There is a school of thought that believes...

[Liberty]

Jobs was a micro manager. He attended to every detail and made changes until the last minute. Things were taken out, changed, put in, etc at the last minute. He was also know to change his mind frequently. During his final days, they were working on IOS 5, iPhone 4S and the iPad 3. Do you think he was ignoring that and working on IOS 6? Prototypes evolve a lot during development. Even if Jobs was shown some initial prototypes, what you saw yesterday is likely to be very different from what Jobs would have seen 18 months ago.

 

Jobs may have set a high level, strategic direction but with Apple its the details that make the product. Further, Apple was free to reject Job's direction after he stepped down. For example, the new AppleTV interface was one that Jobs hated and had rejected.

 

Indeed, that's why I said that he hasn't seen every detail of what came out, but if he had died, say, 3 years ago, we would truly see what the companies does without his input. I'm sure that when Jobs was still alive they were already looking into HiDPI screens and flash storage and maps, etc, and planning prototypes around them, but they had to wait for costs to go down and suppliers to ramp up and such (as well as waiting for the most to be squeezed out of current designs - you don't want to do full refreshes too quickly, especially if competitors aren't close to catching up). Product cycles at Apple are pretty short, but not that short afaik.

[Uccmal]

Here's the bet - "between now and June 12, 2014, I am betting $5000 US that Apple will exceed $750B in market cap at least once."

 

You are the guys who started making short term, specific predictions - not me. I am simply challenging you on it. Are you confident in your analysis?

Well, put some money beyond those words then. C'mon!!

 

Valueinv, there was nothing short term, or specific about my predictions.  I was very clear in my analogy that I was looking 3-10 years out, and saying that it was not predictable where AAPL would be, hence, not a value investment from my perspective. 

[Guest valueInv]

Here's the bet - "between now and June 12, 2014, I am betting $5000 US that Apple will exceed $750B in market cap at least once."

 

You are the guys who started making short term, specific predictions - not me. I am simply challenging you on it. Are you confident in your analysis?

Well, put some money beyond those words then. C'mon!!

 

Valueinv, there was nothing short term, or specific about my predictions.  I was very clear in my analogy that I was looking 3-10 years out, and saying that it was not predictable where AAPL would be, hence, not a value investment from my perspective.

 

I consider 1 year as short term:

 

Valueinv, All of your projections are product projections.  In reality the growth you are talking about has never happened before.  Consumers, suppliers, and business people are fickle.  I could go on, and on.  All of your assumptions presuppose that Apple will out market, out innovate, and somehow thwart basic consumer fickleness, Q after Q, year, after year.  I think they stumble sometime later is year.  The thread will still be here.  I will check back then.

 

I consider $500-$600B as very specific.

 

[Parsad]

You are the guys who started making short term, specific predictions - not me. I am simply challenging you on it. Are you confident in your analysis?

 

When did anyone say anything about Apple's short-term results or success?  I think everyone said that the long-term competitive advantages at Apple would diminish over time without Jobs, and that is due to the company's lack of the visionary and driving force behind the business, and in particular his marketing skills. 

 

Before you do something retarded, go back and read the thread from last October.  Not once did I say anything about Apple falling apart in the short-term, but that over time competitors would slowly start to catch up...and I think that would start to happen within a few years rather than a decade.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/why-apple-won't-be-the-same-after-steve-jobs/

 

The truth is that I admired the hell out of Jobs and I give him sole credit for what he did with the company.  I'm not lambasting Apple, but praising Job's abilities...that's always been the case!  Cheers!

[Guest valueInv]

You are the guys who started making short term, specific predictions - not me. I am simply challenging you on it. Are you confident in your analysis?

 

When did anyone say anything about Apple's short-term results or success?  I think everyone said that the long-term competitive advantages at Apple would diminish over time without Jobs, and that is due to the company's lack of the visionary and driving force behind the business, and in particular his marketing skills. 

 

Before you do something retarded, go back and read the thread from last October.  Not once did I say anything about Apple falling apart in the short-term, but that over time competitors would slowly start to catch up...and I think that would start to happen within a few years rather than a decade.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/why-apple-won't-be-the-same-after-steve-jobs/

 

The truth is that I admired the hell out of Jobs and I give him sole credit for what he did with the company.  I'm not lambasting Apple, but praising Job's abilities...that's always been the case!  Cheers!

 

This is all talk. For the sake of the bet, lets assume I am silly, retarted, whatever label you want to attached to me. That only makes you smart to be on the other side of the bet. If I don't know what I am doing, I deserve to lose my money and I am fine with it. I have done my analysis and my calculations and I am comfortable with the odds. Question is, are you?

 

So gentlemen, let me ask for the third time, are you willing to take the bet?

 

I am willing to put $5000 down. Either one of you can take the bet for $5K or both of you for $2.5K

[Parsad]

You are the guys who started making short term, specific predictions - not me. I am simply challenging you on it. Are you confident in your analysis?

 

When did anyone say anything about Apple's short-term results or success?  I think everyone said that the long-term competitive advantages at Apple would diminish over time without Jobs, and that is due to the company's lack of the visionary and driving force behind the business, and in particular his marketing skills. 

 

Before you do something retarded, go back and read the thread from last October.  Not once did I say anything about Apple falling apart in the short-term, but that over time competitors would slowly start to catch up...and I think that would start to happen within a few years rather than a decade.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/why-apple-won't-be-the-same-after-steve-jobs/

 

The truth is that I admired the hell out of Jobs and I give him sole credit for what he did with the company.  I'm not lambasting Apple, but praising Job's abilities...that's always been the case!  Cheers!

 

This is all talk. For the sake of the bet, lets assume I am silly, retarted, whatever label you want to attached to me. That only makes you smart to be on the other side of the bet. If I don't know what I am doing, I deserve to lose my money and I am fine with it. I have done my analysis and my calculations and I am comfortable with the odds. Question is, are you?

 

So gentlemen, let me ask for the third time, are you willing to take the bet?

 

I am willing to put $5000 down. Either one of you can take the bet for $5K or both of you for $2.5K

 

Sorry, I don't make stupid bets.  But here is an option for you since you are very comfortable with your analysis:

 

Why don't you buy January 2014 in the money calls with the $5K?  The $575's trade around $106, and if you get anywhere near a $750B market cap, you would have 3 times your money.  After you buy the calls, please make sure you scan and post your trade confirmation on here, with the name, account number, etc. redacted.  Cheers!

[Uccmal]

valueinv, 

 

Lets try inverting this.  Approaching it as a value investment:  My answers are in brackets.

 

1) What is AAPLs intrinsic value - or book value - or sale value? 

( book value is easy to find). - the rest I have no idea).  ( book value is nearly entirely made up of cash at the moment - patents and real estate are worth marginally more than at Rimm)

2) what is its PE (12-14 - not unreasonable - say fairly valued assumming of course that earnings continue to maintain).

3) What is Apple's growth rate/ or shrinkage rate going forward?

(no idea again - and you wont convince me of any number you produce unless it is a negative number)

4) They have alot of cash - once that is dividended out or blown away on bad investments, what will happen to the stock price?

5) Who are Apples competitors and what is their status. (extremely powerful existing competitors in EVERY field AAPL is in - then there are the unknown up and comers). 

 

In every piece of analysis on Apple there are assumptions that they will continue to be a superior marketing machine, and that consumers will continue to love their products.  This is not possible.  It has never, ever occurred for any company in history.  At various times in history companies have been ascendant for various reasons: Motorola, Nokia, Msft, Dell, The Nifty 50 of the 1970s, Ibm, GE, HP, Aol, Netscape, RCA, Standard Oil, etc., etc, etc.

 

No one has ever defied the law of gravity indefinitely, and APPL wont, no matter what.  Will Apple live on for a long time.  Of that I have little doubt, but more like MSFT or IBM - i.e. Half its present value.

 

And no, I wont bet you. 

 

 

 

 

[Guest valueInv]

Sorry, I don't make stupid bets.  But here is an option for you since you are very comfortable with your analysis:

 

Why don't you buy January 2014 in the money calls with the $5K?  The $575's trade around $106, and if you get anywhere near a $750B market cap, you would have 3 times your money.  After you buy the calls, please make sure you scan and post your trade confirmation on here, with the name, account number, etc. redacted.  Cheers!

 

Prasad, I've followed and held Apple for over 10 years.  I've bought Apple six times - at 12.50, 130, 190, 350, 380 and 550.

 

I haven't sold a single share. So I have a large enough position on Apple, thank you.

 

I also have another related trade - RIMM which I bought around 70 and sold around double that. I sold RIMM a little while after the iPhone came out and I saw the writing on the wall.

 

So, you're right.I make stupid bets ;)

 

I bought Apple long before I knew what value investing was. See, I had a simpler technique. Every time Apple released a new product, I would analyze it and try to handicap its success. Then I would look around and see everyone was crapping on it.  I would look to see if the stock price had dropped after the announcement. If it did and I believed the product was likely to be huge, I bought more Apple.

 

When the iPhone came out, everyone thought it wouldn't work.  It had no keyboard, no 3G, too expensive, Apple was too controlling to succeed with the operators, etc. I bought Aapl.

 

When the iPad came out, it was just a big iPhone with a lousy name. Why would anyone buy it? Well, I bought more Aapl. 

 

The problem was that everyone was looking at the features, just like you. Apple will never have more features. Its because they are good at saying no. Read what Jobs says on saying no. Thats was makes Apple succeed. Thats why everyone loves their Apple products and people keep buying more and more of them.

 

Let's analyze this removing of features that makes Apple succeed. Take the iPad. Compared to a laptop, it removes two critical things. First, it removes the mouse. When you use a mouse, your brain has to translate your movements on a horizontal plane to movements of on a vertical. You brain needs to figure out every time how much to move your move horizontally and in which direction to click on that button. Thats a huge cognitive load. By removing the mouse, they are letting you interact with the device the way your brain is built - by touch. Thats why old people who've never used computers and autistic children love the iPad. That's why people just feel more comfortable with the iPad.

 

The iPad also removes the filesystem. When they tested people using computers, filesystems always presented the biggest learning challenge. People just had a hard time understanding them. That's why there is no filesystem access on the iPad.

 

When you look for features, you're never gonna think Apple will win. I look at it the opposite way. When I see Android cramming feature up on feature on to a small screen, I know they're blowing it. I know that over time their phones will become more complex and unusable. Guess who that is going to help?

 

When the iPad 3 came out you weren't impressed. Well, it went on to sell like crazy. I've been checking their website. They just caught up with demand a few weeks ago. So what does this tell you about your ability to handicap Apple? Have you been right? Should you be re-examining your premise? Do you understand what drives sales? Is Apple in your circle of competence?

 

People say a lot of crazy things on Internet boards because there are few consequences. I put some real consequences behind the words by putting the bet out there.  You can dodge the questions by using all sorts of labels and topic deviations as you like. In the end, I wanted you to play your cards and see if there was any meat behind your views.

 

Remember, your actions speak louder than your words. ;) ;)

 

 

[Guest valueInv]

 

3) What is Apple's growth rate/ or shrinkage rate going forward?

(no idea again - and you wont convince me of any number you produce unless it is a negative number)

On one hand, you say you don't make any specific predictions. On the other hand, well, you do.

 

In every piece of analysis on Apple there are assumptions that they will continue to be a superior marketing machine,

Not in my analysis. On the contrary, I think Google had done a much better job marketing Android than Apple has done marketing iPhones.

[jeffmori7]

ValueInv, just relax!

 

Like you I own Apple, but I don't need to convince uccmal or sanjeev to invest in it or bet against me! If they don't feel comfortable with the investment because they don't have a sufficient margin of safety or because they are out of their circle of competence or any reason, even if they like Apple, fine! There are plenty of investment opportunities so if you're not confident enough, go to the next idea! And that's what they do.

 

The board is a place to discuss ideas, not to position ourselves for or against something! It seems unfortunately a big trend nowadays to think that we have to choose between : You are with us or against us...

[mcliu]

Hi. First post here. Just like to say that this forum is an extremely engaging place for investors and the quality of work is remarkable!

 

Quite an interesting and lively debate here, so I would just like to add my two cents and see what you guys think. First, it was interesting to see the emotions running through this thread. As value investors, isn't it best if we stayed rational and considered only the facts or opinions backed by facts?

 

Personally, I do think that there is the possibility of Apple may be able to create a sustainable moat. Although, it's not obviously inevitable that the business will be a winner in this industry. It's also not obviously inevitable that Apple will fall like the giants of the past. I mean IBM has continuously evolved its business.

 

I think Uccmal's idea of inverting is sound. However, rather than thinking of it as a value investment, maybe we can invert from the perspective of what would Apple need to do for it to have a sustainable moat that lasts?

 

Would we think about Apple different if:

 

1) Jobs was still alive? (Not a possibility)

2) Someone just as creative as Jobs was a live? Is Jobs really one of a kind visionary?

3) Is it possible that Apple has laid the foundation of a R&D group that will continue to out innovate the rest of the world?

4) What if Apple products become as pervasive as Windows or Office globally?

5) What if switching costs of Apple products become very high?

[Cardboard]

I think as value investors that we should question why we are so convinced that Apple will eventually falter and the stock price collapse? A thought that seems to be shared by all investors actually since it trades at a discount to the market and a significant one when you consider its cash and growth. You have to admit that there is a massive amount of skepticism here which normally creates investment opportunities.

 

I have not bought Apple yet and I kick myself real hard. I looked at it in 2010 in the $250 range, $330 range in 2011 and it looks like we are entering a new one around $560. Every time the P/E was around 12 and with a mouthwatering rapidly growing cash pile. Every time the worry was about the law of large numbers or Steve Jobs or competition.

 

Instead, I bought garbage like Clearwire and Level 3 Communications! That is right, stocks that are supposed to be worth a fortune based on their asset values and future growth, but that never materializes. Apple on the other hand has delivered on all fronts and I have not seen any indication that it will change any time soon. The upside at the time may have looked larger in the other names, they seemed a lot cheaper, but looking at it now, it is not hard for me to see AAPL at $1,000 in 18 to 36 months. So much cash, such earnings power and growth. A 4 bagger from 2010 is a lot of upside! I am currently exploring a vertical spread that I will likely buy once I free up some cash. Actually, this is kind of stupid since I should free up cash now from these losers and buy it right away!

 

Another one being discussed now on the board that I have owned and actually sold at a small profit is Dell. There you have a big business within the company that is in clear decline and they have not shown much growth at all in overall sales and keep acquiring companies left, right and center. Yes, it is statistically cheap especially when you substract the cash from its EV, but they keep spending a lot on acquisitions that I have no clue if they will ever be worthwhile. It's supposed to morph into some IBM, but when and is it a certainty? On the other thread, it was even discussed some growth numbers extending many years out. How can you be convinced about the growth in a Dell and express so much doubt about AAPL?

 

I am not trying to beat on anyone here, but I realize that I make many mistakes which seems to be rooted in trying to find the cheapest stuff out there while paying a little more could get me into fantastic businesses creating real value for my portolio and really improving my batting average. Maybe that comparing technology stocks is not the best way to look at this issue, but it seems to apply at other sectors as well. It is like a disease from constantly looking at the list of 52 week lows and ultra low P/E stocks. Or because something has gone up it must come down and vice versa. Too quantitative and very little to none on the qualitative side.

 

Cardboard

[txlaw]

Personally, I think that AAPL is a great company trading at a reasonable value.  I don't expect it to be a home run, but I would not be surprised to get an annualized return over the long term that beats the S&P index by simply buying and holding.  Even a double digit annualized return is possible over the long term.  Having said that, I sold the little amount of AAPL I owned a couple of months ago, as I'm looking for much greater returns.

 

I've said this before, but AAPL must be viewed as a software company that bundles its software with the best hardware in order to provide an optimized experience.  Moreover, AAPL does not just create any software -- it develops operating systems, and the competitive market for such complicated OS's is currently oligopolistic and lends itself to network effects.  Yeah, if we ever have the Web as platform, things could change, but I think that, even then, Apple will grow market share and profits and will add enough value to keep unit sales of the OS family growing. 

 

It seems like people are getting a little too influenced by stock charts and price action.  It doesn't matter what the price action of a stock has been for the last X years.  It doesn't matter that AAPL has been a 4 bagger from 2010 or that DELL has done nothing from the very same time.  Only the future prospects of the business and the price you're paying for those prospects matters.

 

Finally, ask yourself this on batting average.  If your portfolio does nothing for two years but then doubles in the third year , giving you a pretty nice annualized return on an after tax basis, did you make the wrong decisions along the way?  Couldn't you have structured your portfolio differently so that you could have grown your portfolio steadily while still being able to take advantage of whatever caused you to get that double digit return in the third year? 

 

Maybe.  Maybe not.  Ideally, IV gets reflected in price action as soon as you're done buying or shorting, but that's not how the market works unless you can create a catalyst. 

[Parsad]

Can somebody please remind me not to get into raucous debates with ValueInv?  He's a partner in our fund and I keep forgetting his damn nickname on here.  ;D  And no I still won't take your bet!  Cheers!

[Guest valueInv]

I think Uccmal's idea of inverting is sound.

Absolutely. I hold a lot of Appl and I invert almost on a weekly basis. I scan the fringes constantly for threats that could kill Apple.

 

Except, Uccmal's idea of inversion is to first assume negative growth and then look at other factors. How is that inversion?

If you want to invert, you need to take the other position and let go of dogma. If I am a FFH bull, I don't invert by assuming 30% ROE.

 

2) Someone just as creative as Jobs was a live? Is Jobs really one of a kind visionary?

Let's assume he was. Let's assume Apple won't execute like it used to under him. Will that kill Apple? To win, Apple needs to execute better than its competitors not "as good at the Jobs era".

 

3) Is it possible that Apple has laid the foundation of a R&D group that will continue to out innovate the rest of the world?

Steve has often said that Apple was his greatest creation. Would that imply that he has? Organizations don't disintegrate overnight. EVen if it started fracturing, it would take time.

 

4) What if Apple products become as pervasive as Windows or Office globally?

Apple seems certainly heading in that direction. It is pretty clear to most in the tech industry that tablets will replace laptops. Today, Apple holds about 80% of that market with no competitors even getting close.

 

5) What if switching costs of Apple products become very high?

This follows from 4. If it becomes pervasive, people invest more. The more that is invested, the higher the switching costs.

IOS and Android are mobile platforms. Their value increases or decreases according to the amount of third party products available on them (just like Windows). If you look at the latest release, you'll see Apple is increasingly moving in that direction. What phone are you going to buy if your new car has a button with an Apple logo on the steering wheel constantly reminding you that your Android phone does not work with your car? If you own an iPad why would you by an Android if you can't use Facetime, access your files from iCloud or get your iMessages?

 

Apple  just added a big one to its platform:

 

http://techcrunch.com/2012/06/13/apples-passbook-could-be-a-platform-not-just-another-mobile-payments-rival/

 

I constantly look for cracks in both Apple and its competitors. What I am finding increasingly is cracks in its competitors:

http://techcrunch.com/2012/06/07/yep-developers-are-still-building-for-apples-ios-over-android-by-a-factor-of-2-to-1/

 

Android is fragmenting more and more. People are not upgrading. The phone vendors are losing money. It costs more to develop on Android but you make only a quarter of the money. Last quarter (the second quarter that the iPhone 4S was on sale), ATT, Sprint and Verizon reported that the iPhone outsold all other smartphones. If you look at these trends, they are not improving, they're getting worse for Android. Yet, somehow we feel its logical to assume that Android is going to kill Apple. 

 

When Apple introduced the iPhone 4S in China, there were riots. It was so bad that they had to shut down their stores.

Yet we are all shocked when they report good numbers that quarter. Don't you think the amount of demand in a large country would indicate a good quarter?

 

Apple intro the "unimpressive" retina Macbook Pro this week. I see a 3-4 week delay for an almost $3000 machine!!

Should we assume that the product is going to fail? Should we assume that next year, when Apple brings the retina display to lower priced laptops, that they're not going to do well?

 

The typical line of thinking on Apple is "I'm not impressed by their products. I think they're overpriced. Hence, Apple is going to come down to earth". Do I need to point out the irrationality of that argument?

 

Heres another one "Jobs is dead. So is Apple". How did we gain so much insight into the worlds most secretive organization?

 

Or "Apple can't keep out innovating its competitors forever". Yet, we hold Berkshire expecting above market returns over the long term. Is there an assumption there that innovation is a random process that will tend towards the mean over the long term? Aren't the EMT guys making the same argument about investing? Aren't we the guys who argue that if you have the right processes and mental models, that you can beat the market over the long term?  Could Apple have codified some processes in their organization that could result in superior performance for the next 5 years?

 

Or "technology cycles kill leaders all the time. Look at RIMM and Nokia". Yeah, stock market cycles kill leading investors all the time. Do we handicap Warren Buffet future returns by comparing him to Long Term Capital Management? Or did we go through the trouble to understand that they do completely different things?

 

Or "Apple will stumble some day". Sure, it will. And a meteor will destroy life on Earth too. Unless, you can give me a reasonable timeframe, its meaningless. This is a company that grew its FCF 72% during the 5 year period that had one of the worst recessions in US history. If they stumble 4 years from now but grew 25% avg until then, would I lose money?

MSFT stumbled too. But do you see people who bought their stock are reasonable valuations in the 80s crying?

 

I know I could have easily lost the $5000. But that would peanuts compared my Apple position. If calamity strikes Apple, the $5k would be the least of my worries. If Apple grew at a quarter of the rate in the next two years that it this last year and if it has no multiple compression, I would have still won the bet. If you subtract cash, today you're paying what, 11 times earnings for a business that just doubled? What would be Apple's multiple in two years? 5x? Wasn't that RIMM's multiple?

 

At some point, you need to assimilate all the facts out there and see if it agrees with your hypothesis. To me this thread is about biases in thinking. It is about assuming that we know things that we actually don't and jumping to conclusions. 

 

 

[vinod1]

I think Uccmal's idea of inverting is sound.

At some point, you need to assimilate all the facts out there and see if it agrees with your hypothesis. To me this thread is about biases in thinking. It is about assuming that we know things that we actually don't and jumping to conclusions.

 

I think Parsad and Uccmal represent what Howard Marks calls “I don’t know” school of investing. You seem to be pretty confident that you have handicapped the downside scenario for Apple. So I do not think it is fair to say they are assuming things that they dont know, when in fact, they are saying the opposite.

 

I am not very confident about Apple's future's earnings for all the reasons they mentioned above. If apple just maintains current profit margins and increases revenues in line with GDP growth then it would be earning about $0.5 trillion over the next 10 years at very very high rates of return on invested capital. Such a big honey pot would be very tough to defend.

 

Here is my comments on fool board regarding Apple's moat:

 

Coming to the question of moats, purely based on my own circle of friends, I am not seeing much of a moat.

 

1. Network effect - The number of apps for a platform would likely not be a big factor for users. It is not like Ebay where the number of sellers increases the value to buyers and vice versa. The most common apps and those which the users care about are quite limited in number. Once a core set of say 5000 apps are developed, it really does not make much difference to how many additional apps are available. These core set of apps would be available on other platforms as well. Users are going to iPhone mostly because it is such a well made device and it is so easy to use. Once the others catch up in learning curve this difference would become minor enough to not be a significant factor in purchase decision. I see the iPhone more as a fashion choice and fashions do (or rather must) change over time.

 

2. Switching costs - Most of the tasks that are performed on apps are very easy, non critical and does not require much training to become proficient. There is very limited data in any of these apps. Even the data that exits would become portable between platforms in future. The cost of apps also is minor compared to device or yearly phone costs. So I do not see much of a switching moat here. I had several friends (one used to be a diehard iPhone guy) who switched to Android just because they got bored with iPhone. iTunes did not really get them to stick with Apple so at least right now it is not much of a moat.

 

Much of the above would be true for iPad as well.

 

Vinod

[mcliu]

@ValueInv, yes you've definitely nailed some of the points I was trying to make with my inversion of Uccmal's bear case to see whether the business' growth is actually sustainable. On the other hand, when we're inverting, I guess we also need to invert the bull case. What would need to happen for Apple's growth to be unsustainable?

 

How would we think about the business:

1) If Bill Gates goes back to MSFT and it's the 90s all over again? (Not possible.)

2) If the current team at Apple fails to out innovate its current competitors? (Hard to see, there's a small leap of faith component here, since we don't know what they're really working on and what competitors are working on. We can only see the incremental innovations of the past from the current release cycle.)

3) If a competitor, like MSFT or Google, creates an equally innovative OS and the "commoditization" of hardware drives down the price of handsets?

4) If the switching costs of competitive products are equally high? (I have a Windows PC + X Box, maybe I'll get a Windows Phone once a decent one comes out. Or Google Search works better on an Android.)

 

For me, this goes into the "too hard" basket, although I personally think the bull argument is a lot stronger than the bear argument. I buy the whole "Apple has a superior ecosystem argument" which is especially true in a growing global market, this could potentially be just the tip of the iceberg. (Then again, I take myself with a grain of salt, 4 years ago, I probably also thought RIM's powerful Enterprise Server + BB Client business was a superior ecosystem.)

 

I am not very confident about Apple's future's earnings for all the reasons they mentioned above. If apple just maintains current profit margins and increases revenues in line with GDP growth then it would be earning about $0.5 trillion over the next 10 years at very very high rates of return on invested capital. Such a big honey pot would be very tough to defend.

 

That's the hardest to say. I mean, there will definitely be tremendous amount of competitors targeting this space, but to succeed in capturing share from Apple it'll require a combination of superior vision and execution. If Apple has assembled the right culture and team, it would potentially be possible for them to defend against new entrants. I mean, maybe Jobs has figured out the secret Coca-Cola recipe for tech/product R&D success and maybe it tastes like an Apple?

[Guest valueInv]

Ok. Let's invert. Here are the things I think are the biggest risks and what I would consider a possible mitigations.

 

Patent Dispute: Apple loses one of the lawsuits and its products are kept out of a major market such as US for an extended period of time

 

Mitigation: This is a total unknown. At best I can hope that Apple has enough in its patent arsenal to keep others at Bay. Apple seems to have a slight upper hand at the moment.

 

Supply Chain/Manufacturing Disruption : Some problem with Foxconn, China  or one the component suppliers that disrupt supply after a major launch.

 

Mitigation: I'd like to see Apple diversify its supply chain and manufacturing. They've opened up a factory in Brazil but they need to go further. One important thing is for them to not have Samsung as a component supplier. They double Samsung's economies of scale and allow it to use the same components to under Apple in price. Further, they train Samsung on building components and phones.

 

Market share : For any platform to survive over the long term it has to maintain marketshare over a threshold. If it falls below that level, it becomes a downward spiral (Eg RIM). A rough guess would be a min 15% marketshare.

 

Mitigation: I think Apple loses because of two reasons: price and carrier support. There's not much they can do about carrier support (they have conflicting interests). They can mitigate price by subsidizing previous generation of phones themselves (Eg 3GS or the iPhone 4). They use their enormous cash to provide the subsidy themselves and position their lower end phones for marketshare gains. This way they have a tighter relationship with their customers. They could also cut deals with MVNOs like Free in Italy who woud be more open to this. It also allows them to address the pre-paid segment where they lag. They could even undercut the price of Android phones. Its better than keeping all that cash in the bank.

 

Disruptive Innovation (See Innovators Dilemma): Over the longer term phone makers will add enough features, performance,etc  that the marginal value of adding an improvement will be very low. In that market phase, the cheapest vendor will win. In this phase, Apple has no advantage and its higher pricing will be a liability. Note that this will happen over the long term.

 

Mitigation: Apple will have enough scale economies to match competitors' prices and still have good margins. Another mitigation is that Apple disrupts/cannibalizes itself with a new product line. It has done this in the past - the iPhone cannibalized the iPod and the iPad in cannibalizing the Macbook.

 

Antitrust Issues: Apple is held back by antitrust issues. Their closed way of doing business makes this a real problem.

 

Mitigation: They're far away from this scenario in the smartphone market but could run into road blocks in the tablet market in the  future. But then, if they have this problem, it would mean that continued to do extremely well.

 

Internal Political Struggles: Politics rips apart the organization and the culture/processes Steve has built.

 

Mitigation: The CEO. Cook seems a capable leader willing to enforce discipline. The question is who comes after him. For now, it looks like he is going to stick around for a long time. And he has given his management team enough stock for them to keep working at Apple.

 

Note that nowhere I have mentioned sustaining innovation as a threat. There are a number of reasons for this. I haven't seen it become a threat. People are not going to switch to other phones because Google introduced a feature a few months before Apple. In fact, I would prefer it did. I want Apple to look at what Google did and improve the design and release a better version. In fact, that's what Apple has always done. They have looked at other products and said, "This sucks, lets build a better one". They were not the first with mp3 players, smartphones, tablets or even pcs. They just built better version of all of those after looking at the mistakes in others product. I'd rather Google take the risk of introducing a new feature first. Because once you release a mistake, its impossible to take it back. Over time, your platform accumulates cruft and becomes untenable. Take a look at the Android ecosystem to see what I mean.

[Guest valueInv]

 

I am not very confident about Apple's future's earnings for all the reasons they mentioned above. If apple just maintains current profit margins and increases revenues in line with GDP growth then it would be earning about $0.5 trillion over the next 10 years at very very high rates of return on invested capital. Such a big honey pot would be very tough to defend.

And what would Apple's economies of scale be in that scenario? How dominant will their platform be? Would Apple be a monopoly? Would people just stop supporting other platforms once Apple is that dominant?

 

In that scenario, would the defending be tough or the attacking?

[Guest valueInv]

Looks like Apple still has the same attention to detail as under Jobs:

 

http://www.tuaw.com/2012/06/14/ios-6-adds-some-great-eye-candy-to-new-music-app/

[vinod1]

 

I am not very confident about Apple's future's earnings for all the reasons they mentioned above. If apple just maintains current profit margins and increases revenues in line with GDP growth then it would be earning about $0.5 trillion over the next 10 years at very very high rates of return on invested capital. Such a big honey pot would be very tough to defend.

 

That's the hardest to say. I mean, there will definitely be tremendous amount of competitors targeting this space, but to succeed in capturing share from Apple it'll require a combination of superior vision and execution. If Apple has assembled the right culture and team, it would potentially be possible for them to defend against new entrants. I mean, maybe Jobs has figured out the secret Coca-Cola recipe for tech/product R&D success and maybe it tastes like an Apple?

 

What Apple has is not much of a moat. It is mainly operational excellence and superior management both of which can either be copied or hired away. I would not be surprised to see many of the Apple's senior management venturing out on their own and be hired away by competitors.

 

Vinod

[vinod1]

 

I am not very confident about Apple's future's earnings for all the reasons they mentioned above. If apple just maintains current profit margins and increases revenues in line with GDP growth then it would be earning about $0.5 trillion over the next 10 years at very very high rates of return on invested capital. Such a big honey pot would be very tough to defend.

And what would Apple's economies of scale be in that scenario? How dominant will their platform be? Would Apple be a monopoly? Would people just stop supporting other platforms once Apple is that dominant?

 

In that scenario, would the defending be tough or the attacking?

 

:) Apple is the RCA of our age. I am sure you could have made that argument about RCA in the early 1920s and 1930s as well.

 

Vinod

[Uccmal]

Vinod, those are very valid points about RCA and millionaire employees who exit for more fun elsewhere. 

 

The biggest bear case for Apple for me is their success.  To quote a friend of mine "that's an awfully attractive honey pot they are sitting on". 

[txlaw]

Now we're cooking!  This debate is great -- much more useful than just posting biased articles about how AAPL is great and Android sucks.

 

ValueInv, you seem to be discounting the effect of increased competition on AAPL profit.  Despite Android's problems (e.g., fragmentation), it's still a great OS, and most in the tech world would agree.  And now MSFT is entering the picture with an unified OS experience that a lot of people are lauding.  Competition is coming online, and there's only so many times that having a better screen resolution than everyone else on a new product can keep you ahead of the pack.  I can tell you that I would have seriously considered getting an Android phone if the iPhone 4 had not had a retina screen. 

 

I'm not sure its realistic to expect that AAPL can undercut the price of Android phones without having an adverse effect on the entire product line, which I view as the OS rather than the various form factors of computing hardware.  Android phones are low cost because the cost of the OS is minimal compared to other OS'es.  If we have an iPhone 3g competing with the latest Android phone at close to the same price point, the Android phone wins hands down.  Moreover, if AAPL does shift to a strategy of undercutting on price, you have to take into account margin compression.  So how much will increased market share be offset by margin compression?  This factor is what makes me think that AAPL is not a home run at this price but, instead, will compound at a nice clip.

 

Vinod, I would disagree with you on comparing AAPL with RCA.  RCA produced goods that led themselves to being commoditized, like a Samsung or Asus.  They were subject to the "everything becomes a toaster" phenomenon.  AAPL, on the other hand, produces an OS and development platform.  IMO, this is inherently an oligopolistic market.  You simply can't have a commodity operating system where there is a fungible product that can be supplied by close to an infinite amount of producers.  (Of course, the web as platform could become the ultimate OS, which would be awesome.)  On the other hand, you can have obsolescence in the OS space where market share gets rapidly destroyed due to disruptive innovators providing a better product.  So I'm not really sure what the best analogy is.

[vinod1]

 

Vinod, I would disagree with you on comparing AAPL with RCA.  RCA produced goods that led themselves to being commoditized, like a Samsung or Asus.  They were subject to the "everything becomes a toaster" phenomenon.  AAPL, on the other hand, produces an OS and development platform.  IMO, this is inherently an oligopolistic market.  You simply can't have a commodity operating system where there is a fungible product that can be supplied by close to an infinite amount of producers.  (Of course, the web as platform could become the ultimate OS, which would be awesome.)  On the other hand, you can have obsolescence in the OS space where market share gets rapidly destroyed due to disruptive innovators providing a better product.  So I'm not really sure what the best analogy is.

 

Agree it is not exactly an apples to apples comparison :)

 

What I am questioning is how big of a lock the OS/Development platform poses. To me, even though OS might not exactly be a fungible product, the presence of an Android and its rapid rise suggests that the OS/Dev Platform might not allow Apple to extract the rents that Microsoft did with Windows. I do not know if Google/Apple go the route of Fedex/UPS earning high returns or the route of Car manufacturing reducing returns for all parties.

 

I see people mostly downloading apps as needed and discarding them as better ones come up. There is very little lock in with apps. So any well funded competitor (Microsoft) can have a viable OS/Dev Platform in the future.

 

Vinod