Apple

[Richard M]

I'd suggest buying some today in a tax-protected account.  Assuming the dividend goes up - and I don't see how it can't - you could be looking at a pretty strong yield, tax-free, with the opportunity for big capital appreciation. 

As a back-of-the-envelope, if Apple moves the dividend up to $20/share and can pay that out of only operations....

In 10 years total dividends will equal $200/share realized, plus $150/share in cash, means in 10 years you'll be out $45 a share, net/net.

While tech trends change, lets examine some conservative numbers:

Mac net sales in 2012 (a sector allegedly in decline, but grew 7% for Apple) = $23B.

iPod sales (a segment that declined 25%) = $5.6B

Other music revenue (iTunes) = $8.5B, up 35%

Software, Service, and Other Sales (Mac App Store) = $3.5B, up 17%.

Thus, ignoring iPhones and iPads, focusing on the sectors in decline, Apple totals:

$40.6B revenue.  Take a low margin on this of 20% and that's $8B in profit.

Used the 20% margin as a "catchall" for declining iPod sales, but growing iTunes and growing Mac App Store stuff.

Over 10 years that's $80B of profit, plus or minus $20B, so $60-$100B.  Meaning it should be able to cover almost half the dividend alone. 

This also ignores last holiday quarter, as the annual numbers were year-end September 29.  The last quarter included $11.3B in iPod, Mac, and AppStores (didn't break out the iPhone part of the App Store).  Spitball it down to $10B in revenue and you're about 25% of the way towards another $40B year in the non-iPhone/iPad segments.

As Warren Buffett says, "What is smart at one price is dumb at another."

Happy Investing.

--
Richard Mordini

[Richard M]

Aftermarket surge that kind of puckered out.

What I like the most:

$60B buyback to be completed by year end 2015 is only 2.67 years remaining.  That's $1.875 per month....$15B this year alone.
Add in $11B in dividends annually.

Company will begin to borrow - hey, it's cheaper than repatriation, and tax deductible.  But I like that this opens to the door to the company turning into a strong value play.

At the current price, $15B repurchased this year would reduce shares outstanding by almost 4%...in this shortened year.  As a case in point, today's earnings were $10.09.... with 3.9% fewer shares, that's $10.50. 

Take today's $381B, remove $15B by year end, and remove another $22B (all assumes the stock price averages the current for the next 2 years - unlikely), and that same $10.09 would be $11.17 per share.

The nice thing about this in conjunction with the expectations of a slow upcoming quarter is that the buyback should really end up having teeth right out of the gates.

If you owned all of Apple, you'd literally be taking $100B out of the business in 2 years, 8 months..... and have not needed to touch your underlying business.

By reducing their share count by 12-15%, they are also reducing the dividend burden on outstanding shares, meaning the increased dividend payment will actually be mitigated to a certain degree, allowing the company to increase the dividend further in the future.

iCloud has 300million accounts, up from 250million in January.  A few software changes and iCloud could become a serious social network. 

A greater number of iCloud users is a decent indicator for whether these people would be open to a payment solution (which I still believe if the manifest destiny of the company.)

40 billion apps because 45 billion in 4 months.  $9B total paid out to developers, with $4.5 of that in the last year alone.  That is a $1.92B cut for Apple in the last year and shows remarkable acceleration.  I imagine this to be high-margin revenue, and could double pretty easily going forward. 

So, I see a lot of potential for the ecosystem items to accelerate with little additional investment.  (Launching payments doesn't mean you need to manage spinning up production factories at Foxconn).  BUT, assuming basically zero growth in the overall business, this capital allocation effort is solid...but the timing before another tepid quarter should prove to yield increased accretion in future quarters.  When you up your buyback, you want the stock to stay low....

--
Richard Mordini

[Richard M]

Updating Chodestocks with a friendly valuation reminder and updated analytics:

• Apple sold a record $17B of debt at amazing rates...that already are hosing investors down ~8% due to the Fed's easing comments.  What's interesting (and I think unexpected) is that Apple debt is so prevalent and liquid that it has become a currency of sorts.
• The App Store hit 50 billion downloads and $10B paid to developers of June.  That amount was $1.5B, $2.5, and $5B in 2010, 2011, and 2012, cumulative.  Assuming zero growth, at $5B paid out per year, that means Apple's 30% cut is $2.14B annually. 
• iTunes announced, outside of music, it's selling 800,000 TV episodes and 350,000 movies a day.  Assuming $2 per episode and $10 per movie (low), that's over $500MM in net revenue a year.  Grand totals since iTunes started selling them is 1 billion TV episodes, 380 million movies.  This creates a lot of lock-in, by the way.  Ditch Apple and lose your video library?
• Adding those together to be a $3B business, taking them as pure profit (they run servers, so the total costs are pretty low) with a conservative 9 multiple, that's $27B of market cap value, or 7% of today's market cap.
• Make a somewhat believable assumption that this business doubles in the next 2 years and you're over $50B in market cap for running servers.  This, conceivably, involves zero additional hardware sales (like how the city of LA committed to getting an iPad for every student...there are 630,000 students in the system).  Zero new products, and zero contribution from music, or iBooks (which is now shipping default on OSX, not just iOS). 

Given the company is repurchasing $60B of stock by the end of calendar year 2015, and paying out $11B of dividends per year...the Value Investor perspective is that the lower price ($416 today) will be more accretive going forward.  $60B would reduce today's share count by ~15%, increase today's EPS from $42 to $49.40, and with a multiple of 10 result in a price of $494, which is 18.7% over today's price.  Increase the total yield by the dividends paid.

Does anyone know about the mechanics of company buybacks?  Must they pace them?  Or if Apple knows they have exciting products coming out in the fall, can they accelerate purchases now where they expect to get more bang for their buck?

This also assumes no change in sentiment.  Increase the multiple on the company and the price should easily hit $550 or $600.

--
Richard Mordini

[Andrew Stepner]

Agree with a lot of your sentiment. Fundamentals on Apple remain strong.

AAPL Value

Yeah, I think this is a return to the Apple stock trend of old which was it grinding steadily higher as continuation of strong performance steadily pushes the low valuation up.

Trefis

Trefis is a good tool. It values apple at $626 per share. 4.2% ($25 billion) of that value is assigned from iTunes and apps which is right in line with your estimates.

http://www.trefis.com/company?hm=AAPL.trefis&from=search#

Trefis is great for visualizing where the valuation comes from and how it is distributed within products/divisions of the company. They have iPhone at 48% of the value. And as the 24% of value sitting in cash gets used, everything else should climb.

Buybacks

Don't know buyback details but people say the rules are pretty restrictive. I think they can only purchase in certain windows so they tend to follow those rules.

Apple seemed to announce the amount as less of an "up to" and more off a "we will" purchase that amount. I expect them to purchase fairly steadily, in line with what they have pledge.

There is always the chance that they incrementally bump up the buyback amount (akin to a company raising their dividend annually)

Stepner

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[Richard M]

I didn't know about Trefis.  Thanks for that.

The other big assumption I left out is that the rest of the business holds steady.  This is a big assumption.  But if it holds, the company is generating over $40B of cash a year.  At 2.5 years, all the buyback can be funded out of today's operations, (even paying the repatriation tax), fund the $100B buyback....

and still have basically not touched their existing cash hoard.

it's just amazing.  so, i'm not worried about the stock price as much knowing the buyback is happening.  and that it could go up.

--
Richard Mordini

[Brendan Mathews]

Accenture $ACN fell 10% on friday.  At $72, it looks pretty good.  $47b market cap, $6b in net cash, should generated $4-5b of free cash (85% of which will be paid to shareholders), and it should grow around 5% on the low-end for 5-10 years.  So fundamentally, it's at least a 15% return, possibly 20% or more annually from today's prices.  It's already my biggest position (by far), so I probably won't buy more... but if you don't own any, this could be a nice entry point, assuming it's available on Monday around $72

[Richard M]

Why'd it drop?

sent from my phone

[Richard M]

And what's the thesis for 5-10 years growth?  Oracle missed earnings and I worry that's a harbinger for consultancies that basically deploy Oracle or SAP.

sent from my phone

[Brendan Mathews]

It fell because they reduced FY guidance from 5-8% sales growth to 3-4%.  Obviously, a bad short-term issue, but not a big-deal long-term. 

The thesis for long-term growth is continued investment in IT by businesses and the wave of outsourcing. IT investments yield improved efficiency, so companies will continually spend money for better systems. Accenture installs these systems (and it isn't tied to any particular technology -- whatever companies need, Accenture will install and set-up). Outsourcing is also more efficient and cheaper than doing back-office stuff in-house. So companies will continue to outsource non-core functions.  It's not a huge growth market, but it should easily outpace GDP -- most forecasters, like IDC or such, put the market growth at least 5% annually... over the past 3, 5, and 10 year periods, Accenture has grown 7-9%... driven by the factors already mentioned

The oracle miss is a short-term issue... 

[Andrew Stepner]

So what is the cause on these short term issues that should not affect long term?

[Brendan Mathews]

Given the company is repurchasing $60B of stock by the end of calendar year 2015, and paying out $11B of dividends per year...the Value Investor perspective is that the lower price ($416 today) will be more accretive going forward.  $60B would reduce today's share count by ~15%, increase today's EPS from $42 to $49.40, and with a multiple of 10 result in a price of $494, which is 18.7% over today's price.  Increase the total yield by the dividends paid.

I was doing this same math myself, but it assumes the P/E stays at 10, which theoretically, it wouldn't because the company would have less cash.  If assume a constant EV to earnings multiple, then the P/E would fall from 10 to 8.35.  

--

[Richard M]

I'd posit their extra cash is so far beyond necessary that they aren't getting any valuation benefit from it. Utilities trade at 10x. And the 494 target at 10 assumes the market values them with an appropriate amount of cash/working capital. Aka for me the PE isn't a balance sheet thing unless the company is in danger of a cash flow squeeze. Moreover companies with a lot of cash don't command higher pes.

In reality, even with a slight decline on the business, they will still have too much cash. The buyback and dividends are not substantial enough to decrease the cash balance below healthy levels.

So I used 10x because it's just historically low for any company. ITW RLI MSFT all trade above it.

So I'm OK with the lower price now but really wish the company was buying back at a faster clip. If the stock goes to $700 I'd rather not see the buybacks.

sent from my phone

[Mike Jones]

Dear Investors, I own AAPL in my IRA, I believe in the ecosystem, but at some point all that matters is the story and I am not as confident in the near/bear term trading opportunity as other options. Growth and Liquidity are the primary beneficiaries of contractionary monetary policy and top down APPL is cheap and liquid (and FCF yielding), but is the product of low growth expectations in the any foreseeable investment time horizon (6mth-3yrs). I am a firm believer in investing in  consolidating industries for recognizable price power and would own LCC/AAMRQ into the late august merger.

LCC will get ~27% of the new co/largest US airline with 4 airlines controlling 80% of the uS market by volume (DAL, UAL, LUV). Oil price remains the main trading impediment along with IT/integration/cultural improvement time but in the end the airlines should like the refiners which had a cyclical peak MaY with the market (CvI, HFC, MPC) before declining. I'd own LCC in line with post merger guidance of $15-$20 per share to $21/share of EV multiple parity with peers post merger. The case is UAL/CO. I also like CPA on the "Hub of the Americas" theme on global recovery. 

Note: the airlines are cyclical in nature but own pricing power that flows to the bottom line. Unless the ability to adjust supply to meet demand changes the market structure,this investment holds into he catalyst (merger and integration$.) 

Mike Jones

703-407-7072

[Brendan Mathews]

Rich - Agree with your sentiments re: Apple buybacks.  Faster is better, and at 10x P/E & $58b in repurchases at today's prices would make it a $500 stock, even with no earnings growth. 

Mike - Trying to trade around and time stuff is a tough game, so I don't really try to do it.  Have you ever looked at Core Labs during your energy days?  Looks great, but really expensive. 

Buffett doesn't think consolidation will help airline pricing... or at least he said something to the effect at the annual meeting.  He does seem full of shit sometimes though... either way,  I've pasted the excerpt below, and as I free bonus, I've attached a 2013 AM transcript for your records.  I actually slavish typed this whole thing up and edited it...

The U.S. airline industry has been

plagued by horribly economics.

With the pending merger of US

Airways and United, 90% of

domestic capacity is held by four

players. Do you think the industry

economics have improved, and

pricing power will manifest?

Warren: The answer to second question is no. The industry

has consolidated. In some businesses, you can only have

two competitors, and they’ll beat each other’s brains out.

You can argue that happened with Freddie Mac and Fannie

Mae. They drove loans down to improper levels. In some

industries, they do very well when they get down to a few

companies, they do very well. Some don’t. You can take

Coke and Pepsi in the U.S. The only two colas of note in

the U.S., but if you go to the grocery store on a weekend,

they’re beating each other up on price. Airlines have

low incremental cost per seat with high fixed cost. The

temptation to sell the last seat a low price is very high. It’s

capital intensive, commodity-like business. It has been a

death-trap for investors since Orville took off. If there had

been a capitalist at Kitty Hawk, he should’ve shot them

down. If it gets down to one airline with no regulation, it

will be a wonderful business. With all these bankruptcies, it

could be a good business, but I’m not sure, and I’m skeptical.

Charlie: The railroads consolidated, grew their profits

and what did we do? We missed it. It’s conceivable that Bill

Miller is right. It goes into my “too hard” pile.

Warren: Mine, too.

Warren: We don’t think things will change dramatically

in See’s Candy. If there, the real profitability is limited to

the West coast. But we don’t see a competitor taking away

business.

Charlie: You really couldn’t create another railroad. You

could create another airline.

Warren: I’ve had a dozen proposals from people that

wanted to get into the airline business. It is sexy for some

reason. If you go to Mr. Big to talk about airlines, he’ll see

you. You can raise money because it’s interesting. There

have been an enormous number of bankruptcies. I bought

US Airways. By the time the check was cashed, they were

having trouble. We made quite a bit of money, but they went

bankrupt twice after we bought it. Charlie and I were on the

board and we’d look at projections, which were ridiculous.

[Richard M]

Brendan this is good stuff.

Mike - I've attached one of Whitney Tilson's presentations.  He basically is investing on the same thesis as you...except in rental cars via Hertz. 
I actually bought into his thesis on JDate and Christian Mingle via Spark Networks.  Seems like a great case that the financials are depressed due to plowing money into building ChristianMingle...while JDate runs itself at huge margins.

Richard Mordini

[Richard M]

Buyback

Buyback update (to me, the most relevant part after the fact that it was their best June quarter ever at $35.3 revenue vs. $35.0 last year....with nothing launching period).

They announced a $60B buyback in April, priced the debt in late April.  Buyback to be done by end of calendar 2015.  That means there was 2 months in the quarter to buy back:

$60B, 2.67 years to buy back, $22B a year, $1.87 per month.  That's 4.355 million shares per month at $430.  8.7 million shares for 2 months.

YahooFinance has them at 938.6MM shares o/s most recent quarter.  Apple announced 924 million now.  Difference = 14.6 million.

In order to get that to reconcile, I can't.... unless that means that Apple is massively frontloading these repurchases, or they are including results as of now aka July 20th or something.

Any help? 

If you think the business can grow thanks to a new product, this reduction in shares outstanding should magnify any subsequent upwards price movement.

Average Selling Price and Cannibalization

While people are worried about the average selling price of the iPhone now being $580 vs. $613 before, and how that means they must make a cheaper iPhone...... those people should stop talking:

The cheaper iPhone is about developing markets, and expanding the footprint.  Why should you design, make, ship, and market a new $400 phone when right now you can simply sell the model from 2 years ago for $400.  No investment.  No manufacturing defects.  No new contracts.  Just run the factories longer and ensure you sell out of your old inventory.  iPhone 4s are selling like crazy at $450.

Tell me, do you think introducing a $400 shiny new iPhone is going to increase low-end sales and reduce the ASP, or the reverse?

All that effort to sell something cheaper, when you're selling well now.  The $650 Newest iPhone is THE franchise to protect.  And it's doing well.  People spending $450 are getting models 2 years old....and they're happily doing it.  That's a fine thing.  Don't convince those people to demand a NEW phone at $400.  Then they'll "upgrade" to the new $400 phone in 2 years.  While in the current situation they may love the phone and get annoyed they're waiting for features.

Here's the parallel I keep thinking of...

In a Media Law class I took, the guy who runs Lucasfilm's library came.  People asked him why Star Wars was also SO slow to be on HDDVD, or BluRay, or streaming, or DVD, etc., despite its most fervent audience being techies and tech-forward.

His response:  "Because we have to wait for enough DVD, HDDVD, and Bluray players to be in the market so we can make the biggest splash."

The lesson - when you have an amazingly good thing on your hand, you don't push the envelope.  You maximize the rent you can collect.

Apple being slow on the iPhone is exactly that strategy.  The Nano was going to cannibalize the iPod Mini.  So they killed it.  But the Shuffle was priced at $99 at launch.... a price that the Nano still has never hit, and a feature set much simpler.

the iPhone gets MUCH harder to segment, mainly because Apple WANTS every iPhone user to install apps.  Apps keep the product "sticky".  You can't move your apps to another phone (you CAN move your mp3s*).  But to offer Apps, they have to offer pretty much the whole shebang when it comes to processor, ram, etc. 

Anything cheaper and chitzy doesn't lock you in to the ecosystem.  And if they are going to sell you a phone for $400, the whole entire point of the endeavor is to get you locked into the ecosystem.

That is why the cheaper iPhone should be a developing market product.  It's unnecessarily cannibalistic in the US.  Until it isn't...and hey, just ramp up production.

*This is why the competition is going for the spotify-model.  They are hoping/praying that they can eliminate the problem with the old mp3s keeping you on iTunes by giving you access to every song.  Moreover, Google is paying for the "iTunes Match" offering - which means paying labels in order to quickly mirror your music collection online - simply to remove even the friction of "having" to copy over your selection from iTunes.

Or, at least that's how I see it :)

--
Richard Mordini

[Richard M]

Lucasfilm approach also explains China Mobile, in my opinion:

Getting China Mobile on its own terms far outweighs the "middling" performance before it gets them.  Mainland China was up.  If you're growing "fine" without China Mobile, you keep growing that way and make them eventually pay.  And you point to AT&T vs. Verizon.  (The rumor about Verizon's massive iPhone commitment?  That is the cost of not being AT&T and getting it first).

--
Richard Mordini

[Andrew Stepner]

Buyback

Details in the conference call on buyback it seems...

From: http://www.businessinsider.com/apple-q3-earnings-2013-7

5:53 PM Tavis McCourt: Share buyback?

Peter: Ending share count ... all that on income statement. Ending basic and diluted.

During June quarter, we concluded $2 billion ASR program. Final shares in on that. Second ASR of $12 billion started at end of April. Fiscal 14 that will close. Bought $4 billion on open market, about 9 million shares. Impact, 22.9 million shares. Into Sep quarter, we would expect to see 11 million share benefit.

Stepner

[Andrew Stepner]

iPhone Product Line

Agree with your points.

The way I would say it is that they need multiple iPhones to prevent customer reasons not to buy. One reason not to buy is price, so whether its the 2 year old model or building the 5S in two simultaneous versions with the second having cheaper components, I dont care a ton as long as they serve the cheaper developing markets with phones.

Another reason not to buy is if you want a different size. Thats why I would like to see them offer at least two sizes. My concern is that they may not be competitor focused enough. They have only had one size so far so the risk is that they stick with that plan. Hopefully they go with a large/small setup and give customers both options.

Stepner

[Andrew Stepner]

Buyback
From the earnings call transcript where there wasn't much else of note:

"In early April, we concluded the 1.95 billion accelerated share repurchase program that we initiated in the December quarter, resulting in cumulative retirement of over 4 million shares of Apple's stock under that program.
In late April, we executed a very successful debt offering issuing $17 billion of debt across, 3, 5, 10 and 30 year maturities. We paid $2.8 billion in dividends in the quarter and we also utilized a total of $16 billion in cash on share repurchase activity to a combination of a new accelerated share repurchase program and open market purchases. $12 billion of the $16 billion was utilized under a new ASR program initiated with two financial institutions in April. An initial delivery of 23.5 million shares was made under this program, with the final number of shares delivered and average price per share to be determined at the conclusion of the program.
Based on the volume weighted average purchase price of Apple's stock over the program period, which will conclude in fiscal '14.
In addition to the new ASR, we executed $4 billion of open market share repurchases, resulting in the retirement of 9 million additional shares."

"During the June quarter we concluded the first $2 billion ASR program that we started in December and then we so we got the final shares in on those. And we did our second ASR program of $12 billion that started at the end of April and we received 23.5 million shares initially on that, and as I went through in my prepared remarks fiscal '14 that program will close and we'll get the final number of shares. We also bought (indiscernible) of stock in the open market during the June quarter and received about 9 million shares. So the impact of those in the June quarter lowered our diluted share count in the quarter by about 22.9 million shares and as you look forward into the September quarter, before any further buybacks or any issuance to employees we would expect to see an additional approximate 11 million share benefit from the things that occurred during the June quarter."

Stepner

[Andrew Stepner]

Only thing from the transcript that stuck for me was a downturn in Hong Kong sales that they seemed to imply might have been a decrease in "resellers" buying there and then flipping them elsewhere.

Key going forward is going to be the forthcoming new product announcements.

Stepner

[Richard M]

For the record, I'm missing the boat here.  Apple had a $10B buyback, upped it to $60B to finish "in 2015".

So it seems like the $10B program finished:

"In early April, we concluded the 1.95 billion accelerated share repurchase program that we initiated in the December quarter, resulting in cumulative retirement of over 4 million shares of Apple's stock under that program."

Then, now they have $50B more, and it's the end of April. 

We paid $2.8 billion in dividends in the quarter and we also utilized a total of $16 billion in cash on share repurchase activity to a combination of a new accelerated share repurchase program and open market purchases. $12 billion of the $16 billion was utilized under a new ASR program initiated with two financial institutions in April. An initial delivery of 23.5 million shares was made under this program, with the final number of shares delivered and average price per share to be determined at the conclusion of the program.

How could they repurchase $12B in one quarter, initiated in April.  AND the "initial delivery of 23.5M shares" for $12B is $510 per share.  Stock didn't trade that high once. 

Is the 3rd party financial institution a swap?  So Apple buys at $510 and the 3rd party made a killing on the delta?
Then, they made another $4B in open market transactions (at least the $12B plus the $4B equals $16B, which ties to their statement of using $16B of cash "in the quarter").

In addition to the new ASR, we executed $4 billion of open market share repurchases, resulting in the retirement of 9 million additional shares.

OK, so in April they finished the $1.95B, started the $16B at a $12B clip, and then just made another $4B.  That's $16B in a quarter, which is way too fast for a $50B facility that is going to last into 2015.

Couldn't have this make any sense, so looked up last quarter's filing.  Turns out that's exactly what is happening with a 3rd party - up front payment shares delivered later.  So ponying up $12B this quarter doesn't mean they're "at that clip" for the next quarter, and there's no mention of when the ASR program concludes. 

"During the June quarter we concluded the first $2 billion ASR (I guess he's right - "concluding in early April" IS the June quarter) program that we started in December and then we so we got the final shares in on those. And we did our second ASR program of $12 billion that started at the end of April and we received 23.5 million shares initially on that, and as I went through in my prepared remarks fiscal '14 that program will close and we'll get the final number of shares. We also bought (indiscernible) of stock in the open market during the June quarter and received about 9 million shares. So the impact of those in the June quarter lowered our diluted share count in the quarter by about 22.9 million shares and as you look forward into the September quarter, before any further buybacks or any issuance to employees we would expect to see an additional approximate 11 million share benefit from the things that occurred during the June quarter."

The estimation of another 11 million seems to be based on these agreements, and probably relates to the final $4B and true-up payments on the earlier $12B.

Details bolded:

Dividend and Share Repurchase Program

During the six months ended March 30, 2013, the Com

pany paid cash dividends per common share of $5.30

for a total of $5.0 billion. No

dividends were paid during the six months ended Mar

ch 31, 2012. On April 23, 2013, the Company announc

ed it was raising its third quarter

2013 cash dividend by 15% to $3.05 per common share

. Future dividends are subject to declaration by th

e Board of Directors.

In 2012, the Company’s Board of Directors authorize

d a program to repurchase up to $10 billion of the

Company’

s common stock beginning in

2013. In April 2013, the Company’

s Board of Directors increased the share repurchase

program authorization from $10 billion to $60 bill

ion.

The Company’s share repurchase program does not obl

igate it to acquire any specific number of shares.

In August 2012, the Company entered into an acceler

ated share repurchase program (“ASR”)

with a financial institution to purchase up to $1.9

5

billion of the Company’s common stock in 2013. In e

xchange for an up-

front payment of $1.95 billion, the financial insti

tution committed to

deliver a number of shares during the ASR’

s purchase period, which ended on April 1, 2013. Th

e total number of shares delivered, and therefore

the average price paid per share, were determined a

t the end of the purchase period based on the volum

e weighted average price of the

Company’

s stock during that period. In the first quarter of

2013, 2,582,782 shares were initially delivered to

the Company. These shares were

retired and accounted for as a reduction to shareho

lders’ equity in the Company’

s Condensed Consolidated Balance Sheet. The Company

accounted for the ASR as a repurchase of common sto

ck for purposes of calculating earnings per share a

nd as a forward contract indexed to its

own common stock which met all of the applicable cr

iteria for equity classification, and, therefore, w

as not accounted for as a derivative

instrument.

In the second quarter of 2013, no shares were deliv

ered to the Company under the ASR. On April 1, 2013

, the purchase period for the ASR

ended and an additional 1,494,992 shares were deliv

ered, retired and accounted for during the third qu

arter of 2013. In total, 4,077,774 shares

were delivered under the ASR at a repurchase price

of $478.20 per share.

2nd quarter, no shares were delivered because the true-up happened 1 day later on 4/1/13.

So, this muddies things up since the cash spent repurchasing is upfront.  But, learned something new about buybacks.

[Brendan Mathews]

This 3rd party thing is infuriating.

Sent from my iPhone

[Richard M]

The reason I was focused on it was because I wondered whether they were front loading the purchases which could indicate their expectations for the pipeline. If they know they are launching Payments and getting China Mobile, makes a lot more sense to buy as much as they can now. MA and Visa are worth a lit of money and iTunes will have a million registered credit cards by 2015.

Plus there's always a chance the buyback finishes early and they increase it again. Since I think value investors and institutions will be supporting the stock due to the dividend, I'm using the buyback to infer the minimum expected dividend increases and taking a 3.5% yield as so attractive it would serve as a "floor".
12.2+1.5 increase divided by 3.5% is about $391 as a pretty firm end of 2014 floor/resistance. $10B annual dividends for a company with $127B net cash would seem to command pretty strong interest if the yield got to 3.5%  $456 at 3% 

sent from my phone

[Richard M]

Well my first email suggesting you buy on 4/18/13 ended up being 1 day before the bottom ($390.50 the next day).

Icahn just disclosed a stake, stock up $17.  Thinks it's undervalued and pushing for a bigger buyback.

Honestly I think it's an ego thing - Icahn wants to succeed where Einhorn fell short, haha.

--
Richard Mordini

[Richard M]

One of the more interesting things I've come across about the iPhone 5C.  While the lack of disclosure on pre-orders is a bit troubling, at the same time the 5C is really just a 5 that costs less.  It was never going to be the flagship, line-forming techie-hipster line.  (It's not "latest" or "greatest").

But this discusses something Apple would know that tech pundits wouldn't - the iPhone Touch sales, and adoption among younger people.  Seems like the 5C could be angled exactly for youngsters graduating from iPod Touches to iPhones.  I thought the silicone cases are ugly, but from a parent's perspective, here's my thought:

1. Slightly less expensive at $99.  Much less expensive that an iPod touch.
   
2. Won't get confused with my iPhone 5 or 5S.
3. Less likely to shatter/break due to plastic.
4. Easy discussion with my kid on what color they want.
5. Add silicone case for further protection.

Seems like something that is meant for a backpack.
http://www.zdnet.com/two-factors-reveal-apples-real-mission-with-iphone-5c-7000020669/

Looking at AT&T Mobile share, it seems like they make the decision to add a new phone a ~$35/month one, where you kid gets unlimited talk and text and shared data. 

Could be very savvy. 

My personal take is that the 5C is an admission of slowly penetration, but equally part of positioning the phone as a luxury item.  Here's why:

Previously you could buy the 1-year-old-model and "fake it" as if you had the top of the line.  They looked the same - one was $100 less.  Now, normally prior models added things that were "a big deal", (or at least marketed as such).  The 3GS's spec bump really DID matter.  The 4S added Siri.  5S's fingerprint is, right now, a fancy unlock mechanism.  To me that's diminishing returns.

Same with the weight and thinness:  at some point the phone is "thin enough".

So, how do you protect the $200 Flaghship phone as a status symbol, in the fact of the S updates being less important?  Ensure that people know you paid/afforded the premium line.  Expect 6S and 6C in the future - so you can't backdoor-into looking like the premium buyer.  The colors are quite obvious on that.  The Colors are Apple's equivalent of Outlet Stores:  You get the goods, and they cost less.  But just like retailers now make clothes specifically for the outlet stores that is lower cost (and no longer transfer flagship inventory there), Apple made the 5C cheaper so they can keep margin.

My prediction is that after the iPhone 4S sells out, for the next iteration the C will have a $0 model/color/storage size, and the S will be $200.  Apple did this similarly with iPod shuffles before (one basic color was cheaper), and they are doing with with iPod Touches now.  http://store.apple.com/us/buy-ipod/ipod-touch

This addresses the conundrum they had with the phones vs. iPods:  With iPods, removing features was easy via screen, storage, battery life, size, etc.  But with phones, Apple wants to ensure you can purchase apps, music, tv/movies, etc, since it increases lock-in.  So they can't sell a dumbphone - there's no point.  Similarly they sell developers on a "standard platform", so they want similar screens and resolutions.  The introduction of the App Store means they serve 2 gods:  developers who want everything the same vs. profit which relies on customer differentiation along Willingness To Pay. 

Allowing the cheaper "off cycle" customer to have what LOOKED like the latest-and-greatest to achieve it by paying only $99 every 2 years for a one-year-stale model was an issue.  Now if the 1-year old becomes #C, then it's preserved.

Where I'm less sure is what features they may deny the #C.  E.g., will fingerprint ID head to that device?  If it truly increases media purchases, yes.  If it doesn't and instead just is mainly enjoyable and used by companies for security...then no.

--
Richard Mordini

[Andrew Stepner]

Good points.

The 5C idea is an improvement to the product line because the discounted models are no longer "old iPhones", they are instead "new" (even though they are mainly old iPhones on the inside).

Apple has need to move beyond a single phone product and slowly but surely they are iterating to make it a more multidimensional and compelling lineup.

[Andrew Stepner]

Real strong announcement of 9m units of 5S/5C and revised guidance. Seems to setup very well for the next earnings release. Stock only up 4% today at $486. This look like a good buy point to anyone else?

[Richard M]

I think it's a good buy point because I expect Apple to have at least 1 more product announcement before Christmas - namely to goose iPad sales as gifts.  That will create a sense of "things are back on track".

I have a negative thesis about the company's long term trends*, but I really do like the stock short term. 

Subsidies fade away/get tighter.  Big problems.

Competition in tablets.

Tech-savvy younger generations beginning to feel ripped off - things like no expandable memory, etc.  Apple's true advantage is with less tech-savvy people, namely Baby Boomers, wading into tech for the first time.  People growing up with iPhones aren't going to have the expendable income to shell out on iPads at super-premium prices with low memory, etc.

Then again, Apple has always survived on getting other people to buy their products: education buying macs, carriers paying for phones, and now school systems and companies buying iPads.  Even iPods became "THE" gift/spiff etc.

But as I've opined in the past, these lower stock prices are turbo-charging the buyback.  You absolutely know that Carl Icahn's discussions with Tim Cook involve a mutual agreement that when the pipeline hits, and the stock goes up, this summer was the best time to buy a LOT of stock.  A lot of iPhones sold is going to mean higher gross margin, combined with a sharply reduced share count outstanding....going to be a great quarter.

It's quizzical that after announcing 9M phones sold, the stock is still lower than in the 3 days after Icahn bought in.

[Andrew Stepner]

I think that people growing up with iPhones WILL blow expendable income on apple products. A young person being "tech savvy" doesn't mean they value expandable memory or even "specs" at all. All it means is that they are big users of technology products.

I expect them to continue to value the best product experience and to date that has been provided by Apple. I wouldn't expect teenyboppers to grow up and suddenly pine for an iPhone that supports Flash.

[Richard M]

Last June I wrote about the app store (see below).  The 1.5, 2.5, 5B, and 10B were July-to-June figures...last January Apple was at 7B cumulative paid to developers.  So they'd done $5B additional June 2011 to June 2012 (5 to 10), and I said a "believable" assumption would be that the business doubles in the next 2 years.  So from Jan 2013 ($7B cumulative) through June ($10B cumulative) they paid devs $3B.

Well, Apple announced that $15B has been paid to developers by YE2013.  So that's another $5B incremental for an $8B total in the Jan 2013 to Dec 13.  Moreover, $10B was spent...with a $1B in December alone.

So, it's on a path to double in a single year, vs. 2.  67% growth from the first half of the year to the second.  $8B sent to devs means $3.42B as Apple's cut.

While I think this tops out, let's say 50% growth in 2014 is $12B paid, or $5.14B as Apple's almost pure margin cut.  $17B total revenue.

Target has revenue of $70B, Net Income of $3B, and Cash Flow from Operating Income of $5.3B.  A market cap of $40B and PE of 16.78 and operating margin of 6.7%.  (Apple is at $488B).

So, you could ignore all the device revenue, all the Apple Stores, and ignore iTunes, insurance sales, accessory sales, and just imagine the App Store as a Target that only sells 30% margin items, is growing over 50% year of year (Target grows at 5%), has 1/4th the revenue but almost the exact amount of cash flow from Operating activities, and sells at a lower PE.

Like, if Apple shuttered all its stores and never sold another device (but somehow magically managed to keep the current field of devices current), you have a company that should be valued at least at 40B, but given it's growth something more like $60-80B.

For running servers.  And this doesn't count iTunes, and it took no effort (largely, app developers have figured out how to make more compelling apps that are worth paying for).  Again, 2013's revenue was greater than all prior years combined. 

And all these purchases increase lock in as you'd have to give them up if you left the ecosystem.

Richard Mordini

[Brendan Mathews]

I love the angle -- "Apple's huge opportunity in iApps" especially w/ the creative twist of comparing it to Target. I'm putting together a rough outline in my head to write an article about it. I'll probably follow-up with specific questions. Off the top of my head, any way to take the $2b in 2013 gross profit to an operating profit estimate? I have absolutely no basis to estimate the cost of servers, people reviewing apps, maintaining iTunes software, etc... I'd guess that it's not much, but I can't really publish a wild guess. I guess maybe I could just gloss over the issue...

It also got me reading and thinking about the value of the install base. Interesting stuff.  Thanks!

Good picture of App $ growth via Asymco: 

https://twitter.com/asymco/status/420631030429921280

--

[Brendan Mathews]

On an unrelated note, I'm increasingly disenchanted with Apple's management. There have been a lot of little things that I don't like (hiring outside senior management, building a palatial new HQ, flubbing the buyback situation, etc). But mostly, I don't think Cook et al have any strategic vision. What are they doing to secure Apple's competitive moat and build the long-term value of the business?  I'm not aware of anything. Cook just seems like a corporate flunky cruising along on Steve Jobs' accomplishments in product development and branding. I like Apple as a business/franchise, and there's probably lots of ways it could succeed. It's got a great brand, great products, loyal followers, big install-base, etc... but without a solid leader... well, things could easily go wrong and not much upside optionality.  

[Andrew Stepner]

asymco.com has a ton. You want to check his archives to see if he has any operating profit techniques.

Mgmt

On your distaste for management, I mildly disagree. I'll lay out the other side of the argument.

HQ

The palatial new HQ was Steve Job's idea so you have to blame him for that. [I do agree that it is probably a bad idea though]

Cash

Flubbing the buyback is also largely Steve Job's call for hording cash so you also have to blame him for that. Plus all of corporate american is squandering foreign cash on the balance sheet, all you can really do is blame Apple for following the herd and not being independent thinkers.

Moat

Again, I'm not sure what Steve Jobs did to secure the moat and build long term value that Tim Cook is not doing except invent bold new product categories that didn't previously exist. But virtually no one in the world is consistently capable of doing that so I wouldn't vault Tim Cook for it.

Steve Jobs did oversee a lot of iterative and incremental innovation that over time has added up to a lot. It seems to me as though Tim Cook has continued that.

New product categories

The real question will be how Apple launches into new categories under development, i.e. iTV and iWatch/wearable. It remains to be seen whether they can match the Steve Jobs era but they really havent tried the game changer yet.

Hires

By the way, which hires don't you like? Arguably the retail thing has been a miss, yet I'm not sure I've seen much negative results out of their retail end.

Chart

On a mostly unrelated note, with respect to the chart, I really like Apple here at $533. If the uptrend holds there seems to be a lot of upside for it to pop back to the top end of the upward channel.

Stepner

[Brendan Mathews]

Yeah, asymco.com is great -- that is what I was reading yesterday after Richard prompted me to do some additional research on the App store. 

Cash and HQ

Regarding the HQ and Cash situation, those aren't my  biggest concerns. I see your point on how Cooks sort-of inherited those problems from Jobs, so I can give Cook a pass on those issue. And, you're right, Cook is just doing the conventional thing with the cash. For corporate America, I'd grade Apple's capital allocation as average. However, the average practices -- what most companies do -- is pretty bad. I'd prefer to invest in companies that do much better than average on capital allocation. 

New Products and Moat

I also agree that Steve Jobs didn't do much to build a moat for Apple. Unlike say, Bill Gates or Jeff Bezos, I never considered Jobs to be a brilliant strategic/business thinker. Jobs had a different set of skills. He set-up Apple with an awesome brand and awesome products, but he didn't do much for the moat. Jobs was a once-in-a-generation product development genius, and I don't think anyone at Apple will ever come close to replicating his success in that area. I'm not optimistic about iWatch/iTV or any new other revolutionary product from Apple. In fact, I'm very confident Apple won't introduce another massive blockbuster product in the next decade. You said, "It remains to be seen whether they can match the Steve Jobs era but they really havent tried the game changer yet." I could always be wrong, but I'm absolutely convinced that Apple's future product development won't come anywhere close to the Steve Jobs era. 

But that's fine, Apple has great existing products, a great brand, and a growing market. The company doesn't need a revolutionary new product to reward investors, especially at the current valuation. It's just needs to sustain and enhance its current businesses over time. Considering today's multiple and the cash hoard, Apple will do very well for investors if it can simply sustain current profits and maybe grow at a nominal rate, say 5%, over the next 10 years. Given the extremely competitive nature of the industry, the key to doing that is building a competitive moat. I haven't seen Cook or Apple make any smart moves in that direction. What have they done to ensure that Apple will be thriving in 10 years? Of course, building the moat requires keen strategic thinking and a willingness to defy conventional wisdom. From the little that I know about Cook, I'm not sure he's capable of it. Supposedly, he's a very hard worker, very smart, dedicated, personally effective, but he's not a Visionary or strategic thinker. He's an Operator or Processor (see this link for a brief explanation of those terms/framework, http://www.predictablesuccess.com/books/the-synergist/). 

Hires

I don't have a problem with any of the particular people that Apple has hired. I do have a major problem with the practice of parachuting senior leadership in from the outside. It doesn't work very well, and it speaks poorly to the company's culture and ability to develop future leaders. In my opinion, it's just a lazy way to develop an organization. Of course, there are always exceptions (e.g. Alan Mullaly at Ford, etc), but I don't like the general practice. I feel pretty strongly about this, and it's based on a mix of my corporate consulting experience, my time studying successful businesses/organizations at the Fool, the academic research on the subject that I've read, and finally my general outlook/philosophy about the world.  If you don't want to hear an off-topic ramble on my worldview, skip the next paragraph. 

I think that most people overestimate the correlation between experience/credentials and intelligence/effectiveness because they are lazy and tied to conventional notions. I've worked and studied with a good mix of people. Some had gold-platted resumes (Harvard, Stanford, Goldman Sachs, McKinsey, etc), others had more modest credentials. And, I haven't see strong evidence that the gold-platted people are that much better. At Accenture, I regularly saw people from XYZ school that I've never heard of outperform Wharton MBAs on the job. I'll give you two real examples. First, in my fraternity at UVa, we had one guy that pretty much everyone agreed was stupid, a bit lazy, and at best moderately likable. I'm assuming he got into UVa because he went to a prestigious private high-school. His father owned a big Pepsi bottling/distribution business, so he was able to secure him an internship at Goldman Sachs during college. And after college, via another connection, he landed a job at a hedge fund, where he's the office lackey. But, he probably makes more than $300k per year. And, he could write-up a good looking resume, put on an expensive suit and probably fake his way through an interview, and some lazy hiring manager would think he's a great candidate. By contrast, one of the smartest investors that I know is a 23-old guy that dropped out of the 4th grade. He's completely self-taught, and he has absolutely no educational or career credentials. He doesn't even have a GED. He has a resume, but there's literally nothing to put on it. He has long-hair, doesn't own a suit, and his social/interpersonal skills are a bit stunted. But, he's absolutely brilliant -- an investing savant -- and despite that fact, I'm pretty sure the Motley Fool is the only investment research organization in the world that would even consider hiring him. So, those are two pretty extreme examples to contrast, but they are absolutely 100% true and real. That's how the world works. Hopefully I've illustrated my point without being too dramatic. And, I don't mean to suggest that good credentials are meaningless. On average, a Harvard grad is probably smarter, harder working, and a better hire than someone from University of Maryland. But, that's just on average and there's so many exceptions. Kevin Plank, CEO of Under Armour, graduated from University of Maryland in the mid-1990s, and I'm pretty sure he a better entrepreneur, business-person, CEO, etc.. than anyone that graduated from an Ivy League school or Top 10 MBA program in the mid-1990s. Off-topic rant = over. 

Back on the topic of Apple, I outlined my thoughts on their hiring strategy in a series of three articles for Fool.com (links below). This articles weren't widely read, and reader feedback was exclusively negative. But, I stand behind everything that I wrote. 

http://www.fool.com/investing/general/2013/12/10/apples-hiring-spree-has-potential-pitfalls.aspx

http://www.fool.com/investing/general/2013/12/22/will-apples-hired-guns-flame-out.aspx

http://www.fool.com/investing/general/2013/12/23/why-is-apple-bringing-in-corporate-elites.aspx

[Andrew Stepner]

Cash

Agreed.

Moat

Agree with a lot of what you said. Good points. On the other hand, I do think the whole iOS ecosystem goes a significant way towards a moat though. And I think Apple's culture and product development are underappreciated for their uniqueness. They are uniquely focused on simplicity No one else does it like them, and no one else is built to. People have been trying to do what they do for years and no one has been able to replicate it. Its basically because no one externally properly understands what their magic/moat is.

The Synergist

Interesting. Is this a book worth reading?

Hires

I completely agree with your general hiring point, I just don't see it applying to Apple as much as you do. To be clear, I definitely agree that there should be a preference to promote internally.

But are the external hires that your article mentions really representing Apple senior leadership?

Let me make the counterargument...

Take a look at this link to who Apple considers to be their leadership team https://www.apple.com/pr/bios/ It looks to me like they are all long term Apple guys: 

Cook (apple veteran)

Cue (24 yrs @apple)

Federighi (former Apple guy that they hired back)

Ive (17 yrs)

Oppenheimer (17 yrs)

Riccio (15 yrs)

Schiller (20 yrs)

Sewell (5yrs - legal)

Williams (15 yrs)

I would argue that most of the hires that you mention are to bring in specialty expertise in areas where Apple has little experience. Its akin to their long tradition of acquihires for lower level engineering talent. They often buy startups for the engineers which seems to be a successful talent strategy for them.

Paul Deneve, former CEO of Yves Saint Laurent, "special projects". To me it seems like he was hired to bring expertise to build out a secret new product category, probably watch/wearables. The argument is that Apple has no experience in this area so its a way of bringing in an expert.

Lisa Jackson, former head of the Environmental Protection Agency, environmental initiatives. Again I don't think Apple has experience here so why not bring in an expert.

Luca Maestri, Apple's new corporate controller, Xerox CFO. Seems like a hire in a non-core area. Maybe they have brought him in to challenge the "conventional thinking" on spending cash that you and I both detest.

Kevin Lynch, CTO Adobe, Apple's VP of technology. Here is one where I agree. His hire was strange. But I am not on the inside so who knows why they did it.

Off the top of my head the only area that is really important where they have clearly gone external is retail. And I would argue that retail is not historically a core Apple competency. Thus it makes sense for them to try to grab some external expertise in that area. They are a tech company, not a retail company. For instance, with Ron Johnson they hired him from Target and he worked out pretty good while he was at Apple. Angela Ahrendts is too early to tell but notice that they don't list her on the Executive Profiles page yet.

If you want to play extreme devil's advocate you could also criticize apple for hiring Tim Cook away from Compaq back in the day as well as their hiring of Steve Jobs and other executives from the external company NeXT.

The other factor here is that Apple is growing massively. Who else has grown like Apple has without hiring externally? I would argue a lot of it is that they need to bring in external talent because they were not too long ago a relatively small company and with there current size there are just gaps that need to be filled.

What do you think of that argument?

Stepner

[Richard M]

One of the more "silly" takes on Apple is the overweighting of Jobs at the expense of the other managers. The more savvy take is that Cook largely built the Apple of today, which is Apple At Scale. Jobs was fighting an illness and was a  product guy. But Apple's LAUNCH weekend sales of recent iPhones now match an entire quarter's production of earlier models. That's unseen innovation and it drives almost as much profit as new products. The iPhone was big. But shipping 8 million of 2 new iPhones (5s and C) in a week which were more than swapping out a processor (new case double processors touchid) is bigger. Something small: iPhone 5c factory backgrounds match the case color. Think about that: previously they just made a phone with different memory and the software was exactly the same (the OS automatically detects on board memory for example). Now they launched 6 different phones and the software needed to be configured to the phone - the os can't detect the case color.

My criticism is nuanced: greed. It relates to their famous margins at the expense of a moat. They are so stingy that it's so easy for competitors to offer more for less.  And it's in the cloud. They leverage production scale for profit (chamfered edges are pricey, but not really at 40m units) but also try to leverage weak cloud scale for profit rather than moat. And Google is better at cloud. So apple charges more, with cloud, for an inferior product. Rather than more for a superior product as with hardware.

In fact, I'm befuddled by cook here: he gets production scale. But iCloud is weak. Photostream is clunky and storage is weak. Google will back up every photo you take for free. Apple will back up 10k for 30 days because they want you to buy more storage. (High margin). So Google offers a better software experience and charges nothing for our. Photo stream SHOULD be the reverse: store every photo online, organized, keep only the last 10k on your phone. Users would NEVER leave if they had a half decade of photos neatly organized. Instead, my wife transfers her photos to Picasa to free up space on her iPhone. She could leave iOS for Google without a hiccup.

In short, Apple's cloud services really suck and are stingy at the expense of a competitive moat. Paying up for a beautiful device can be worth it, bit receiving inferior software support on that device versus android is an ongoing reminder that you paid up for something that may not be worth it. That's bad. Expensive restaurants shouldn't skimp on service as otherwise you don't come back. As music and video streaming become the norm, past iTunes purchases mean less and less. It's decaying and they are not replacing it with cloud services due to greed.

Except the car: iwatch and ITV are nothing compared to the car: you own a car for at least 3 years. If you get an icar system BECAUSE you have an iPhone, then you are going to get another iPhone upgrade. It creates a very long-cycle asynchronous staggered iOS purchase, which helps lock in. A watch can be discarded/ run out of battery and you use another watch you used to own with zero transactional costs. Your car is used every day.

Final note:
Brendan you love Berkshire but get mad at Apples cap allocation. I disagree and think their cap allocation is VERY Berkshire. They hoard cash and have authorized a big buyback. They are prudent in their acquisitions and spending. Their HQ should help attract and retain talent. They will probably increase the buyback and surely will increase the dividend. I love the stock at barely any growth - I just want to see them use cheap cloud services to fight against NEGATIVE growth, which they aren't doing. That's the existential threat.

And on innovation: AppStore. It's growing to be giant. Jobs was initially against it. As was he against an iPad mini. Is he the genius because he changed his mind or is the person who thought of it and relentlessly hounded him to change his mind the real genius?  Jobs hired great - and he chose Cook.

sent from my phone

[Andrew Stepner]

Yeah, I am not happy with them on cloud either.

[Brendan Mathews]

What do you think of that argument?

First, I enjoy the counter-perspective -- thanks for helping me sharpen my thinking. Second, the issues of hiring, management, culture are highly subjective. It's possible to have smart conclusions, but nothing is scientifically certain. So there's plenty of room for smart people to disagree. Third, all of your arguments are logical & they're certainly plausible, but you haven't managed to change my opinion. I'm still pessimistic about Apple's hiring strategy, and I'm uncertain about management overall. Finally, my biggest concern is that I'm blowing the hiring issue out of portion, and it's reduced my ability to objectively evaluate other aspects of Apple's management. I've done A LOT of research and writing about the hiring issues, but I'm much less knowledgeable about other issues. I may be judging Tim Cook too harshly. There's probably 4-5 key things that I need to understand in order to judge management. The most important is whether they have a workable strategy to build and expand Apple's competitive position to ensure years of healthy profits. I'll try to read the conference calls from the past year this week. Hopefully, I'll find some indications of sound strategic thinking. 

The Synergist

I haven't read it. I find it hard to get excited about most "business" or "management" books. So I can't tell you for sure. But it's a very popular book among management at the Fool. We've had the author visit our office several times to speak. And our CEO encouraged all employees to take an online diagnostic test and share results with colleagues. So, I'm familiar with the framework. I tested out as a Visionary, but maybe an Operator is more accurate. Anyway, it definitely presents an interesting model for behavior at work, how people interact, personal style, team dynamics, etc... it's definitely up your alley. At the very least, I'd suggest you read a little more about it on the web. You can probably find an online diagnostic to classify yourself. After that, you can decide whether the book is worth reading. 

Hires

In the context of Apple, I'd say they are senior people, even if they aren't in the top 10. Angela Ahrendts will join the top management team and report directly to the Cook. All of the others will be a few levels lower. But Apple is the largest company in the world, and I'd argue that anyone with a few levels of the hierarchy to the CEO is definitely a senior manager. These people are all in the stratosphere of corporate management with thousands of other employees rolling up to them and potentially billions of dollars of P&L responsibility. Compensation isn't disclosed for any of these people, but I'd bet they're all in the top 0.1% of all corporate executives. So I consider them all very senior. 

Ideally, I'd prefer that companies develop experts, not buy them. I'm not a particular fan of Larry Page, but I like certain aspects of Google's culture and organization. I think it's set-up to develop awesome people internally. But, I'll admit in certain cases it makes sense to bring in outside experts. But, I don't like the way Apple is doing it. They are bringing in high-level people for management roles. None of these people is a brilliant engineer or software designer. They are managers, and they'll spend most of their time "managing." That means lots of meetings, supervising, traveling around, giving speeches, etc... In my experience, the higher someone is in an organization, the more time they spend managing people and the less time they spend actually "doing stuff." And, because these senior people spend all their time "managing," they lose touch with what's going on at the ground level. Over time, any "expertise" that they ever had fades. Of course, there are exceptions, but that's the general rule. So, if Apple really needs outside "expertise," get the real experts. If Apple announced that they'd hired 30 PhDs from Cal Tech, Stanford, and MIT, to work on various projects, I'd be on-board with that. So, I guess my point is, I don't think any of these people are "experts." And, it's disturbing to see that Apple needs so much outside experience. Based on this array of hires, it seems like they need experts in almost every area of their business. If they just needed people for wearable tech, that's fine. But they're hiring across the board. That's a bad sign. 

For instance, why does Apple need to bring Ahrendts to run retail? Apple's been at the retail game for a while now, and they've actually done pretty well. If they don't have someone in that organization that can step up to lead it, that's a major red flag. Personally, I think they've probably got some pretty good people inside retail. You can give Ron Johnson or Steve Jobs the majority of credit for Apple's retail success, but I'm sure there were quite a few other people that contributed. But, I think Cook wanted to make a splash by signing the biggest "free agent" in retail management, and he's assuming you can succeed by buying talent. I don't like that. 

On the individual people, I'm just speculating because I don't actually know them. But, I'm pretty sure Deneve is a manager, not an expert. I'd be shocked if Maestri made any positive impact on capital allocation -- I don't know if he's good at it, but even if he is, that's a decision that's way above his pay-grade. Re: Lynch, if Apple needs an outside VP for Technology... well, WTF? And, I really don't like the Jackson hire. She's some form of a high-level bureaucrat or politician. In almost every case, those people are completely ineffective and unprepared for the demands of competing in the free market. They only excel at 1 thing -- promoting and advancing their own egos and self-interest. Of course, that's a broad statement, but I'd say it's true most of the time. If Jackson wants money so bad, she should just become a lobbyist. Government-types can rip-me off as a tax-payer, I have no choice in that matter. But, it's annoying when they rip-me off as a shareholder. My exact same thoughts apply to Al Gore being on Apple's board... but that's another matter 

Because they've all become so rich and respected it's easy to forgot now, but Ron Johnson, Tim Cook, and Steve Forestall were not high profile hires. Before Apple, they had experience, but they weren't considered super-stars. And they didn't parachute into the top ranks of the world's largest corporation. They joined at lower levels and worked up. Same goes for Jony Ive and Bob Mansfield. As for Steve Jobs... yes they brought him back, but he founded the company. I wouldn't classify him as an outsider. It's a special situation, and I don't think Apple's re-hiring of Jobs has any parallels with this recent group of hires. Here's the details on some of these guys: 

The architect of Apple's incredible design, Jony Ive, joined Apple in 1992, only a few years out of design school. Scott Forestall, a driving force in Apple software, started working with Steve Jobs at Next in 1992. Bob Mansfield, who led Apple's hardware engineering for the iPod, iPhone, and iPad, joined Apple in 1999 when it acquired his employer, Raycer Graphics. Ron Johnson, who built Apple's retail business, joined Apple in 2000, leaving his position as head of housewares at Target (NYSE: TGT  ) . Tim Cook joined Apple in 1998 to clean up the supply chain. Previously, he was VP of corporate materials at Compaq, where he was described as "not very senior or visible."

Re: they need to hire because they're growing. There's probably a little truth to that. But, I think that's a bit of an overblown excuse. Consider Chipotle. It's growing faster than Apple, and it's business is much more dependent on the workforce. Apple can ship a few extra iPhones without hiring, but Chipotle can't open a new restaurant without more people. And, Chipotle's growth creates hiring needs beyond store manager and a bunch of burrito rollers. They need corporate executives in finance, supply chain, HR, real estate development, etc... Steve Ells has always believed in promoting from within and developing great people (not signing big-name free agents). So Chipotle is growing faster and is more dependent on hiring to fuel growth than Apple. So, if Chipotle can meet its growth needs by developing internal talent, why can't Apple? There is no reason Apple can't develop enough people internally to handle the growth of the business. They simply choose not to do it. Ells has the somewhat radical believe that great organizations succeed by developing great people, and it's part of the fabric of Chipotle's organization. I don't know what Cook believes. Perhaps he thinks of people as plug-in parts (if you need a few more executives, just dial-up a headhunter and buy them off the shelf), or perhaps he's just desperate and trying to buy success. I guess this all comes down to your personal philosophy, but I think I'm probably more aligned with Ells than Cook. 

[Andrew Stepner]

I don't know enough about Cook's hiring strategy so I'll defer to your research since I agree with your general hiring principles.

[Brendan Mathews]

If you read the synergistic or find it interesting, let me know.

Sent from my iPhone

[Brendan Mathews]

One of the more "silly" takes on Apple is the overweighting of Jobs at the expense of the other managers. The more savvy take is that Cook largely built the Apple of today, which is Apple At Scale. 

I think Jobs and Cook made a good team. Jobs was a visionary, and Cook was the operator that made things happen. When Cook initially became the CEO, I was pretty optimistic. And, I still give him for credit for his supply chain savvy, Apple At Scale, etc.. He was an awesome COO, but I'm not sure that he's the right person to be CEO. I think Ballmer was actually pretty good in the COO role too, but he was a terrible CEO. I don't think Cook is terrible, but he's not really good either. Apple is in a relatively solid position at the moment, but competition is intense. Apple isn't the type of business that can just be put on auto-pilot. It needs solid leadership to sustain the business. 

My criticism is nuanced: greed. It relates to their famous margins at the expense of a moat. 

I absolutely agree on this point. And, I'd say it's not just greed, it's short-term thinking. Apple's team is thinking about how to succeed in 2014 or 2015. Meanwhile, Jeff Bezo is thinking about succeeding in 2020 and beyond. 

In fact, I'm befuddled by cook here: he gets production scale. But iCloud is weak. Photostream is clunky and storage is weak. 

Amazon and Google offer much better cloud services. If someone was thinking strategically at Apple, they could easily be a leader in this area.

Brendan you love Berkshire but get mad at Apples cap allocation. I disagree and think their cap allocation is VERY Berkshire. They hoard cash and have authorized a big buyback. They are prudent in their acquisitions and spending. 

I'd say Apple's capital allocation is about average for a big US company, or maybe its above average only because most companies are so bad. On the plus-side for Apple, they haven't wasted a bunch of money on bad acquisitions. They definitely deserve credit for that. They are returning cash via dividends and repurchases. I've only looked briefly at repurchase timing, but my impression is that it's so-so. The foreign cash situation is a constraint, and I'm not sure how to solve that problem. I'm not sure about the employee options situation, but I'd assume a good bit of value transfers from shareholders to employees every year. I can accept a little bit of that as a cost of doing business in Silicon Valley, but it's still annoying. I don't think they should be paying a regular dividend. I would've like to have seen a more aggressive buyback activity with slightly better timing. But, I'm probably asking for too much. 

I don't see the similarity to Berkshire. Both companies have lots of cash, but for different reasons. For Berkshire a strong balance sheet is a strategic asset. Apple has a cash hoard because they can't repatriate it and they want to be conservative or something like that. Berkshire has an outstanding person and an effective/differentiated strategy for capital allocation. I'm not sure who is the brains behind Apple's capital allocation, and whoever it is, I don't think he or she has any special talent. Apple's strategy is to just stick w/ the status quo approach for US companies. In short, Apple's capital allocation is fine. I wouldn't sell because of it, but I also wouldn't consider it a reason to buy. I haven't bought eBay because of capital allocation concerns. Conversely, a big reason that I own Berkshire, Markel, Liberty Global, and Valeant is outstanding capital allocation. For Apple, it's just kind of a "meh" factor. 

I just want to see them use cheap cloud services to fight against NEGATIVE growth, which they aren't doing. That's the existential threat.

I'd be happy to see Apple taking any action that would widen their moat. If Apple develops a strategy to do that via cloud services, I'd certainly be more excited about the stock.

When I first invested in Apple towards the end of 2011, the company had a big lead on the competition. Nothing from Android was comparable to an iPhone, and I don't even remember who else was making tablets. At the time, I believed that Apple's brand, ecosystem, scale/install base, customer loyalty, and unique product development approach would keep Apple well ahead of its competitors for many years. Just 2 years later, the competition has made huge strides in catching up with Apple, at least in terms of unit sales and product quality. In retrospect, I underestimated Apple's competition, and I overestimated Apple's moat. The competition is moving much faster than expected. If Apple wants to sustain its awesome profits, it needs to find a way to outflank its competitors. I don't have a specific solution or recommended action for Apple, but the company needs something better than "business as usual," which hasn't succeeded in keeping competition at bay over the past few years. Apple has strategic assets (e.g. brand, scale, install base, plenty of cash) that it can leverage, and the situation is far from hopeless. We just need management to step-up to the challenge. 

[Richard M]

"Apple is in a relatively solid position at the moment, but competition is intense. Apple isn't the type of business that can just be put on auto-pilot."

So it's a bit contrarian but msft really was able to be on auto pilot for 20 years.  I agree there is competition but each passing quarter seems to show Apple is continuing to hum along. They ARE making progress in businesses which is the best moat - and the main reason msft is still relevant today.

I'm not saying apple has won, but I am willing to entertain the possibility that maybe, just maybe, apple is entering a Microsoft situation: they will do what they want but fast-follow successful strategies of others.  Microsoft couldn't just update Windows on every device: they needed you and corporations to upgrade and pay $;  that's their business model. Apple may be viewing the install base as a not just a momentum competitive defense but as an offensive weapon. iMessages, iWork going free, iTunes Radio. 

Which is part of my confusion on them allowing Gmail and Chrome apps and mapping apps.  Just deny them from ever joining the platform. Too late now. 

But the press relentlessly harps on cook not being jobs, so I feel like that can be priced into the stock already. 

On capital allocation, they will return like 25% of their market cap in buy backs and dividends over 2 years.  I think that is far above average.  And the buy backs make dividend increases cash flow neutral (fewer shares mean the same $ amount makes dividend increases easy). 

--
Richard Mordini

[Andrew Stepner]

"they will do what they want but fast-follow successful strategies of others. "

Definitely agree with that.

"Apple may be viewing the install base as a not just a momentum competitive defense but as an offensive weapon. iMessages, iWork going free, iTunes Radio. 
Which is part of my confusion on them allowing Gmail and Chrome apps and mapping apps.  Just deny them from ever joining the platform. Too late now."

Apple doesn't think about things in terms of a moat or a competitive defense and I don't think they ever have. They are purely customer focused. The only way they think about it is "what products/features do customers most want?" and then they try to deliver on that. I don't think they have ever thought "competitively" except in terms of "what is wrong with our competitors products that we can solve?".

And this mindset has served them pretty well over the last decade.

Stepner

--
Richard Mordini

--

[Brendan Mathews]

So it's a bit contrarian but msft really was able to be on auto pilot for 20 years... I'm not saying apple has won, but I am willing to entertain the possibility that maybe, just maybe, apple is entering a Microsoft situation:

I agree with your contrarian take. Msft's network effect created an incredible competitive moat that allowed the company to cruise for years. It's sort-of still cruising after years of seeming ineptitude. I just don't think Apple has that kind of moat that will allow it to cruise. That's my worry with the stock. But, maybe I'm wrong, and it does have a moat. Or, maybe I'm over-focused it. It sounds like you guys are a lot less worried about that. 

On capital allocation, they will return like 25% of their market cap in buy backs and dividends over 2 years.  I think that is far above average.  And the buy backs make dividend increases cash flow neutral (fewer shares mean the same $ amount makes dividend increases easy). 

I didn't know it was that high. That is pretty impressive, I need to give Apple more credit for that. 

--
Richard Mordini

--

[Richard M]

March 2012 started - $45B returned over 3 years, with $10B as repurchases.  (Ending 2015).  So that was about $12B a year in dividends and $10B total.  Dividend was $2.65.
http://www.apple.com/pr/library/2012/03/19Apple-Announces-Plans-to-Initiate-Dividend-and-Share-Repurchase-Program.html

April 2013 - Upped total allotment to $100B by the end of Calendar 2015 (so potentially they extended it from summer 2015 to end of year 2015).  Upped dividend to $3.05 (15% increase, and they state it's about $11B per year) and massively increased the buyback.

August 2012 through December 2015 will be $100B, with about $40B in dividends and $60B in buybacks, with $50B of said buybacks happening in the latter 2 years. 
http://www.apple.com/pr/library/2013/04/23Apple-More-than-Doubles-Capital-Return-Program.html

So 25% was based off them being a $400B market cap, at today's $488B it's 20%.

Thus, to me, I've been very happy with a lower stock price, and I hope they are front-weighting those buybacks based on their knowledge of the upcoming pipeline.  I can't figure out whether they can know they are going to crush a quarter and accelerate the purchases, or wait on the purchases in case they know they are going to miss a quarter.

For most of last year the stock price was sub $480 and mainly around $450, which was around $420B market cap and the cash return was 24%.

Seriously that's one of the MAIN reasons I like the stock.  They aren't spending a lot of cash on silly acquisitions and have created some good price support both on yield and EPS.

And I know they are going to increase the dividend again and very likely increase the buyback amount again.  At $40B of cash flow a year, they can return $100B every 3 years AND not even decrease their balance.

So, to me, it's very Berkshire-in-a-recession:  big buybacks at a depressed price.  If the stock soars, then I'm less enthused on the buyback, but hey....the stock soared....so, a good problem to have.

--
Richard Mordini

[Andrew Stepner]

iPhone Margins

Why do detractors expect iPhone to become commoditized and thus lower margins when the PC business has commoditized yet Mac still garners high margins?

I.e. the PC business has been around forever in tech years and most computer makers are essentially selling undifferentiated commodities with low margins. So how do we explain Mac sales where they continue to sell at very high ASPs/premium? (AND they are growing market share - albeit from a low base)

Stepner

[Richard M]

Because their market share is like 15% while iPhone is higher.
It's a question of how much of the ultimate market will be upscale versus mass market.
Think of it like 2 car brands in the world: Toyota and Porsche. Toyota has Lexus and scion and Toyota. Porsche has Porsche.

Right now macs sell like Porsches. Yet iPhone is a Porsche selling like a Toyota. What is the ultimate market share of Porsche?

If it's like PCs it's a LOT smaller than current.

sent from my phone

[Richard M]

It is quite amazing that during the entire Q1 they bought back $5B (which was completely underwhelming...but may be due to the subtleties of the Accelerated Share Repurchase program) and then just bought back $14B in 2 weeks.  That's about 3% of their market cap.*

Total repurchases are $40B out of a $60B plan that ends in December 2015. 

If you think that plan is not being re-upped, you are not smart.  Even if they plan on spending only $20B through 2015, they'll be increasing and extending the plan through 2016/2017.

*that was done through an accelerated share repurchase plan.  I do not understand the nuts and bolts of these, as plans are based on volume-weighted share prices.  Meaning the mere fact that he disclosed the purchase would hurt the buyback.

from their 10K

In August 2012, the Company entered into an accelerated share repurchase arrangement (“ASR”) with a financial institution to purchase up to $1.95 billion of the Company’s common stock in 2013. In the first quarter of 2013, 2.6 million shares were initially delivered to the Company. In April 2013, the purchase period for the ASR ended and an additional 1.5 million shares were delivered to the Company. In total, 4.1 million shares were delivered under the ASR at an average repurchase price of $478.20 per share. The shares were retired in the quarters they were delivered, and the up-front payment of $1.95 billion was accounted for as a reduction to shareholders’ equity in the Company’s Consolidated Balance Sheet in the first quarter of 2013.

In April 2013, the Company entered into a new ASR program with two financial institutions to purchase up to $12 billion of the Company’s common stock. In exchange for up-front payments totaling $12 billion, the financial institutions committed to deliver shares during the ASR’s purchase periods, which will end during 2014. The total number of shares ultimately delivered, and therefore the average price paid per share, will be determined at the end of the applicable purchase period based on the volume weighted average price of the Company’s stock during that period. During the third quarter of 2013, 23.5 million shares were initially delivered to the Company and retired. This does not represent the final number of shares to be delivered under the ASR. The up-front payments of $12 billion were accounted for as a reduction to shareholders’ equity in the Company’s Consolidated Balance Sheet.

The Company reflected the ASRs as a repurchase of common stock for purposes of calculating earnings per share and as forward contracts indexed to its own common stock. The forward contracts met all of the applicable criteria for equity classification, and, therefore, were not accounted for as derivative instruments.

During 2013, the Company repurchased 19.4 million shares of its common stock in the open market at an average price of $464.11 per share for a total of $9.0 billion. These shares were retired upon repurchase.

So vetting his math:

$1.95 ASR (1st Quarter 2013) + $12B ASR = $13.95B ASR.

$9B open market purchase in 2013. 

$5B in Q1 2014

$27.95 B total repurchase.

$12B ASR and $2B open market in the last 2 weeks:

$41.95B total.

Cook:  "More than $40B in shares in the last 12 months. 

True. 

--
Richard Mordini

[Andrew Stepner]

Good interview with Tim Cook in WSJ

http://daringfireball.net/linked/2014/02/07/cook-interview

Interesting tidbit in the phrasing of the first quote makes me think that a larger iPhone 6 is in the cards. I don't recall him saying anything like this previously.

Also from the WSJ interview: "We’re really working on some really great stuff. I think no one reasonable would say they’re not a new category."

[Brendan Mathews]

So $40b in repurchases in a year is over 8% of market cap. Between steady earnings and the balance sheet, they could keep doing that for a while. That would be pretty awesome, if Tim Cook has the balls to keep it up on an annual basis. But, I guess he's locked in as it's repurchases are going to be the EPS growth driver going forward. And you can borrow at low rates using foreign cash as collateral.

[Andrew Stepner]

Yeah 8% buyback is strong.

To nitpick on one of your statements:

But, I guess he's locked in as it's repurchases are going to be the EPS growth driver going forward

...he obviously has a bias but in WSJ he still professed growth (despite deceleration):

WSJ: There is a perception that Apple’s no longer a growth company. How do you respond to that?

 

Cook: Last year, we grew (revenue) by $14 billion to $15 billion. Yes, those percentages are smaller compared to a year earlier and two years earlier and so forth. But that doesn’t mean that you’re not a growth company. We were in hyper-growth, or whatever is above growth. We went from $65 billion to over $100 billion to $150 billion to $170 billion. These are historic, unprecedented numbers. I don’t know any companies adding growth at that level. So when you say $14 billion to $15 billion compared to those numbers, it’s clearly smaller and a smaller percentage, but, to put it in some context, that’s like adding three Fortune 500 companies in a year. I think that’s hard to say that’s not a growth company.

 

Also: "So when you look at the sell through, the iPhone was actually higher than the sell-in so I care more about that."

[Richard M]

can someone expound on his sell-in vs. sell-through?  I know the difference, but I don't see how this relates to anything.  Sell-in has never before been an item, and sell-in is meaningless.  This just worries me that it could be a sign of apple mgmt crafting bologna talking points.

the only thing i read into that statement is that the overproduced iPhone 5Cs actually ended up selling.  yes, a good thing.  but i pray they realize the truth - it's not that customers love TouchID as much as he says, it's because customers couldn't get top-flight phone appearance for $100 less any longer.  The product mix shifting to the 5S was a result of touchID a little and probably the 5C and the gold a lot.  The gold phone shows that exactly:  people wanted what was rare and expensive. 

have the 5S sell for $100 would be a mistake.  Having the 5S go color (with colored touchID rings) is a great idea - it would reaffirm to the market that the top product will always be a top price point. 

[Andrew Stepner]

Sell-through

I agree with your point that sell-in is meaningless.

What he's saying is that they have to report financials based on sell-in but he manages the business on sell-through. And he claims the latter was stronger. His point is to counter critics who said apple had a bad qtr (based on reading the sell-in numbers).

[Andrew Stepner]

Loss Leaders

Apple and Samsung combined for 119.6% of phone profits. via: http://daringfireball.net/linked/2014/02/12/phone-profit-share

At what point do the other firms who are losing money (or at least not making money) decide to give up? And if that ever happens, who stands to benefit from consolidation?

[Richard M]

I don't think apple's reported "sold iphones" is the sell-in number.  Or, at least not for apple-owned stores. 

higher sell through than sell-in during the xmas quarter means earlier oversupply...meaning the earlier quarters overreported?  (if they counted sell-in the prior quarter)? 

the way i see this stock is that it's downside is cushioned due to cash and yield (increasing the dividend causes a pretty meaty yield), plus the buyback and then it's a free option on the upside for new products and growing iTunes and AppStore.  Again, stop being overgreedy and make iPhoto and iCloud more generous and you will lock those users in forever.

iPhones, to me, are like fancy purses and cars.  People are ok - even excited - to get new ones every few years. 

iPhones, to Apple, I think are similar.  Chamfered edges, heavily-lacquered plastic, sapphire displays - these are "luxury" things that Apple can use as such a gigantic scale that they drive down the costs to affordable levels.  I think Corning Gorilla Glass 4 is better than sapphire - I do NOT currently have a scratching problem, and GG4 is anti-glare, which is the main problem with iPads and mac screens (ambient light is super reflective).  I've seen GG4 myself - it's amazing.  This is not a hole:

That's the anti-glare GG4. 

But a sapphire screen is unreal marketing and no one else can produce at the necessary scale to make it cost effective.  I will guarantee you that GT advanced is barred from selling these screens to other phone companies. 

Maybe the sapphire just ends up in a watch to start.  Maybe it's an iPhone screen.  But it's something luxurious that only apple can afford. 

Loss Leaders

No one really benefits from them giving up.  You'd think apple and samsung, but the other vendors sell so few phones that getting all their business would be insubstantial.

Caveat - Blackberry has enterprise customers, and if they give up, there is such a high spend attached that I think Apple would benefit since iOS offers tight control with less risk (while Android offers more control...which businesses like...but users have more freedom, which they don't like). 

[Andrew Stepner]

Sell-In

The extended quote from Cook in WSJ: "About 70% of our business is indirect, 30% is direct. In that 70%, we look at great detail of what’s selling through. So when you look at the sell through, the iPhone was actually higher than the sell-in so I care more about that."

So you are probably right that direct is sell-through, but indirect is the majority at 70% and that portion is probably sell-in sales to the channel.

To me higher sell-through means that inventories declined. Probably due to new product launch and tight supplies. I dont care too much about that. Mainly I think he is just saying that in an apple's to apples sell through analysis the growth numbers are better than reported in the iphone unit numbers reported with earnings.

Value vs Growth tweets

@modestproposal1 :

Bernstein: "analysis of 1000 mutual funds with AUM over $1B.. 72% of growth managers own Apple.. only 35% of value managers" @pmarca

"The issue that we hear from value managers is that AAPL is still pretty well liked. Many value managers are contrarians"

Stepner

[Richard M]

iTunes had almost $5B revenue in the quarter, but I cannot figure out whether this is a catchall including App Store.

But, iTunes has 800 million with almost all of them with registered credit cards...

So...by Zuckerberg math if Whatsapp users were worth around $40 each and they pay, at max, $1 a year...a user with a reg'd credit card should be worth twice that. 

"Zuckerberg hears iTunes has 800 million users, offers $70B in Facebook stock for the business."

[Richard M]

nice runup lately.  But there was 1 item that worried me - and maybe I missed it.

Every single year at WWDC Apple announced how much $$ they'd paid to developers.  They even did it come the holidays.  But this year they were quiet on it.

Usually that means bad news.  I reduced my exposure as a result (mistake), and sold some short-duration covered calls (good move) and if there is a pop on the product news I'll sell some more. 

--
Richard Mordini

[Andrew Stepner]

It might have been buried but I vaguely feel like they did mention it. Seems like they did:

http://fortune.com/2014/06/27/apples-users-spend-4x-as-much-as-googles/

Also seemingly mentioned on the earnings call this week:

http://thenextweb.com/apple/2014/07/22/apple-now-paid-20-billion-app-store-developers/

I expect it to run up to 98-100 but I am considering drastically reducing my position if I can get out at 99.

I expect it to test the 100 level but I also see that a a big time resistance point mapping back to the previous high water mark at 700. Practically speaking I expect a lot of sellers to come forward if/when it hits 100.

I also am hesitant to carry undue risk through the imminent new product announcements. I am unsure of whether new product will under or over whelm but given that these new products should be the last big events for a while I fear a pull back at some point and I prefer to get out ahead of that. Or at least reduce exposure.

Stepner

For more options, visit https://groups.google.com/d/optout.

[Richard M]

FWIW if the new launches include payments, that's where I'm making my call.  If they are getting into the Visa/MC business, that's a fantastic business.  Even better if they sort of become Paypal (even higher margins) by convincing you to fund an account with your bank account...or allowing you to sell something and receive funds into your account (like a garage sale) which is then zero cost as well.

That gets them into the service business, increases the tail of value they get from users (currently they get almost nil except through iTunes purchases) and would support a lower handset price to stay competitive.  If it's just more iPads and more iWatches and iPhones - I've turned bearish long term.  You might think "forever" with these things but if you dig up your old iPhone 3G it feels ancient.  Basically, wireless plan prices are under assault, and therefore the subsidies are under assault, and Apple needs the subsidy more than anyone. 

Unless they do a better job of monetizing USE of the phone.

Prediction - while I don't think the Firephone is going to be successful now, I think that phone is going to get to $0 to EXISTING Prime users.  Think about this:  2 years of Prime is $198 spent on the service, plus whatever you have bought from Amazon. 

That's the same model as Apple ($200 every 2 years).  And Bezos gets a cut of ALL your purchases thereafter. 

--
Richard Mordini

[Andrew Stepner]

Payments is a nice business model but I don't see it as something that really fits with Apple's core competencies. They are ultimately a hardware company so I find it low probability.

After this product cycle completes I am skeptical on $AAPL.

[Richard M]

BTW an explicit thanks for finding the iTunes store payout update.  To update here, the numbers they were announcing at WWDC, cumulative payouts to developers:

2010 - $1.5B

2011 - $2.5B

2012 - $5B

2013 - $10B

2014 - no WWDC announcement, but slightly later (July) they announced $20B.

That's $10B being paid out a year, meaning $4.28B is Apple's 30% cut...and this does not include any iTunes Media sales. 

In my Jan 8th email, I noted that it was $15B at YE2013 meaning Calendar 2013 got about $8B, and 50% growth would be $12B for 2014.  Given there's been $5B so far in 2014 (just over half of the year) and the holiday season remains...this looks spot on for about $12B annually and Apple's haul of ~$5.14B of almost pure profit.  Assume $140MM to run the servers makes $5B, and a conservative growth PE of 20 means iTunes is a $100B market cap business.

Note that this again ignores all profits from selling content on iTunes. 

Target Corp's market cap is now $38B, makes only $3.8B in Operating Cash Flow (sees less due to leverage), and trades at a 20PE. 

Netflix is a $25B business, trades at a PE of 160, and as Operating cash flow of just $168 million.

Final note with iTunes - the next iOS8 supposedly is going to introduce AppStore bundling and couponing, so that could end up with a material impact on sales to the upside. 

Given the June-July period was an almost double (Apple didn't announce the $20B at WWDC - you have to assume they would have if that was the case*), if you get conservative and say 50% growth for the following year, that would be ~$15B June-July and $16B Calendar 2015. 
That's about $6.5B in profit, or $130B business. 

It's sort of unbelievable. 

*Unless the results are now considered material and Regulation FD means they CAN'T announce it during a paid-admission conference?

BTW, a great quote on Amazon's bigger loss:

"It's sort of unbelievable that a retailer can have $20B in revenue and make no money.  It's quite a feat."

When you think about it - it really is.  To get to that size and lose money while you do it...that's sort of hard to do. 

[Andrew Stepner]

Speculation on Apple and payments. Still not sure I buy it.

http://finance.yahoo.com/blogs/talking-numbers/forget-iphone-6--this-could-be-a-huge-deal-for-apple-224036679.html

[Andrew Stepner]

Richard, I think I was wrong and you were right on Apple and payments being in their plans. The rumors seem to indicate that Payments is in the cards for the upcoming Sept 9 announcement:

http://daringfireball.net/linked/2014/08/28/september

The thing I'm not clear about is whether they will be competing with Visa, Paypal, etc or whether they will just be facilitating those companies' methods. It would still seem reasonable to me to expect that at least at some point in the future they will try to put themselves in a position to take a cut of the action.

Generally Apple is a creature of habit so I would expect them to do as they have done in the past. To me that means they still try to get consumers' money by having them pay for hardware. Thus I think the pitch will be able how payments is a convenience feature. Apple also seems willing to take payment on who is their default search provider in their phones. I wouldn't be surprised if Apple tried to get paid by Visa/Paypal, etc for the right to be featured or to be the provider of choice.

Any new thoughts?

[Richard M]

I wasn't predicting it - I was just saying if they aren't doing payments (and do other long-tail things) to increase the lifetime value of an iPhone owner...then I'm bearish on the stock.  I don't think they can keep prices where they want them in the face of declining subsidies and better android competition for another 2-3 years, but if their payments and Beats and AppStore revenue can replace that...then I'm OK and bearish.

E.g. if you buy an iPhone you get 2 years of Beats included.  Then the phone hardware can get better but still spur users to upgrade when the subscription runs out after 2 years...or start paying Apple $5/month to keep Beats on their old phone.

(A user calculus after 2 years:  "In 1 year I'll pay $60 for Beats, so why not pay $200 for a new phone since the incremental cost is only $140?")

If they are doing payments, they're taking a cut.  I wouldn't be surprised to see them partnering with Discover Card, who is a weaker #3 and could literally forever change their place in the market landscape by doing this. 

I think it will most likely be a Paypal model, where you "load" an account and then they offer merchants a "smaller" fee for receiving payments but have nearly zero cost themselves.  Merchants then just have an Apple Balance where they can withdraw from, potentially directly to an Apple store for a 5% discount.  Users can cash in their balances directly to iTunes, of course.  (Zero swipe fee and zero tx fee after the balance loads.  This is the SBUX card - the credits you earn and mainly just the swipe fees SBUX saves.)

Keep the $$ in the system. 

[Richard M]

Also, if you want to slice this another way:

Visa:  2.2B cards, market cap: $135B.
Mastercard:  $4T processed, 38.6B transactions.  703 million consumer credit cards, 578 million commercial, prepaid, and debit.  = 1.2 billion cards.  Market cap = $88B.

iTunes:  800 million iTunes accounts in April 2014, "most" with credit cards.

If Apple is working with these companies, I imagine they won't see as big of economics from it.

-however, and maybe someone can help me on this -

What is the difference between Payments volume and Total Volume?  It looks like it might be "cash volume" but hard to think it's THAT high: Page 38 (46 of document) http://investor.visa.com/files/doc_downloads/annual%20meeting/Visa%20Annual%20Report%202013%20final%20website.pdf

Maybe that's cash withdrawals through a debit card?

So the "however" is that if TouchID significantly reduces fraud, Apple could enjoy a bigger cut than normal gateway processors, because they get a bigger cut.  But the weird this is that the fraud costs are born by the banks, so I don't see how the Banks would get involved in this at launch.  (In other words, Visa/MC wouldn't/shouldn't give them a bigger cut, it's the banks.  And to get the banks to pay them, Apple would have to "hide" the fact that the user bought via TouchID because the banks could otherwise just see it in the system.)

Either way, these are big market cap numbers, $80-$130B) even for Apple.  The company could spin up a significant revenue source very quickly:  I would not be surprised to see Payment Volume being separately broken out and used as an example of how Apple and technology companies can launch huge businesses, quickly, from a standing start.

​

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Richard Mordini

[Andrew Stepner]

Interesting. Not sure if I can shed much additional light on the details. I would just say that for me given the current valuation, growth rate trends, and run up into this product cycle refresh timing I no longer see an asymmetrical upside opportunity. I am paring down my large AAPL position because I don't see the upside of holding through the product announcements (even though I expect them to announce cool stuff).

I am thinking that i will keep a good chunk of my position and maybe sell it after Jan 1 so that I can book the long term gain in 2015. Richard do you think its a reasonable philosophy to delay a sale for tax purposes?

Stepner

[Richard M]

ha!  i make so many bad decisions based on getting long term tax rates.

Here's the simple math:
Take your tax bracket minus your long term bracket (15% or maybe 18.9% thanks to obamacare or whatever it is), multiply it by your potential short term gain, divide by the potential shares sold.  That's how much the stock can fall for you to be "even".

E.g.  Potential $100k gain and you'd pay 33% as short term, but 15% as long term.  You'd be selling 500 shares.  $100k*(33%-15%)=$100k*18%= $18,000/500 shares = $36 per share. 

So you'd either pay $33k in taxes, or $15k in taxes, and that $18k saved is worth $36 per share.

Assess whether you think the stock will fall $36 between now and then.  And whether you'd get any dividends during that time.

Obviously it's a case by case basis, and if you think the stock is going to fall then get out (and short it!)

But as a side note - this is one of the convenient genius strokes of Buffett:  When he's SO far in the black on a stock - where his basis is so low that it's almost all pure profit - it almost never behooves him to sell.  The stock could fall 30% and he's still ahead (as he'd have to pay 35% corporate rate).  That's why he never sells. 

[Andrew Stepner]

Great info. Thanks!

[Richard M]

I liked the watch.  I think the iPhone 6 is sort of ugly - the black is fine, but the gold with the white lines looks unfinished.

The watch is fine.  Here's why it's important for the iPhone:  https://medium.com/@ratch/think-obvious-about-apple-and-its-iwatch-9dfe583748b1

ApplePay - I love it, just can't figure out how they got into the economics (yet).  Speaking of non-recognized assets, the fact that Apple can pull together Groupon, Target, Macy's, Bloomingdales, the Magic Kingdom, Whole Foods, etc etc etc to launch a payment platform is incredibly valuable in and of itself.  That's worth tens of billions.  It makes Apple a pseduo IBM:  IBM has the ability to "mint" an enterprise standard and roll it out.  Apple, similarly, can spur a big company into action:  They hesitate adopting NFC because they don't know which technology to use.  But Apple comes along and it gives them the confidence to go live with a new technology.  Much like when IBM comes calling, the company knows the tech will work and be sufficiently robust.

Fun note - when I searched gmail for this and the first email appeared, I re-read it.  First line:

"I'd suggest buying some today in a tax-protected account.  Assuming the dividend goes up - and I don't see how it can't - you could be looking at a pretty strong yield, tax-free, with the opportunity for big capital appreciation."

Stock was ~$395, and it was one day off the bottom (which occurred the next day at ~$390).

So, I'm holding my shares until I figure out the applepay part. 

I also think you should buy GTAT today. ($13.00, down 13%) There's WAY TOO LIKELY A CHANCE that the 6"S" will stand for "Sapphire".  Let's say, 20%?  10%?  So in 1 year the stock could double from here.  How do you support continuing to charge a premium price as a company that values material unless you start making the screen sapphire???

[Richard M]

What does bug me, still, is the iCloud pricing.  When you get an apple account, you get 5GB in iCloud.

Buy an iPad - no more storage.  So the more money you give them, the more you fill up your sparse 5GB allotment.  This should be the opposite - your total storage should keep increasing, creating more lock in and making people loathe to give up all the storage they've accumulated by buying iPhones.  E.g. if you bought the 3G, 4, and 5S...you'd now have 15GB, plus another 5GB for getting the iPad Air.  20GB total. 

As a salient example:  Microsoft gives you 15GB with OneDrive just for signing up...free.  The above example would be $2,450 in revenue to Apple (3*$650 + $500). 

--
Richard Mordini

[Richard M]

By the way - I definitely suggest you guys buy GT Advanced, which then went bankrupt.  So I have the crown as "worst suggested stock" for this little group.

I still believe the company should have played hardball and gotten Apple to buy the whole thing to keep them quiet.  If they had unveiled their supply contract, that value of that information alone is worth tens of billions the next time another supply contract is up for renegotiations.  GT's market cap was $1.5B before busting....a rounding error for Apple. 

Epic mismanagement by Apple and GT.  If Apple had "bought" the company for a 10% premium ($1.65B) no one would have ever known. 

--

Richard Mordini

[Richard M]

Another update before earnings tomorrow:

AppStore payments, WWDC to WWDC (May/June)

2010 - $1.5B
2011 - $2.5B
2012 - $5B

2013 - $10B  ($13B in October)

2014 - no WWDC announcement, but slightly later (July) they announced $20B.

Year End 2014:  $25B, with $10B in 2014.

Growth is definitely slowing:  They did $10B from WWDC 2013 through July 2014...so just over a year.  They did the same amount $10B for the calendar year...also with TouchID being bigger and making buying easier.

That's $4.28B for apple's cut.  Even with 50% growth next year, hitting just over $6B, that's $60B of market cap with a 10 multiple.  Without some catalyst, I think further growth will be increasingly difficult (the apps you buy stay with you forever inside iOS, so some useful ones are "one time" purchases). 

Interestingly...Asymco points out that this is bigger than US Hollywood:  http://www.asymco.com/2015/01/22/bigger-than-hollywood/

Thesis Update:

Everyone loves Apple.  I'll be writing a lot of covered calls after earnings (which I expect to be gigantically profitable for 2 reasons):

1. Apple's cheapness in having all the starting phones have only 16GB - I think many people paid $100 more for 64GB (they eliminated the 32GB option). 
2. iPhone Plus being $100 more and very popular. 

This very well could be the biggest iPhone quarter for profit ever-----for years.  The bigger screen size spurred tons of purchases and the memory and Plus nudged much higher margins.  The next phone will likely have 32GB in the base model, meaning lots and lots of buyer's won't upgrade.

Seriously considering taking a short position if there's a surge in the price for the watch.  Comparisons just get too hard going forward.

--

Richard Mordini

[Richard M]

Update:

AppStore payments, WWDC to WWDC (May/June)

2010 - $1.5B
2011 - $2.5B
2012 - $5B
2013 - $10B  ($13B in October)
2014 - no WWDC announcement, but slightly later (July) they announced $20B.
Year End 2014:  $25B, with $10B in 2014.

2015 WWDC (today):  $30B paid out.

That is effectively flat:  Recasting the above in half-year increments, assuming flat line growth:

2010 2nd Half:  $0.5 Billion

2011 1st Half:   $0.5 Billion

2011 2nd Half:  $1.25 Billion

2012 1st Half:   $1.25 Billion

2012 2nd Half:  $2.5 Billion

2013 1st Half:   $2.5 Billion

2013 2nd Half:  ~$5 Billion

2014 1st Half:  <$5 billion (slightly less as they hit $20B total a month after WWDC, meaning $10 in the prior year)

2014 2nd Half:  >$5 Billion ($25B total and was at $20B in July, so a hair over.  Also announced $10B total for 2014).

2015 1st Half:  $5 billion.

That's 4 consecutive half-year periods of flat growth.  They'll probably get a little more this Xmas season, but let's assume flat, meaning $10B paid out a year.  Let's make it $12B to be safe. 

That means $17.14 total taken, their cut is $5.14B. A 10x multiple (no growth should make this aggressive) and that's $50B of market cap....~7% of the company.

Some reasons for this:

Apple is skimpy with internal storage:  You can't download more apps if you don't have the space.

Existing purchases:  It's hard to uninstall older items that you paid for even if something better comes along.  It's like throwing out money.

Initialization purchases have run their course:  some apps you guy and sort of last forever...or they last until a bigger company comes out with a free version that's better.  Put another way, the bigger vested interests have gotten better and getting free apps to market more quickly.

Things to keep an eye on:

Apple's gaming efforts.  Turning $1 or $2 games into $20 or $60 purchases (like Call of Duty) is a very simple way to consume another industry, plus its add-on purchases like Maps Packs.  Videogame industry revenue runs north of $15B annually.

--

Richard Mordini

[Richard M]

putting stepner's post below and chiming in.

What the msg board analysis missed, to me, was completely ignoring the question:  "Will the iPhone remain the only technological product in history to not go down in price?"

I don't have an answer to that.  It's bucked the trend so far, but history has had several phone kings: Nextel phones had all the profit for awhile, then the Moto RAZR, then Blackberry with the enterprise licensing being pure profit and security, etc.

What I know is that Apple faces tough YoY comparisons and buying a stock when it's low is just as profitable as getting out when it's high.  With the iPhone 5 apple kept minting money but its stock was punished.  At that time, as I shared here on chodestocks (I think), Apple had a few enormous catalysts waiting in the wings:

• The market had moved to a bigger phones; they had none.
• China Mobile.
• Stock split - yes it's meaningless, except it isn't to Main street.
  

Taken together, that's everything - the bigger phones are supporting a higher price point, and China sales are giant.

What I think that "Liberty" poster missed is that at the top of the pile they are being gunned for by everyone, and Android has gotten insanely better in 5 years.  If Xiaomi and OnePlus and others can get you "everything you need damn good phones" for $200 and Apple has to start selling phones for $400....that's giant.  NOT in terms of "Apple loses money" but in terms of "does the street think Apple's best days lie ahead?"  Shares tanked when the margin was slimming.

Liberty also, the other way, discounts the brand.  Fashion labels keep high profit margins and don't have to reduce price.  If Apple can position itself even more as a brand, then yes, you won't shop around and you'll keep buying.  When the first Android came out it looked terrible and I, an iPhone owner, scoffed at it.  Then Android got better and by being more widespread it became, to me, more worth owning.  I have considered going back to iPhone but the value just isn't there.

So what I see:

• History rhymes.  Nextel, Blackberry, Apple 2013.
• Everybody wants to be King.
• Stock market IS a voting machine in the short term.
• Law of large numbers.

I got out of Apple and went bearish with a small amount.  I also got out around $118 (after buying in sub $400 pre split, ~ $57.)

Hopefully it tanks below $100 and creates another buying opportunity. 

One of Apple's problems, to me, is that they insist their business model is the best, and history shows that it's not the best for the long term.  Selling tech consumer products for a profit is a rise-and-fall story.  Driving down tech costs to near free and charging people that are NOT the consumers is an enduring edge to date.  (eBay - low cost and no buyer fees, Google - charges consumers almost nothing, Intel - chip prices fall and price not very exposed to consumers).

Just a case in point was iPhone 6 starting with 16GB of memory when the rest of the market now gives 32GB...but then giving a ton more memory for the same upgrade price.  (16GB, 64GB, and then 128GB when others go 32, 64, 128).  That shit pushes up the ASP big time.  BUT, given memory is expensive and Apple charges crazy prices for iCloud Drive and Photos, it pushes consumers to use free cloud services that aren't apple - dropbox, GooglePhotos, OneDrive, etc.  This means you are less beholden to Apple.

If icloud was free, Apple would make a teensy less in profit but users would have little reason to switch, and would be less exposed to competitors.

So...I dislike that Apple refuses to use it's profitability as a weapon.  The enduring tech companies to date do so (Google, Amazon, eBay (bought Paypal, bought Skype), Microsoft (aggressively enters new markets at low prices), Intel (low end near-free chips).

Ha. I follow that Liberty guy on twitter (twitter.com/liberty8988). I like him and I like the qualitative discussion of apple's long term product strength. However a good company is not always a good stock. And product strength does not necessarily mean high product growth.

I view it as Apple sitting smack in the middle of their product cycle lull. A similar seasonal dip happened with the 5S and I expect similar with the 6S. The watch will take a lot of time to ramp up. By the time it does it may even cannibalize the iPhone.

I feel like Liberty's analysis is a bit too rosy because he is looking at Apple's EPS growth during the launch of the iPhone 6. He quotes 40% EPS growth which is true for the last 3 qtrs, but thats exactly when he iPhone 6 launched.

Take a look at when the iPhone 5 launched, and EPS growth is not as rosy. 

Qtr "YoY EPS Growth for that Qtr"    Notes

Q3 2015 45%

Q2 2015 40%

Q1 2015 48% iPhone 6 first sold

Q4 2014 20% iPhone 6 announced

Q3 2014 20%

Q2 2014 15%

Q1 2014 5%

Q4 2013 -5%

Q3 2013 -20%

Q2 2013 -18%

Q1 2013 7% iPhone 5 first sold

After the iPhone 5 growth actually went negative. This hasn't happened yet with the iPhone 6, probably because the large form factor of the 6 unleashed latent large phone demand. I think the 6 was a bigger help to Apple growth than the 5 for that reason. But it also means they have farther to fall now with respect to growth deceleration. The next product up will be the 6S and it will have an extremely tough YoY comp in the iPhone 6. And the iPhone 7 is a long way off and it will not have the benefit of a larger screen either. To me there is too much risk that this is a peak in the phone product cycle. And the phone is the main driver of Apple's profitability.

My expectation is that growth will decelerate again. At that point you are left with a value stock. Which is fine. Except I don't expect it to trade at the increased P/E multiple that its at now.

The one wild card for me is the offshore cash. I feel like they have used up most of their domestic cash, but they are still sitting on a huge pile offshore. Is that the current lay of the land? If so thats a big wildcard because if and when they can repatriate that cash at a cheap tax rate, it could mean a massive special dividend or something in that realm. And I feel like congress has been looking into this issue recently. But I don't know how that will play out and the cash has been sitting offshore forever.

I don't expect Apple to crash, I just feel like the upside has been sucked out based on the product cycle and few people are really saying that right now.

Are you guys still long Apple? I exited in Jan 2015 at about 115. Funny that it just came back to around there today. To me it is still a great company, I just see a lot of other places where I would rather put my money.

Make sense or am I rambling/wrong?

--

Richard Mordini

[Andrew Stepner]

Makes sense.

I would also add one more bit: Apple's amazing growth was largely in conquering the smartphone market which had crazy growth (a big tailwind). At this point they may reach saturation of the smartphone market and thus diminishing returns. They are at risk of being limited by the market size.

Stepner

[Richard M]

Found this article on buybacks with foreign money (something IBM did and I think the loophole has closed).
http://ww2.cfo.com/banking-capital-markets/2007/05/ibms-unusual-buyback-has-overseas-twist/

Interesting that an Accelerated Share Repurchase (ASR, which is what Apple does) allows you to boost your EPS immediately...but the company is still on the hook for subsequent price moves.  I previously thought that the financial counterparty was assuming the risk - delivering shares and hedging, etc, and getting an up front fee.  If Apple is acting like IBM, then this is actually self-defeating: the immediate EPS boost, if it boosts the shares, reduces the ultimate value of the buyback.

[Richard M]

Updating here as it's helpful to keep current.

In 2016 apple paid out $20B to developers, so for a while they were flat at $5B a half year but looks like they doubled the business in 2016.
2015 is implied to be about $14B so it went $10, $14, $20B which is astounding and will continue to motivate me to go in when the stock falls.

The figure implies they collected $8.5B for running servers. I am skeptical it can keep growing but with a 10 multiple that's $85B of value on a stock thats at $640B market cap.

Quizzically I'm bearish on the stock now. I think we see sub $100 again.

sent on the go

Great info. Thanks!

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[Andrew Stepner]

Short $AAPL here ahead of earnings Tuesday?

Great info. Thanks!

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[Andrew Stepner]

...I ask in part because of this thread:

https://twitter.com/firstadopter/status/1215765596035518465  

[Richard M]

I would not get short Apple for any reason because the market has detached from fundamentals for that name. Apple will beat on Services Revenue (IMO) and that could carry the day.  Last year they issued a Profit Warning first week of January, so the absence this year removes (or, at least should remove) any chance of a BIG miss.

I owe you a response on the merger math.

Also you said you are getting long.  I am almost completely in cash.  I see 3 scenarios, in order of what I think is most likely:

1. Any gains from here on out will likely be revisited. December 2018 was instructive.  Price changes sentiment, and there are 2 big issues for me:
1. The Dec 18 drop was reversed by the fed pausing.  The May/June drop was reversed by Powell indicating they would drop rates.  I am less confident any other drops will turn on a dime.
2. When the yield curves inverted, everyone pointed out that it didn't mean recession immediately.  Instead, it happened in the next 12-24 months.  Therefore, if there is a drop, these news articles will come back IN FORCE.

2. Market will pull back significantly.  So many sectors don't make sense anymore, and the rise in many names since December is greater than the reduction in the corp tax rate.  It's ridiculous.  Semiconductors (cyclical, bellweathers) were up 80% last year on a 5% decrease in earnings.  Texas Instruments just guided to another flat-to-down YoY comp.  The 2 year Q1oQ1 EPS is down 22.5% but the stock is up 50%.  Election year uncertainty.  Sanders winning nomination.  History may rhyme, and the 08 crash was during the campaign season.

3. I just miss a surge, but I do not lose wealth, and figure out what to do later.

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[Andrew Stepner]

Apple

AAPL chart is way up recently, so I'm thinking expectations are fairly elevated for them.

Macro

Thanks for your views. My view is that if it can be overpriced now then there's not much to keep it from being more overpriced in the future. I think a good chunk of the valuation absurdity is driven by monetary policy and not fundamentals. Big supply of money, negative interest rates and big demand for any kind of yield. And thus a lower "discount rate" allowing people to rationalize higher valuations (push back if you think I'm missing something on discount rate).

Anyway your view is rational I'm just skeptical that rational will prevail. But I could be wrong and I agree to disagree.

(Macro catalysts are a wild card and fairly hard to predict in my opinion)

Stepner

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[Richard M]

you're right, except 2010-2017 we had rates lower than today and the market didn't zoom like this (while earnings did.)

Japan has had the low rates and the share prices haven't moved.

you are right they are hard to predict, so I'm taking the time bet on it.  i see so many things self-fulfilling/causing fear.  Namely, nothing does until everything does.

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[Andrew Stepner]

FYI, I was wrong on AAPL having strong results. I covered after hours for a very minimal loss.

Stepner

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