great fortune; it is Apple choosing which opportunity they say “yes” to, out of many that they say “no” to. (This is hardly a state secret; it’s even in one of their ads.)

        Your short comment embeds a couple of assumptions that deserve calling out. The fact that I disagree with every one of them is perhaps secondary to the fact that it seems they are neither documented nor supported:

        • Apple depends on magic. No; they build entire ecosystems in secret and in contrast to Google’s perpetual beta machine of “exploration,” introduces them when they’re sufficiently complete that they can be useful to a wide audience.
        • “at this price.” Apple has almost 100% control of its pricing, unlike every one of its competitors who produce barely differentiated products, or niche products. They have economies of scale, and the operational talent, to acquire parts that others can’t, in volume, so they have some price advantage, too.
        • Everybody has known for years that Apple would enter the TV market; ditto watches. But remember the hue and cry for Apple to enter the netbook market: when they DID go for an ultralight laptop, it was instead the iPad that they’d started building in 2002. Your claim is essentially that Apple’s many R&D engineers have all been on holiday for the past 3 years since the iPad was introduced; it’s a claim that Apple has STOPPED doing the very thing that they claim is the source of their success.
        • The market for TVs… Yes, I’m quite confident we won’t see an Apple-branded TV going head-to-head with a $139 22″ LG, a $199 32″ Samsung or the $598 50″ Sony. This is NOT a market that fits any of Apple’s criteria. But Apple has a LOT of experience in movies, in games and in other entertainment; I’d be just as surprised NOT to see something in the space.

        In each of these cases, you take what you don’t see as proof that nothing is there, and you extrapolate the worst-case interpretations years into the future. You don’t buy or analyze stocks on faith but neither should you dismiss the obvious capabilities, resources and values of this powerhouse company.

      • charly

        I never claimed that Apple depend on magic. Apple is a PC company with a brilliant marketing strategy who lucked into the mp3 player market. Became there very successful in and was in a defensive move forced into the phone market. I don’t see what that next step will be unlike the obvious phone move.

        Apple is the only one who makes iPhones but there is pricing pressure within the range. Especially if the differences are not so great which is starting to happen . And Apple does feel pressure from the S4, not as much as HTC or Sony feels but it is still there.

        Netbooks were a surprise market and especially there very low cost nature is not the way of Apple

        The problem with the TV market is that i see a size problem. Even if they get 50% then they still wont experience big growth

      • JDSoCal

        Wow, you are dumb Charly. How can you read PED’s blog and call Apple a marketing company, when only a couple of days ago he showed how little Apple spends on marketing compared to Samsung and MSFT?

        Lucked into the MP3 market? Do you know how many MP3 players there were before the iPod launched? Like with tablets and smartphones, Apple *created* the MP3 player market. iPod was successful because of iTunes, and the licenses that Jobs and only Jobs could extract from the record companies.

        The phone move was obvious? LOL! Before the iPhone came along, and Jobs bent the carriers over, there were zero profits from handsets.

        Apple doesn’t feel any pressure from the S4, that is just idiocy. Samsung just reported lower high end phone revenues a couple of weeks ago, only the low and mid range and chips saved their quarter, and NOKOMO dropped the S4 in less than a month of its release.

        Lawdy you are dumb. You should be on CNBC.

      • charly

        Apple is really good at marketing so they don’t have to spend that much.

        There were a few MP3 makers. You had Diamond and some others. Diamond iirc started selling them in 1999 (i looked it up, was 1998) and Creative & Archos had their harddisk mp3 players a year before Apple. Sony and other consumer electronic brands had their record labels which made it hard for them to enter the mp3 market. And the market only really took of when flash became cheap enough.

        Also claims that Apple “invented” the mp3 market is ludicrous.

        Ipods sold because flash was cheap enough to sell it in a $100 mp3 player but was to expensive to have a usable amount (read 6GB) in a $200 phone. Now flash is so cheap that a $50 phone has enough storage space to be used as an mp3 player so the market for mp3 players is near death (Only joggers buy them still). That is why i claim that the move to phone was obvious and defensive. The Ipad was also an obvious move as thy already sold ipods with nearly the same capacities but i don’t see the obvious move for Apple now. Especially not one which allows them to grow significant

        Also smartphones was a coming thing. See Meego.

      • Walt French

        (not clear that calling somebody “dumb” in a forum where smart people are asked to be civil, actually sets you above. Why not make sure you correct bogus points or arguments, and leave it at that?

      • Walt French

        I said “magic” because you used the metaphor of pulling rabbits from hats, an illusion of magic.

        But your claim about the iPod is badly wrong and you’re not understanding how a company can suddenly become a major brand in the span of a couple of years.

        Simple answer: they didn’t.

        The iPod business is the combination of some nice technology design (and an emphasis on it instead of lowest-cost plastic); years of negotiations with the music industry that feared music players and wanted to suppress them; a concentrated push over a decade to understand how Apple could retail (trial store-within-stores, a Board member; etc); the iTunes jukebox app (an acquihire); and what may be the first mass-market, small-transaction store.

        Certainly, some good fortune was involved. But just as certainly, this was a dedicated campaign to use electronics and computer technology to meet very personal wants and needs of its customers.

        I took a job 1500 miles from home shortly before the iPod, and remember all too well the CD player, stacks of CDs & the bulky Bose-style headphones I had to take to tolerate the noise of the flight and my love for music. But I suspect many, many others had equally strong interest in having music on the go, a market that was unrecognized and unserved by big businesses, e.g., Sony, whose thinking couldn’t go beyond the limited cassette and CD players.

        As I complained earlier, you’re attributing to “luck” or magic, what was in fact merely the first wave of a major iniative towards consumer computing/electronics products. It’s a bad way to understand what’s likely to happen next.

      • charly

        This is not how i remembered the introduction of the iPod. What i remember was that they were the first brand music player on the market and rich enough that a few music industry lawyers wouldn’t scare them.

        Sony had minidisc. But the market could only exist because harddisk became cheap and big enough for music players.

        You have to work hard to get luck. Apple gets luck because they work hard at it but that doesn’t mean that they are not lucky

      • Padova44

        “a new rabbit out of the hat”, your words, is generally considered magic, is it not?

      • charly

        It is one definition of magic. The fake on but i think that if you use magic in a business setting that the other magic is meant.

      • Padova44

        What “other magic”? Pray define.

      • charly

        Sorcery or illusionism.

      • Padova44

        Do you intend “Sorcery and illusionism” or are you of the belief that sorcery is the same as illusionism, hence the “or’?

      • charly

        Two definitions, guess what i meant.

      • azazello

        Off-topic by a mile: yes, sorcery and “illusionism” are dynamically AND dialectically welded. But only if you immerse in the anthropology of Michael Taussig (Shamanism, Colonialism and the Wild Man). I am afraid that this discussion is on a very different level…

      • This guy. He’s Alright

        I just had to sign in to say “you are fucking awesome” Great replies. I’ve loved reading through them.

      • Tatil_S

        Probably? I’d say definitely.

      • Walt French

        Without actually endorsing the logic, it’s obvious that Google has the most repeatable of business: customers come back multiple times per day.

        Apple enjoys a very good “intend to buy again; would recommend” rating from customers, but who knows what magical, revolutionary device Microsoft (snerk) or somebody else might introduce before Apple does?

      • JDSoCal

        Repeatable? Apple started a mobile revolution that is murdering Google’s ad business. Mobile ads pay 1/5 of desktop. Just wait. The market can remain irrational longer than you can remain solvent betting on GOOG.

      • charly

        You see those adds at times that you wouldn’t otherwise see Google ads so it is still a positive for Google

      • Walt French

        Think Big Picture: I have $X that I spend every year, and ads are all around me. At best, an incremental ad can only take away revenue from some other retailer (whether the other party is already a Google advertiser or not). More ads do NOT increase the revenues I contribute to the car, beer, insurance, music and etc companies. What they do is shave off a part of my expenditures for all the above, and send it to Mountain View instead.

        Ultimately, it is a self-limiting exercise. “Peak Ad.”

      • obarthelemy

        But that was true 50 years ago too. Yet “Ad” hasn’t been peaking in the past 5 decades, and why it should peaking right when technology allows for better ads (targeting, designing) and wealth opens up even more market is mysterious ?
        Plus Google only do ‘net ads. Even if “Peak Ad” ever comes, it’ll be even longer before, “Peak **’net** ads” happens, what with all the ad budget moved over from old media to ‘net.
        Also, America’s waist size begs to differ: advertising *does* impact how much we spend on beer and snacks…

      • Walt French

        I don’t follow the subject closely, but the only projections I’ve seen are for ads to grow at the same rate as personal income. What has happened is that craigslist and the web have siphoned off ad revenues from old media. So the portion of revenues going to the internet have risen much more sharply.

        Maybe somebody could gin up some data to show the changing role in worldwide commerce from media-based advertising. (It’d be impossible to count the store signs etc.) My guess would be that the ratio passed the inflection point of highest growth rate somewhere around the time the median income hit $10K/person (2013 dollars). In developed economies, that means a couple of decades back, no?

        While this is just a total SWAG, I’d think the answer bears on the question Horace raised on Critical Path #100: why haven’t new revenue models been found for TV? Following the paradigm that disruption requires a new revenue model that the existing producers can’t co-opt, Google has disrupted traditional ad media but not e-commerce overall.

      • obarthelemy

        I’m not sure what your timeline is, but new revenue models have been found for TV since I was a kid:
        1- per channel and service subscriptions
        2- product placement and fully sponsored shows
        3- online-only shows (Yeah ! Arrested Development)
        4- vanity channels
        5- vertical channels

        The quantity of available TV has ballooned; money for it did come from new sources, or at least from new ways to pump it out of old ones: viewers and advertisers. Costs are way down, too.

      • Padova44

        “Ad” and “ads” are short words. It ought not be difficult to spell them correctly.

      • Walt French

        Just a gol-derned minnit!! I think *I* coined the term “peak ad”—in a comment at JLG’s MondayNote.Com—over two years ago.

        And since then I’ve seen several statistics about how advertising revenues are shifting to the internet, and to mobiles, but NOT why they’d be growing any faster than consumers’ incomes — that is, notably, albeit from a low base in the developing world, and barely in the developed world, where the existing base it.

        Today’s smartphone users are in the more-well-off half of their societies, and are capable of paying for their entertainment; they are most inconvenienced by a second’s distraction from their purpose. They are also least likely to need reminding how to spend their money.

        I guess this’d be a good place to take @obarthelemy’s hating on US subsidies to note that ads are about the same: they appear to be free but end up costing users dearly. Ads were a great innovation in the early days of radio broadcasting, when it was impossible to find, and charge the people who were enjoying the broadcasts. Today’s internet, which has layers of analysis on every byte viewed online, is the opposite and does not need the intrusion of ads between parties that want to communicate.

      • charly

        Adds didn’t appear with the radio. Newspaper had them for centuries and they paid for content

      • obarthelemy

        Most of Apple’s money comes from an externality that might be deemed an historical accident or anomaly: carrier subsidies. As long as they don’t demonstrate they can thrive w/o subsidies (via product or market diversification, probably), their price will factor in a huge “external risk” penalty.

      • dorkus_maximus

        RIMM went public in 1997, Palm in 2000, Apple in 1980. In other words, Apple has been around longer than the other two combined.

      • JDSoCal

        Of course, Nokia and Blackberry and Palm were eviscerated *because of* Apple’s mobile revolution. You logic is like saying in 1920, “look what happened to horse-and-buggies, that could happen to Ford!”

      • charly

        It did almost happen to Ford. They made the T way to long

      • Padova44

        The word “too”, even when spelled correctly, is one of the shorter words in the English language. One ought spell it correctly easily, ought one not?

      • Padova44

        It wouldn’t surprise me if you couldn’t pick your nose without a cue card.

    • PhillyG

      The Price/Earnings Ratio for companies that pay dividends is traditionally lower than that of equivalent companies that don’t. Apple’s P/E collapse coincided with its decision to pay dividends.

      The other thing to realize is that of all the companies selling personal computers in the USA in January of 1984 when the Apple Macintosh was announced, only Apple is still selling them. While your colleagues were busy predicting Apple’s imminent doom, the other companies all went into that good night, at various decibel levels. You are smart to predict that Apple will last longer than most people’s memory of this article. I wonder if you will still be writing when the Apple brand succumbs to its destiny.

      • Sacto_Joe

        One could just as easily say Apple’s decision to pay dividends coincided with the P/E collapse. The reality is that the dividends are enormously helpful to those of us on fixed income who would otherwise need to sell more AAPL to make ends meet.

        There were many, many reasons for the retrenchment of AAPL over the last year. It’s way over-simplistic to lay it all on the commencement of dividends.

      • drx1

        cause and effect – or the effect of cause … oye. Statistics and people that are new out of school is – boring!

      • JDSoCal

        Nonsense. Apple’s P/E collapse coincided with YoY flat earnings and revenue growth.

  • dmx

    Since Apple’s mission is “to make insanely great products that customer love” Apple will be forever chasing that goal and will never lose sight of what it is supposed to do.

    • charly

      I thought their mission was:”Be truly a church, f*ck your followers hard”.

      • Walt French

        Hard for me to see any effort on your part to contribute data or new insights with that type of trash. I suggest you take it to reddit or TheVerge, where the kiddies love to play like they’re grownups, and your wit will seem as more than 50%.

      • charly

        You’re right Was a bit miffed that people take a mission statement serious.

      • Padova44

        Your “apology” to French is so deficient you’ve just dug your hole deeper.

      • Space Gorilla

        That sums up the anti-Apple crowd fairly well, “miffed”.

      • twilightmoon

        Can we please permanently remove this poster from this forum, ban his IP address and lose his useless posts? Thanks.

      • Padova44

        I couldn’t agree more.

    • obarthelemy

      from vocabulary analysis of these pages, it would seem it is:
      “Apple’s Jobs-to-be-done is to quantum-delight with profits magical” ?

      :-p

      • Flexxer

        You should be so glad that “charly” found this place. His utter idiocy makes your one-dimensional, repetitive trolling seem quite tolerable (in comparison).

  • miketto

    Hi!
    could you please explain, why FCF i calculated as:
    (“Cash Flow from Operations” – “Capital Expenditure”)
    I’ve always thought it should be calculated as :

    (“Cash Flow from Operations” – “Capital Expenditure” – “Investments” – “Other Cash flows from Investing Activities”)

    miketto