or Connect
AppleInsider › Forums › Investors › AAPL Investors › Apple $400: A look at Apple's fundamentals, Part II
New Posts  All Forums:Forum Nav:

Apple $400: A look at Apple's fundamentals, Part II

post #1 of 53
Thread Starter 
In Part I of this series, AppleInsider contributor and independent analyst Andy M. Zaky discussed the general risks of using valuation as a basis for placing short or intermediate price targets on Apple (AAPL), and how having a long-term viewpoint is the only appropriate way to rely on fundamentals for investment decisions.

That the day-to-day fluctuations in Apples stock price are more determined by the larger concerns of the broader market than they are with the companys strong fundamentals. So keeping these concerns in mind, what investors want to know is: what is Apple worth and is the company currently undervalued? The short answer - Apple is definitely undervalued, and it should be trading at around $400 come 2012.

Traditional Valuation Metrics: Trailing & Forward P/E Ratios

The very first thing investors learn about fundamental analysis is that stocks are generally valued on a price-to-earnings ratio, and that a stocks growth rate is what determines the multiple it receives in the analysis. For example, on a traditional trailing 12-month P/E valuation analysis where one multiplies Apples $15 in EPS by its 70% growth rate, Apple should be worth about $1,050 a share on a trailing basis come this October.

Yet, as anyone who takes valuation seriously knows, stocks are seldom valued on their trailing P/E ratio. Instead, the market tends to value stocks based on their future expected earnings and long-term expected growth rate. In other words, key to the equation is what will Apple earn over the next 12-months, and what is expected out of the company in terms of growth over the next 5 years. Cash also plays a very important role in the analysis, but not in the way one would expect. Well get to cash in a moment.

So setting aside the issue of Apples enormous cash position, Wall Street analysts are generally modeling for Apple to earn $14.43 in EPS for fiscal 2010 and approximately $17.47 for fiscal 2011 thats about 21% earnings growth. Moreover, when looking at what is expected out of the company over the next 5-years, analysts are modeling for about 18% earnings growth. Thus, based on these conservative variables, Apple should be currently trading at about 18 times next years earnings of $17.47 in EPS or about $314.46 a share. Thats about $54.46 above Fridays close.

Looking at the future trailing P/E to beat Wall Street

Yet, simply analyzing Apples (AAPL) forward P/E ratio doesnt really tell anyone what the company ought to be worth in the future. It only tells us whether the stock is currently undervalued, and what it ought to be trading at today. To get an idea of what the company will be trading at in the future, it is vital to ascertain not only what type of trailing P/E the market is likely to give Apple in late 2011 or early 2012, but what the company will actually report in earnings. This is precisely where investors can beat Wall Street at their own game, and sums up the value offered by independent analysts who consistently outperform Wall Street in forecasting Apples earnings.

If there is one thing that readers should take away from this article its that you should never fight Wall Streets valuation metrics. Instead of relying on some alternative way to valuate the company to determine future price targets, embrace the markets valuation but beat it on the earnings front. For while the market might continue to give Apple an 18 to 20 trailing p/e ratio well into the future despite Apples enormous cash holdings and robust 50-70% growth rate, the one thing that is not determined by the market is the earnings variable of the P/E ratio.

For example, lets suppose that Apple continues to trade at a 19 to 20 trailing P/E come October 2011. Right now Wall Street analysts are modeling for Apple to earn roughly $17.50 in EPS. At that earnings level, Apple would be trading between $332 and $350 assuming a 19 or 20 multiple. Yet, nearly every independent analyst knows Apple will probably earn about $20 in EPS in 2011.

This is where investors can beat the street in forecasting a more realistic and achievable price target. Based on $20 in EPS for fiscal 2011, Apple should be trading between $380 and $400 in late 2011 early 2012 assuming a 20 multiple. This price-target beats the street by nearly $70 in share value, is based exclusively on the markets current valuation of the stock, and presents a conservative, simple, and straight-forward analysis of Apples valuation.

Basing Price Targets on Wall Street Valuation Metrics not on P/E(x-cash)

Yet, if I ended the analysis right here, I would get no less than 40 messages in my inbox by disgruntled investors explaining to me that its irresponsible to valuate Apple on a retroactive trailing P/E basis without backing out Apples cash from the analysis.

For example, my 2011 model calls for Apple to generate roughly $18 billion in cash in addition to the $45.8 billion already stockpiled in the companys coffers. That is a total $63.8 billion or 39.3% growth in cash over the coming year. If one were to back out this cash from Apples expected (2011) market capitalization of $376.4 billion, Apple would be trading at a trailing P/E(x-cash) of only 16.6.

Some would even go so far as to argue that Apple should be assigned a 25 P/E(x-cash) in order to conform with a more realistic 5-year growth rate; and that based on an expected $20 in earnings, it should thus be trading at $600 a share on a 30 multiple.

Yet, its very unrealistic to assume that the market will suddenly wise up to Apples (AAPL) enormous cash position and higher growth rate, and give it a 30 trailing p/e when Wall Street expects Apple to report a mere 18% earnings growth over the next 5 years. For while some might argue that its unreasonable to suggest that Apple will grow at such a meager pace, the market is not so easily convinced. Even if Apple demonstrates that it will far exceed the 18% growth expected over the next 5-years, it will do very little to alter the markets foregone conclusion to the contrary.

There seems to be this underlying notion with investors that there will be some glorious day deep in the future when Wall Street eventually gives Apple a valuation that is perfect in every regard, and which contemplates the full potential and thrust of Apples business model. Theoretically, Apple should have traded at a 50 P/E over the past 5 years, but has only seen that valuation level for only a few moments.

Research in Motion (RIMM) is a fundamental powerhouse growing at astonishing rates, but the market continues to hold the belief that iPhone and Android are going to destroy the Blackberry despite repetitive evidence to the contrary. Research in motion has repeatedly demonstrated its ability to keep up with the competition in the smart phone industry, but the market refuses to give the stock a P/E ratio higher than 10. Altering the markets perception is no easy task.

Furthermore, the historical record indicates that Apple will likely see an 18 to 22 P/E well into the future. Horace Dediu, a rising star among the independent analyst community, recently published a chart comparing Apples stock price, trailing P/E ratio and trailing P/E ratio (x-cash), which I find to be essential in determining the long-term direction and valuation of stock.

From a brief analysis of this chart, one should notice that while Apple has fully recovered and even made fresh all-times highs from the lows of the financial crisis, its P/E ratio has barely even moved. In fact, it has remained relatively flat over the past year and a half indicating apprehension on the part of Wall Street to give Apple a multiple significantly greater than that enjoyed by other similarly situated mega-cap stocks.

Source: Asymco

The Market Capitalization & Return on Equity Problem

Instead of giving Apple the fairest possible valuation to determine the stock price, market participants are relying on Apples earnings to drive the stock higher. It is clear that the earnings part of Apples P/E ratio has been the determinative factor in the rise of Apples stock price over the past 18 months and not a fair valuation. While Apple will probably continue to grow in the 25% to 30% range over the next 5 years, the market is unlikely to give it a P/E any higher than 23 at the high end or 15 at the low end for any extended period of time.

Eventually, all large-cap stocks undergo an age of P/E compression in anticipation of the law of large numbers and lower long-term anticipated growth rates. Even large cap tech companies that continue to significantly outpace the growth of their valuation nevertheless experience major P/E compression. This acts as a ceiling to overall market capitalization and mitigates the problem of return on equity.

When discussing this issue with analysts, I hear the same repetitive concern about Apples market capitalization. That despite Apples growth rate, business potential, and staggering piles of cash, the fact that its market capitalization is about to surpass Exxon Mobil (XOM) to make Apple the largest company in the United States raises questions about its expected return on equity (eROE). And this is precisely where the issue of cash, expected cash flow and trailing P/E(x-cash) becomes front and center in the equation.

Whenever one debates whether Apple (AAPL) should have a larger market capitalization than Exxon Mobil (XOM), Wal-Mart (WMT), Microsoft (MSFT), Hewlett Packard (HPQ), Google (GOOG), or IBM (IBM), the central issue in the discussion is which of these companies have the highest expected return on equity. That is, for every dollar spent to purchase one of these institutions, which of them would yield the highest return per dollar spent? If someone were to purchase Apple at $375 billion outright, would he or she get a bigger return on that $375 billion or would he or she get a greater return by spending $315 billion to acquire Exxon Mobil? If one produces a higher return with Apple, then Apple is relatively more undervalued than Exxon and vice-versa.

This is precisely why theres an artificial ceiling on market capitalization. For if Apple were to reach levels clearly suggesting a higher return on equity for Exxon Mobil (XOM) or any other similarly situated mega-cap name, it literally means that Apple is over valued relative to that name. At $400 a share, Apple would have a market capitalization of $376.4 compared to Exxon Mobils $315 billion cap, Wal-Marts $192.1 billion or Microsofts $221 billion market cap.

Yet, having a higher market cap in and of itself isnt a problem so long as the analysis demonstrates that Apple will likely post a higher return on equity on its market capitalization. Moreover, cash and cash flow must be subtracted from market cap because hypothetical purchasers of the company would get that cash in the acquisition. Thus, net market capitalization becomes the basis for comparison.

This is exactly what investors who think Apple should have a 30 P/E on an expected $20 in earnings fail to realize. At $600 a share, Apple would have a market capitalization of $565 billion or more than Microsoft and Exxon Mobil put together. It is outrageously doubtful to suggest that Apple will somehow demonstrate a higher return on equity than Microsoft (MSFT) and Exxon Mobil (XOM) put together. I hope this demonstrates why its almost silly to believe that the market will give Apple a P/E ratio much higher than what it currently trades at in late 2011. Instead, Apples future stock price will largely be determined by its growth in earnings as it continues to undergo further P/E compression well into the future. Ill be exploring the issue of comparative return on equity and comparative market capitalization in future articles to ascertain Apples true value. Stay tuned.

Andy Zaky is a graduate from the UCLA School of Law, an AppleInsider contributor and the founder and author of Bullish Cross -- an online publication that provides in-depth analysis of Apple's financial health.
post #2 of 53
Buy AAPL!
post #3 of 53
This is an absolutely outstanding series of articles -- all of which easily explain the arcane world of AAPL stock valuation much better than anything I've read from the usual analyst suspects.

Bravo to AI and Andy for this very insightful material.
post #4 of 53
I might tend to agree with you if Apple were acting like a typical behemoth company. Instead, it's acting like a start-up.

Look. Cash is king. Every quarter that passes Apple adds to its hoard of cash. And I suspect it is adding cash at an exponential rate. But its stock is not keeping pace with this growth in cash.

Left unchecked, the line of the net worth of Apple's stock could conceivably touch the line of Apple's pile of cash and equivalent. And that IS inconceivable!

Ergo, the growth of Apple's cash hoard is like a magnet that will draw the stock price irresistably higher. Now, you might say that Apple will do something to decrease that pile. It might give a dividend. It might do a stock buyback. But the reality is that there's no real benefit to Apple the company in doing either of those things.

The third thing Apple could do is to invest that cash. And knowing Apple, those investments will be growing that "seed cash" to even higher values! Once again, Apple reaches the point where its value as a company in cash and cash equivalents exceeds the worth of its stock...but it won't! As this becomes clear that its net worth is closing in on its stock worth, the worth of Apple's stock will have to grow, will ye or nil ye.

And that's why, if it keeps on doing what it's doing, Apple will hit $1,000 a share within the next five years.
post #5 of 53
Quote:
Originally Posted by SixPenceRicher View Post

This is an absolutely outstanding series of articles -- all of which easily explain the arcane world of AAPL stock valuation much better than anything I've read from the usual analyst suspects.

Bravo to AI and Andy for this very insightful material.

I like Andy's stuff, but in fairness to the "usual suspects," unless you are a customer of theirs, you never see anything but a summary of their analysis and not the reasoning behind it. They all use similar methods.

Quote:
Originally Posted by Sacto Joe View Post

I might tend to agree with you if Apple were acting like a typical behemoth company. Instead, it's acting like a start-up.

Look. Cash is king. Every quarter that passes Apple adds to its hoard of cash. And I suspect it is adding cash at an exponential rate. But its stock is not keeping pace with this growth in cash.

Left unchecked, the line of the net worth of Apple's stock could conceivably touch the line of Apple's pile of cash and equivalent. And that IS inconceivable!

Ergo, the growth of Apple's cash hoard is like a magnet that will draw the stock price irresistably higher. Now, you might say that Apple will do something to decrease that pile. It might give a dividend. It might do a stock buyback. But the reality is that there's no real benefit to Apple the company in doing either of those things.

The third thing Apple could do is to invest that cash. And knowing Apple, those investments will be growing that "seed cash" to even higher values! Once again, Apple reaches the point where its value as a company in cash and cash equivalents exceeds the worth of its stock...but it won't! As this becomes clear that its net worth is closing in on its stock worth, the worth of Apple's stock will have to grow, will ye or nil ye.

And that's why, if it keeps on doing what it's doing, Apple will hit $1,000 a share within the next five years.

The cash adds value to the company's stock only in the instance of figuring takeover value. Is anyone going to try to take Apple over? Not in your life. Cash in really only otherwise of use if it is capitalized. Apple is way beyond the point (IMO) where they can capitalize even a small fraction of the cash they have already hoarded, let alone the $15b they are adding at the current rate of accumulation. The bottom line is, profits drive stock valuation. Nobody but an arbitrager buys stocks for the company's cash on hand because unless you buy the entire company or they declare a dividend you see not penny of it.
Please don't be insane.
Reply
Please don't be insane.
Reply
post #6 of 53
What about the elephant in the room, and why I haven't invested more in AAPL (although it has treated me very nicely). Steve Jobs' pancreatic cancer, subsequent liver transplant, and the poor track record of Apple to share information on his health with investors.

Apple is a unique company, I think we all agree to that, thats why were here. Steve Jobs and his unique vision has been a huge influence (to understate things) in forming and steering Apple to it's present position. He appears completely unconcerned with market trends, short term profits, what his investors and pretty much everyone else thinks. And his vision has been proven, time and time again. It's not an act.

The dudes been (is?) a buddhist, applies buddhist principles to business, he's tripped on acid and publicly stated it was one of the most important experiences of his life. He's been around since the beginning of personal computers and singlehandedly had a huge effect on the evolution of the PCs. Who else tells people what they want or will want, and then is proven right, over and over again. Thats vision like nobody else has.

When Bill Gates, the world's youngest self made billionaire, the individual responsible for the company which has been arguably the most influencial in shaping the history of the PC is on stage with Steve Jobs, he looks at him like a wide eyed puppy.

The point is (besides shameless Steve jobs worshiping), what would Apple be without Jobs? Thats not an unthinkable scenario. Pancreatic cancers a nasty beast. It's conceivable, some would say likely, the he could be on his last legs. Each big project he introduces could be his last. What happens to Apple then? We all know what happened last time he left. People without vision took the reins and drove it straight into the ground.

How do you factor that into your forward P/Es?

Rob
post #7 of 53
Andy - its easy to make money on a company like apple. Got any success stories from some more challenging case studies?
post #8 of 53
I agree Apple is insanely undervalued right now, but this is the topsy-turvy world of the stock market today where the health of the overall market has greater import than the individual stock. Lunacy.

Proud AAPL stock owner.

 

GOA

Reply

Proud AAPL stock owner.

 

GOA

Reply
post #9 of 53
The company did get sluggish when SJ was sick and getting the liver transplant. They even hired Mark Papermaster, who is very smart and accomplished in the area of microprocessors, but was not the right fit for Apple/iPhone Manager. So, it is wild guess what happens when he moves on? Do we get somebody fluffy like Carly? Or Balmer with limited vision? Pillage and burn Hurd? History is not encouraging on tech succession.

Apple is gorilla with a dominant proprietary architecture and value added chain. The iPhone is truly revolutionary along with the iPad. However, once the stock goes flat from persistent PE compression, the only the company will be able to reward stockholders is via stock dividends. It also may be a time to sell.
post #10 of 53
Yes, Apple stock is undervalued by every measure of reality, but unfortunately the boys on Wall Street are playing a much different game when Apple trades at about 18 times earnings while both Amazon and Netflix are each currently trading at more than 50 times earnings. These companies run admirable businesses but their real value isn't close to the premium they are trading at.
post #11 of 53
Been sitting on AAPL since 118 and I ain't sellin'. Best investment I ever made. Bought most after Steve Job's illness was public knowledge. However, I still view SJ's health as the biggest short term risk to AAPL stock.
post #12 of 53
Quote:
Originally Posted by robzr View Post

What about the elephant in the room, and why I haven't invested more in AAPL (although it has treated me very nicely). Steve Jobs' pancreatic cancer, subsequent liver transplant, and the poor track record of Apple to share information on his health with investors.

[...]

The point is (besides shameless Steve jobs worshiping), what would Apple be without Jobs? Thats not an unthinkable scenario. Pancreatic cancers a nasty beast. It's conceivable, some would say likely, the he could be on his last legs. Each big project he introduces could be his last. What happens to Apple then? We all know what happened last time he left. People without vision took the reins and drove it straight into the ground.

How do you factor that into your forward P/Es?

Rob

Enderle???
post #13 of 53
I generally like your posts, but I am afraid this article parrots a great deal of mechanical 'wisdom' that Wall Street bandies about on the topic of valuation. Moreover, I disagree that the (long-run) value of Apple - or any other company - is a bet on the next year's earnings. It is more about the return that investors expect to get relative to the growth rate they think the company can achieve in the long-run (in all fairness, you do recognize the importance of the latter variable).

I've been waiting a long time on these boards to say this, but to write a whole article on the premise that Value is equal to EPS (trailing or forward) times P/E (trailing or forward, respectively) is a tautology. In other words, obvious and useless.

Let me explain. Pick your favorite metric of relevance 'X' (where X could be FCF, Earnings, EBITDA, EBIT, # Employees, Eyeballs, Sales, whatever...), and it is a tautology to that Price = XPS*[P/XPS] - since XPS and XPS cancel out, and Price = P. As I said, it tells us nothing. Of course, everybody on Wall Street loves 'EPS' because that is what our accounting mavens have deemed relevant, notwithstanding the fact that it has become a massaged and managed number to the point of irrelevancy for a lot companies (although perhaps not necessarily Apple). So let's stick with that.

The important question is, what does the P/E ratio mean? (The logic for what I am about to say is quite straightforward and requires some high school algebra, which I won't bore you with; if you want to know, PM me - it may be another 24 hours until you hear back, since I am traveling). For an all-equity firm such as Apple, the Forward P/E is simply equal to 1/[rE - g], where rE is the 'expected annual return demanded by equityholders' and g is the 'expected long run growth rate in earnings per share.' It can be thought of as the rE-adjusted-growth-rate (If Trailing P/E is used instead, the formula becomes P/E = [1+g]/[rE - g]).

Incidentally, the price per share is thus P = EPS1/[rE - g]

Bottom line? You can say nothing whatsoever about P/E ratios unless you are willing and able to say something about rE and g. If you are not able to - or cannot - say something about those two fundamentals, you are simply sticking your head in the sand. The P/E does not happen magically, nor is it pulled out of thin air: It comes from the company achieving certain long-run growth rates in EPS relative to its cost of equity. (Aside: The Forward P/E of the US stock market during the past hundred years has been about 14).

Let's look at Apple. In what follows, leave its ~$45B in cash aside (this amounts to about $50 per share).

Now, a reasonable estimate for Apple's rE is something in the region of 12% - 14% (Warning, jargon: this is from applying the Capital Asset Pricing Model, given Apple's beta of about 1.5, assuming a market risk premium of 5% - 6%, and a 30-year T-bond yield of ~4%).

If we think $400 per share is what Apple should be worth (and assuming EPS1 = $18 and rE = 14%), the non-cash value of Apple would be $350. This implies a Forward P/E of about 20. The arithmetic then says that Apple would need to grow its EPS at about 9% per year from here to forever. Is that possible? Perhaps. But it is tough. Consider that nominal US GDP has grown at about 5% in the past couple of decade. It is achievable if the market believes that Apple can grow at supranormal rates for the next few years, and then revert to a long-run (nominal) GDP growth rate. Everything depends on how Apple achieves its growth in the next few years (and then hoping that it can go sideways, matching the broader economic growth rate from then on).

The point I am making is that, 'Apple = $400' is a bet on two huge unknowns, namely rE and g. To suggest that it is primarily about making a bet on next year's earnings is oversimplifying the issue. For instance, Apple may deliver $20 in EPS next year, but if the market believes that Apple has become riskier (thus increasing its rE) or it begins to doubt Apple's growth engine (e.g., because of Jobs' departure or some other factor), then the stock could not only not get anywhere near $400, it could fall relative to where it is now.
post #14 of 53
Quote:
Originally Posted by AppleInsider View Post

This is exactly what investors who think Apple should have a 30 P/E on an expected $20 in earnings fail to realize. At $600 a share, Apple would have a market capitalization of $565 billion or more than Microsoft and Exxon Mobil put together. It is outrageously doubtful to suggest that Apple will somehow demonstrate a higher return on equity than Microsoft (MSFT) and Exxon Mobil (XOM) put together. I hope this demonstrates why its almost silly to believe that the market will give Apple a P/E ratio much higher than what it currently trades at in late 2011.

Sure. About 2011 or 2012. But give us 5 to 10 years.... if Microsoft's decline (as a business) keeps getting steeper, if the other competitors keep failing to recreate Apple's experience, if the oil industry has reached its peak... it is bound to happen.
post #15 of 53
Very keen focus on the numbers but nothing at all on the underlying real qualities of the company that drive those numbers. This is still the same hocus-pocus that analysts spin to befuddle investors and get them to part with their money.

Practically all analysts actions are backward looking. Sure they try to 'project' future earnings but they base it on past performance and intrinsically assume that the current landscape continues unchanged. But there are certain events that analysts do not include in their forecasts because such events cannot be modeled using traditional statistical methods that have been developed for predicting recurring events, i.e. the weather, repeated throws of dice, etc. And it is precisely these types of (non-Gaussian) events that really move stock prices.

What am I talking about? Innovation. Completely new products and markets. It is logically impossible to build a statistical model for the likelihood that Apple will develop the iPhone (and the flow of revenues and profits that it generates) before the iPhone is invented. Likewise for the iPad. And for whatever device Apple will introduce in the next 5 years. These are all unique events, they are not generated from a fixed setting (the earth's atmosphere, or two dice thrown a specific way repeatedly). Each time a new product is successfully introduced, the landscape changes and your old assumptions must be discarded. And so what do analysts do about these non-recurring events? They ignore them. [I won't claim authorship of this notion, google Nassim Taleb and Black Swans.]

I have invested a considerable amount in AAPL. I hardly look at the numbers. The question I ask is "Do I have faith that this company has the ability to keep on coming up with fantastic new products that open up new markets and guarantee exponential growth in profits for the foreseaable future?" I don't have that kind of faith in RIMM, certainly not MSFT. As long as I have that faith in AAPL, I will keep buying and holding it. As soon as I lose faith in it, I'm unloading on the next trading day.
post #16 of 53
Fantastic article! Thanks AI, and thanks Andy. I appreciated the dumbing down of the financial info, but a few things still flew over my head. Regardless, it is really great to have the opinion of an independent analyst, especially when so much of the financial news seems so contrived, especially pertaining to AAPL. (Since our government is predictably asleep at the wheel, I'm glad someone is willing to put out some honest information.) Another thing I would add is that it seems that AAPL is deliberately being pushed down by the powers that be. I'm betting that not too long after the big funds buy up a bunch of AAPL there will be a lot of positive analysis of Apple from the "established" analysts.

As for the pancreatic cancer talk floating around.. while I hope Steve Jobs lives to see 150, when the inevitable does occur (retire or worse), I plan on selling a kidney to be able to buy up as much AAPL as I can after it crashes. There is no stopping Apple.. Two points: 1) Apple plans their products 5-10 years in advance, their genius and foresight borders on clairvoyance, I'm not worried about a dry spell in great products. 2) Apple has a highly engrained culture of creativity and intelligence, they realize that this is their most important asset, which is why they hired an "educational expert" a while back to make sure these values are maintained (can anybody help with the name?).

Looking forward to the next installment!

p.s. Andy.. any chance you'll let us know when you're going to pull the trigger on some AAPL? Doesn't hurt to ask
post #17 of 53
Quote:
Originally Posted by AppleSwitcher View Post

Enderle???

Flattered, but no

Rob
post #18 of 53
Quote:
Originally Posted by anantksundaram View Post

Now, a reasonable estimate for Apple's rE is something in the region of 12% - 14% (Warning, jargon: this is from applying the Capital Asset Pricing Model, given Apple's beta of about 1.5, assuming a market risk premium of 5% - 6%, and a 30-year T-bond yield of ~4%).

Danger! Danger! Be warned! The Capital Asset Pricing Model, the CAPM is CRAP. It will tell you what Asset A should be priced relative to Asset B but it doesn't have anything to say about what the absolute levels should be. And the problem, as anyone may have gleaned from recent stock market experience, is not mistakes in predicting the relative price of assets, it's the complete and utter failure in predicting the collapse in the absolute price levels of securities.

Look at the statement above, "assuming a specific market risk premium and a specific T-bond yield". It's a statement about relative prices! Does the quality of Apple's products not figure at all into its valuation? How about the effectiveness of its management? How about the mysterious ability to consistently come up with wildly successful new products? If you disregard factors such as these in your analysis, then you are in essence assuming that all companies are the same when it comes to these factors. That's not a smart thing to do.
post #19 of 53
Quote:
Originally Posted by tundraboy View Post

Look at the statement above, "assuming a specific market risk premium and a specific T-bond yield". It's a statement about relative prices! Does the quality of Apple's products not figure at all into its valuation? How about the effectiveness of its management? How about the mysterious ability to consistently come up with wildly successful new products? If you disregard factors such as these in your analysis, then you are in essence assuming that all companies are the same when it comes to these factors. That's not a smart thing to do.

If this is just another way of saying that not all companies are created equal, then I agree with you. But it's also instructive to consider that the last 13 years or so of brilliant management at Apple was preceded by just as many years of poor management. The lesson is, things can change, and not always for the better. All the fancy metrics aside, are investors not right to ask themselves how much longer Apple's amazing run of successful new products can last? Very few companies have managed this long a string of successes. History suggests that we should look for signs of a turn.
Please don't be insane.
Reply
Please don't be insane.
Reply
post #20 of 53
Lots of bla bla about something inherently unpredictable.
Economics and related discipline are pseudo science at best.
I'm curious about Mr Zaky's predictions for Apple stock in 2000.
But I think I know the answer already, I cannot recall one positive 'analyst' from that time.

J.
post #21 of 53
Enough with the hocus-pocus.
Buy what you know. and what you believe in.
When the iPhone launched I knew it was a game changer.
So when I had chance (and a significant chunk of change to) I bought at $82.
I'm not selling yet as I continue to see AAPL innovating and breaking new ground and believe they have vast areas of potential growth in the marketplace.
In fact at the next stock market crash I'll probably buy more.
post #22 of 53
Quote:
Originally Posted by anantksundaram View Post

I generally like your posts, but I am afraid this article parrots a great deal of mechanical 'wisdom' that Wall Street bandies about on the topic of valuation. Moreover, I disagree that the (long-run) value of Apple - or any other company - is a bet on the next year's earnings.

/snip

Great post.

Do not overrate what you have received, nor envy others.
15" Matte MacBook Pro: 2.66Ghz i7, 8GB RAM, GT330m 512MB, 512GB SSD

iPhone 5 Black 32GB

iPad 3rd Generation, 32GB

Mac Mini Core2Duo 2.26ghz,...

Reply

Do not overrate what you have received, nor envy others.
15" Matte MacBook Pro: 2.66Ghz i7, 8GB RAM, GT330m 512MB, 512GB SSD

iPhone 5 Black 32GB

iPad 3rd Generation, 32GB

Mac Mini Core2Duo 2.26ghz,...

Reply
post #23 of 53
Quote:
Originally Posted by tundraboy View Post

Danger! Danger! Be warned! The Capital Asset Pricing Model, the CAPM is CRAP. It will tell you what Asset A should be priced relative to Asset B but it doesn't have anything to say about what the absolute levels should be. And the problem, as anyone may have gleaned from recent stock market experience, is not mistakes in predicting the relative price of assets, it's the complete and utter failure in predicting the collapse in the absolute price levels of securities.

Look at the statement above, "assuming a specific market risk premium and a specific T-bond yield". It's a statement about relative prices! Does the quality of Apple's products not figure at all into its valuation? How about the effectiveness of its management? How about the mysterious ability to consistently come up with wildly successful new products? If you disregard factors such as these in your analysis, then you are in essence assuming that all companies are the same when it comes to these factors. That's not a smart thing to do.

It's as simple as this: Suppose I came to you and said,"tundraboy, will you invest $100 to get an equity stake in my business; I promise to give you back $107 one year from now," your sensible reaction would be "it depends." Depends on what? On what you can get from risk-equivalent investments elsewhere. If I - or Apple, or anyone else - can't meet or beat that test, then you'll (indeed, I hope you would) take your money elsewhere.

Whenever you invest money in an asset, you forego the opportunity to invest it elsewhere. There is thus an 'opportunity cost' associated with the use of your capital, whether you know it or not. That's all you need to know about why a cost of capital, or in this case, a 'cost of equity,' exists, and why people do indeed look at Asset A relative to (a risk-equivalent) Asset B. The CAPM is just a handy and simple way of concretizing that insight. More precisely, it says that I need to give you at least a relatively riskfree rate of return (e.g., the return on a T-bond) - for otherwise you would not invest in any risky asset - on top of which, I'd need to compensate you for a risk premium associated with the investors' perception of risk in that asset.

Is the CAPM perfect? Of course not. There are more complicated (and well-known) adjustments that one can make. Can markets have meltdowns and overreactions when everything - incl. CAPM - goes out the window? Of course it does. And, it can do so, both on the downside (e.g., when Apple went back to $80 in 2008) or the upside (say, if Apple gets to $500 per share tomorrow). Relative to evaluation of long-run value using fundamentals (which is also what Zaky is trying to do), that might represent a screaming 'buy' or a 'sell,' depending on your own evaluation.

It does not matter what model you use. I am suggesting there is a relevant expected return for Apple's (or any other) shareholders. Use your own 'model', whatever that is. Incidentally, when you use a P/E, there is a discount rate embedded in that number. Period. Whether you realize it or not, or believe it or not is somewhat irrelevant. As an investor, you need to be aware that, all else equal, if you're attaching a higher P/E to a stock, you're likely attaching a lower discount rate to (i.e., demanding a lower expected return from) it. That's really all I am saying.

If you think 12% - 14% is wrong for Apple, that's fine. We don't have to agree. You'd say Apple is a 'buy' at $250. Someone else might sell. Think about it: every time someone buys thinking Apple is undervalued, there is someone else on the other side of the transaction that is selling, thinking perhaps that it is overvalued. After all, when I bought Apple in the high 80s early last year (which I thought was a raging buy at that price), there was someone who thought the opposite. If there wasn't such disagreement, no one would buy or sell.
post #24 of 53
Quote:
Originally Posted by anantksundaram View Post

It's as simple as this: Suppose I came to you and said,"tundraboy, will you invest $100 to get an equity stake in my business; I promise to give you back $107 one year from now," your sensible reaction would be "it depends." Depends on what? On what you can get from risk-equivalent investments elsewhere. If I - or Apple, or anyone else - can't meet or beat that test, then you'll (indeed, I hope you would) take your money elsewhere.

I completely agree with the rest of your post, but the above assumes there are dozens of other 'sure thing' investments sitting around waiting to be snapped up. In reality, there are other investors who are also looking to make their 7%, especially in a market where your bank account might net you 1% or so. In a real life market situation, while he's pondering on 'it depends', the cost to entry to get the $107 is suddenly $102, because someone else already offered $100. I think the problem with trying to explain any of this is that the models have to be simplified to such an extent that they become almost irrelevant.

Do not overrate what you have received, nor envy others.
15" Matte MacBook Pro: 2.66Ghz i7, 8GB RAM, GT330m 512MB, 512GB SSD

iPhone 5 Black 32GB

iPad 3rd Generation, 32GB

Mac Mini Core2Duo 2.26ghz,...

Reply

Do not overrate what you have received, nor envy others.
15" Matte MacBook Pro: 2.66Ghz i7, 8GB RAM, GT330m 512MB, 512GB SSD

iPhone 5 Black 32GB

iPad 3rd Generation, 32GB

Mac Mini Core2Duo 2.26ghz,...

Reply
post #25 of 53
Thank you Andy Zaky for this series. It explains much of why APPL is undervalued and the metrics used by traditional analysts.

Quote:
Originally Posted by AppleStud View Post

Andy - its easy to make money on a company like apple. Got any success stories from some more challenging case studies?

Yes, please give links to any analysis of other companies.

Quote:
Originally Posted by anantksundaram View Post

........
.... Think about it: every time someone buys thinking Apple is undervalued, there is someone else on the other side of the transaction that is selling, thinking perhaps that it is overvalued. After all, when I bought Apple in the high 80s early last year (which I thought was a raging buy at that price), there was someone who thought the opposite. If there wasn't such disagreement, no one would buy or sell.

Not necessarily true. I don't know the %, but funds do sell stock for profit taking to cover their losses in other stocks and investments. With the recent economic woes, I suspect there are quite a few funds that did this / are doing this with APPL. As I am not a stock expert, I believe there are probably numerous reasons people / funds sell stock other than the straightforward belief the stock is over valued.
just waiting to be included in one of Apple's target markets.
Don't get me wrong, I like the flat panel iMac, actually own an iMac, and I like the Mac mini, but...........
Reply
just waiting to be included in one of Apple's target markets.
Don't get me wrong, I like the flat panel iMac, actually own an iMac, and I like the Mac mini, but...........
Reply
post #26 of 53
Quote:
Originally Posted by rickag View Post


Not necessarily true. I don't know the %, but funds do sell stock for profit taking to cover their losses in other stocks and investments. With the recent economic woes, I suspect there are quite a few funds that did this / are doing this with APPL. As I am not a stock expert, I believe there are probably numerous reasons people / funds sell stock other than the straightforward belief the stock is over valued.

An individual depserate for cash might do that, although it's not really the right thing to do.

If you buy 2 stocks, one share of company A and one share of Company B, each for $100.

After one year:

Company A stock rises to $110
Company B stock falls to $90

You don't sell stock A to cover for the loss of stock B, for more reasons than I can go into here. If you absolutely had to raise some cash (lets say you needed $80) with no other information at hand, it makes more sense to sell stock B (for tax reasons if nothing else). Regardless, in reality you'd sell the one that you thought was most likely to fall, which would in turn be the one you thought was over valued.

Huge mutual funds certainly don't sell high performing chunks of their portfolios to 'break even' and institutional traders generally don't either unless they're working for a company that has liquidity issues.

Do not overrate what you have received, nor envy others.
15" Matte MacBook Pro: 2.66Ghz i7, 8GB RAM, GT330m 512MB, 512GB SSD

iPhone 5 Black 32GB

iPad 3rd Generation, 32GB

Mac Mini Core2Duo 2.26ghz,...

Reply

Do not overrate what you have received, nor envy others.
15" Matte MacBook Pro: 2.66Ghz i7, 8GB RAM, GT330m 512MB, 512GB SSD

iPhone 5 Black 32GB

iPad 3rd Generation, 32GB

Mac Mini Core2Duo 2.26ghz,...

Reply
post #27 of 53
Quote:
Originally Posted by Zoolook View Post

I completely agree with the rest of your post, but the above assumes there are dozens of other 'sure thing' investments sitting around waiting to be snapped up. In reality, there are other investors who are also looking to make their 7%, especially in a market where your bank account might net you 1% or so. In a real life market situation, while he's pondering on 'it depends', the cost to entry to get the $107 is suddenly $102, because someone else already offered $100. I think the problem with trying to explain any of this is that the models have to be simplified to such an extent that they become almost irrelevant.

Ah, notice I said 'risk-equivalent,' not risk-free (i.e., not 'sure thing').

I am simply saying that the price of stocks and bonds will be judged on the basis of what other similar objects are being sold/bought for in the financial marketplace.

This does not at all imply that we won't make mistakes or form poor judgments or be misled concerning what 'risk-equivalent' means for a particular stock (with bonds, it is far easier given credit ratings. Although, even there, we know that raters themselves can be wrong sometimes).
post #28 of 53
Quote:
Originally Posted by rickag View Post

Not necessarily true. I don't know the %, but funds do sell stock for profit taking to cover their losses in other stocks and investments. With the recent economic woes, I suspect there are quite a few funds that did this / are doing this with APPL. As I am not a stock expert, I believe there are probably numerous reasons people / funds sell stock other than the straightforward belief the stock is over valued.

I have no idea what you mean. That is why I said '..... perhaps overvalued'. That is one of many reasons. For instance, liquidity needs might be another.

But the larger point is, ignoring market-maker positions, a fund can only 'sell' when there is someone on the other side who wants to 'buy.' And, people don't 'buy' if they think the stock is going to go down in value.
post #29 of 53
Quote:
Originally Posted by anantksundaram View Post

I have no idea what you mean. That is why I said '..... perhaps overvalued'. That is one of many reasons. For instance, liquidity needs might be another.

But the larger point is, ignoring market-maker positions, a fund can only 'sell' when there is someone on the other side who wants to 'buy.' And, people don't 'buy' if they think the stock is going to go down in value.

Unless I'm missing something, this statement is nothing more useful than a tautology. For every buyer in the market, a seller must exist, and vice-versa.
Please don't be insane.
Reply
Please don't be insane.
Reply
post #30 of 53
Quote:
Originally Posted by Dr Millmoss View Post

Unless I'm missing something, this statement is nothing more useful than a tautology. For every buyer in the market, a seller must exist, and vice-versa.

No, it's not. I am surprised you'd think that.
post #31 of 53
Quote:
Originally Posted by anantksundaram View Post

No, it's not. I am surprised you'd think that.

Then I've missed something, which perhaps you could explain. It is tautological to say that for every seller there must be a buyer, since the system of buying and selling is defined by this very transaction. It's very unclear to me what you believe to have added to this discussion of markets by restating the obvious using other words. Feel free to enlighten me.
Please don't be insane.
Reply
Please don't be insane.
Reply
post #32 of 53
Quote:
Originally Posted by Dr Millmoss View Post

Then I've missed something, which perhaps you could explain. It is tautological to say that for every seller there must be a buyer, since the system of buying and selling is defined by this very transaction. It's very unclear to me what you believe to have added to this discussion of markets by restating the obvious using other words. Feel free to enlighten me.

To say something happens and the obverse of that does not is indeed a tautology. The more important issue is why something happens, and whether the obverse happens for reasons that are different from or opposite to the event in question.

For instance, to say that the US$ depreciated against the Yen is tautologically equivalent to saying that the Yen appreciated against the US$. However, it may have been actions on the US part that led to the market lowering its value relative to the Yen, even though Japan may have done nothing to make the Yen appreciate. Thus, if we are trying to understand what led to the dollar depreciation (tautologically equivalent to a Yen appreciation) we would look to the US for an explanation.

Similarly, [E]*[P/E] is a tautology as I said before. But once we begin ask 'what does P/E mean' as a construct (it is simply the inverse of the growth-adjusted-cost-of-equity), it goes beyond the obvious.

A person selling will complete the transaction only when there is person buying. That is, indeed, a tautological statement if one goes no further.

However, the person selling the asset might be doing it because (s)he thinks it is overvalued, while the person buying it, obversely, think the opposite. They might both be reasonable, intelligent investors who have looked at the same fundamentals and come to opposite conclusions regarding the value of the asset, based on their differing assumptions about the future course of events (e.g., cash flows, cost of capital, growth prospects) related to that asset.

How can you suggest that is tautological?
post #33 of 53
Quote:
Originally Posted by Dr Millmoss View Post

The cash adds value to the company's stock only in the instance of figuring takeover value. Is anyone going to try to take Apple over? Not in your life. Cash in really only otherwise of use if it is capitalized. Apple is way beyond the point (IMO) where they can capitalize even a small fraction of the cash they have already hoarded, let alone the $15b they are adding at the current rate of accumulation. The bottom line is, profits drive stock valuation. Nobody but an arbitrager buys stocks for the company's cash on hand because unless you buy the entire company or they declare a dividend you see not penny of it.

I agree with you. However, the reality is still that cash is being accumulated at an ever-increasing rate. I'm simply trying to draw attention to this fact. It's the IMPLICATIONS of this, coupled with the seeming fact that Apple is acting more like a startup than a huge company, that I don't think has been sufficiently appreciated.

Yes, they can (1) buy back stock (which helps the stockholder but doesn't do much for Apple the company), (2) start giving out dividends (ditto to (1)), (3) sit on the cash, or (4) invest. Of these four, the best thing for Apple the company is (4), especially where such investing helps their core business.

Obviously, stock buybacks have the effect of reducing the market capitalization of the company. Since Mr. Zaky's major determiner of a future Apple being "over-valued" is tied into its future much higher market cap, then this would be a way to increase value. Also obviously, dividends increase the attractiveness of a stock in spite of a market cap making it "over-valued".

All I'm saying is that there appears to be a collision course at work here between the present value of Apple's stock and it's longer term value, in whatever ways one wishes to fram that value, and that this collision course is based on the apparantly exponential growth of profit that Apple is raking in.

BTW, if they ever get to the point where they can go beyond simply keeping up with demand, then that huge bundle of cash can be converted into a decrease in the price of Apple products, which in turn can increase its market share. Indeed, the mere potential of that ability may be one of the major reasons for Apple keeping such a large stash of cash.
post #34 of 53
Quote:
Originally Posted by anantksundaram View Post

To say something happens and the obverse of that does not is indeed a tautology. The more important issue is why something happens, and whether the obverse happens for reasons that are different from or opposite to the event in question.

For instance, to say that the US$ depreciated against the Yen is tautologically equivalent to saying that the Yen appreciated against the US$. However, it may have been actions on the US part that led to the market lowering its value relative to the Yen, even though Japan may have done nothing to make the Yen appreciate. Thus, if we are trying to understand what led to the dollar depreciation (tautologically equivalent to a Yen appreciation) we would look to the US for an explanation.

Similarly, [E]*[P/E] is a tautology as I said before. But once we begin ask 'what does P/E mean' as a construct (it is simply the inverse of the growth-adjusted-cost-of-equity), it goes beyond the obvious.

A person selling will complete the transaction only when there is person buying. That is, indeed, a tautological statement if one goes no further.

However, the person selling the asset might be doing it because (s)he thinks it is overvalued, while the person buying it, obversely, think the opposite. They might both be reasonable, intelligent investors who have looked at the same fundamentals and come to opposite conclusions regarding the value of the asset, based on their differing assumptions about the future course of events (e.g., cash flows, cost of capital, growth prospects) related to that asset.

How can you suggest that is tautological?

Well, rather easily, since I still think fundamentally you are restating the obvious. Perhaps we are talking right past each other, I'm not sure.

Whether a stock skyrockets or plummets, the numbers of buyers and sellers (as measured by shares traded) are always exactly equal. Everyone has their individual reasons for making a decision to be one or the other, and they do not by any means have to be based on opposite conclusions based on the same data. They can be based on reasons entirely external to any given stock, including the need to diversify, the length of time the investor has held the stock, the desire for further investing, or to generate cash to capitalize something else. The reasons are so many and varied, and the number of players so vast that trying to relate them to any one or even any several measures of value, seems like a futile exercise.

But then we have the markets, which don't care about individual buying or selling motivations. They exist only for the purpose of setting a price such that the numbers of buyers and sellers are always equal.
Please don't be insane.
Reply
Please don't be insane.
Reply
post #35 of 53
Quote:
Originally Posted by Sacto Joe View Post

I agree with you. However, the reality is still that cash is being accumulated at an ever-increasing rate. I'm simply trying to draw attention to this fact. It's the IMPLICATIONS of this, coupled with the seeming fact that Apple is acting more like a startup than a huge company, that I don't think has been sufficiently appreciated.

Yes, they can (1) buy back stock (which helps the stockholder but doesn't do much for Apple the company), (2) start giving out dividends (ditto to (1)), (3) sit on the cash, or (4) invest. Of these four, the best thing for Apple the company is (4), especially where such investing helps their core business.

Obviously, stock buybacks have the effect of reducing the market capitalization of the company. Since Mr. Zaky's major determiner of a future Apple being "over-valued" is tied into its future much higher market cap, then this would be a way to increase value. Also obviously, dividends increase the attractiveness of a stock in spite of a market cap making it "over-valued".

All I'm saying is that there appears to be a collision course at work here between the present value of Apple's stock and it's longer term value, in whatever ways one wishes to fram that value, and that this collision course is based on the apparantly exponential growth of profit that Apple is raking in.

BTW, if they ever get to the point where they can go beyond simply keeping up with demand, then that huge bundle of cash can be converted into a decrease in the price of Apple products, which in turn can increase its market share. Indeed, the mere potential of that ability may be one of the major reasons for Apple keeping such a large stash of cash.

Your last statement is most alarming, so I will start with it. You are suggesting that Apple should subsidize their products with cash, in other words, to voluntarily cut their margins, maybe even lose money on every product but "make it up in volume." If you ever hope to see AAPL plummet, this scheme is the perfect way to make it happen.

The investment of cash returns very little, especially in the current interest rate environment. Either way, Apple is not a bank. They are not in the business of becoming an investment management company (hardly their core competence). Profits are supposed to be capitalized, used to grow the business they are in. Apple's ROI is so huge now that they cannot possibly reinvest even a tiny fraction of their cash reserves in this way, let alone the billion or more which pours in every month.

As problems go, it's a great one to have, but I do find myself constantly reminding people that Apple is NOT in the business of accumulating cash. It has little value to the company if it is not spent, and none to stockholders if it's not returned in the form of a dividend. (For the record, I'm not a fan of stock buybacks.)
Please don't be insane.
Reply
Please don't be insane.
Reply
post #36 of 53
Quote:
Originally Posted by Dr Millmoss View Post

Your last statement is most alarming, so I will start with it. You are suggesting that Apple should subsidize their products with cash, in other words, to voluntarily cut their margins, maybe even lose money on every product but "make it up in volume." If you ever hope to see AAPL plummet, this scheme is the perfect way to make it happen.

The investment of cash returns very little, especially in the current interest rate environment. Either way, Apple is not a bank. They are not in the business of becoming an investment management company (hardly their core competence). Profits are supposed to be capitalized, used to grow the business they are in. Apple's ROI is so huge now that they cannot possibly reinvest even a tiny fraction of their cash reserves in this way, let alone the billion or more which pours in every month.

As problems go, it's a great one to have, but I do find myself constantly reminding people that Apple is NOT in the business of accumulating cash. It has little value to the company if it is not spent, and none to stockholders if it's not returned in the form of a dividend. (For the record, I'm not a fan of stock buybacks.)


Again, I'm in basic agreement. And I'm not suggesting that Apple "subsicize their products with cash", I'm simply saying that it's an option. Not for me to say what Apple chooses to do! I'm just a lowly stockholder.

My whole purpose is to spotlight the growing snowball nature of Apple's cash situation (and indeed of Apple products in general), and to suggest that there will inevitably be a positive effect of that underappreciated phenomenon on Apple's stock price.
post #37 of 53
Quote:
Originally Posted by Dr Millmoss View Post

Perhaps we are talking right past each other, I'm not sure.

Good assessment. I am fairly sure, at this point.
post #38 of 53
Quote:
Originally Posted by Sacto Joe View Post

Again, I'm in basic agreement. And I'm not suggesting that Apple "subsicize their products with cash", I'm simply saying that it's an option. Not for me to say what Apple chooses to do! I'm just a lowly stockholder.

My whole purpose is to spotlight the growing snowball nature of Apple's cash situation (and indeed of Apple products in general), and to suggest that there will inevitably be a positive effect of that underappreciated phenomenon on Apple's stock price.

Essentially that is what you suggested. Using cash to lower the cost of products is a subsidy no matter how you cut it. One of the reasons Apple is so profitable, and we have done well as investors, is their margins. If Apple ever decided to try to use cash to "buy" market share, you as an investor can expect to get hammered. (Essentially this is what Microsoft has been attempting with products such as Zune and Xbox. How's that working out for them?)

Again, investors don't buy a company's cash position. Without a dividend, they see not of cent of it. It's about as relevant as the dark side of the moon. Cash does not improve earnings unless it is reinvested in growth.
Please don't be insane.
Reply
Please don't be insane.
Reply
post #39 of 53
Quote:
Originally Posted by Dr Millmoss View Post

Essentially that is what you suggested. Using cash to lower the cost of products is a subsidy no matter how you cut it. One of the reasons Apple is so profitable, and we have done well as investors, is their margins. If Apple ever decided to try to use cash to "buy" market share, you as an investor can expect to get hammered. (Essentially this is what Microsoft has been attempting with products such as Zune and Xbox. How's that working out for them?)

Again, investors don't buy a company's cash position. Without a dividend, they see not of cent of it. It's about as relevant as the dark side of the moon. Cash does not improve earnings unless it is reinvested in growth.

(Sigh) No, I didn't suggest it, essentially or otherwise. I posited it. However, since you seem disinclined to let this go, let me hypothesize a situation where such an action might make good business sense.

At one time my sister and her husband owned a small mailer in the small town she lived in. It was free, paid for by the ads my sister gathered to run in it. A few years in, the main newspaper in town decided to give their ads away for free, thus putting my sister's paper, the only competition for ads in town, out of business. Afterwards, their prices returned to normal.

Needless to say, if my sister had had sufficient reserves, this wouldn't have worked. And such is the case on any scale one might wish to mention. Thus, if one assumes parity is achieved between the products of, say, Microsoft and Apple, and Apple didn't have a sufficient cash reserve, Microsoft could use a similar approach to choke Apple to death, much as my sister's business was.

Now, I admit this is far-fetched, and it is not to be taken as a "suggestion" on my part. It is merely an example of how, in some circumstances, having a good sized bank roll is a good idea.
post #40 of 53
Quote:
Originally Posted by Sacto Joe View Post

(Sigh) No, I didn't suggest it, essentially or otherwise. I posited it. However, since you seem disinclined to let this go, let me hypothesize a situation where such an action might make good business sense.

At one time my sister and her husband owned a small mailer in the small town she lived in. It was free, paid for by the ads my sister gathered to run in it. A few years in, the main newspaper in town decided to give their ads away for free, thus putting my sister's paper, the only competition for ads in town, out of business. Afterwards, their prices returned to normal.

Needless to say, if my sister had had sufficient reserves, this wouldn't have worked. And such is the case on any scale one might wish to mention. Thus, if one assumes parity is achieved between the products of, say, Microsoft and Apple, and Apple didn't have a sufficient cash reserve, Microsoft could use a similar approach to choke Apple to death, much as my sister's business was.

Now, I admit this is far-fetched, and it is not to be taken as a "suggestion" on my part. It is merely an example of how, in some circumstances, having a good sized bank roll is a good idea.

We both seem disinclined to let it go, so don't put it all on me. All I am telling you is, that from a stockholder's standpoint, you'd find out in a big hurry how bad an idea it would be if it ever happened. The markets get freaky whenever margins slip by even a few percentage points, since margins are one of the major determinants of earnings, which is what investors really care about. It also needs to be pointed out that for Apple to dip into their cash reserves means that they are unable to pay for something out of current cash flow. Which, with few exceptions, translates into losing money.

Bottom line: Apple doesn't need cash reserves of this magnitude to do anything short of staving off Armageddon, and since they will never have enough for that eventuality...
Please don't be insane.
Reply
Please don't be insane.
Reply
New Posts  All Forums:Forum Nav:
  Return Home
  Back to Forum: AAPL Investors
AppleInsider › Forums › Investors › AAPL Investors › Apple $400: A look at Apple's fundamentals, Part II