I thought that this was an excellent article, and I am surprised at the number of people who, judging from their comments, seemed not to "get" it.
I would not want to try and reduce something expressed this eloquently to a few simplistic "takeaways", but with apologies to Mr. Zaky:
The market valuation of any stock on any given day is poorly correlated to the intrinsic value of the stock.
The notion of "intrinsic value" is itself a shaky proposition. For any high-tech stock, to the extent that "intrinsic value" is tangible, it is based on the expectation of future earnings, and more particularly, on growth in future earnings.
The market valuation of any particular stock on any given day is highly subject to the market perception of the health of the overall economy. There is no amount of studying of the data that is specific to a given stock, that is going to predict how its market valuation on a given day, week, month, quarter or year will be affected by the market perception of the overall health of the economy.
Even if the overall economy were high predictable, there remains the fact that in high-tech, there are routinely factors that hardly anyone sees coming, that alter the landscape in a way that fundamentally alters the playing field.
By the way, there is reasonable likelihood that the iPad will have disastrous consequences for Microsoft, and more so for Intel. The specific reason may not be obvious, and it isn't because Apple's iPad is going to replace the PC. The reason is that many clones will follow, and most of them will not be running Microsoft software on Intel processors. Given the way that Android is sweeping the smart phone market, it is likely that the greater majority of iPad clones, that will come crawling out of the woodwork in the foreseeable future, will be running Android or else Chrome/Chromium. Devices of this sort will outnumber iPads by probably 5-to-1 if not 10-to-1. Whereas Windows has not been officially ported to any processor other than Intel and the AMD clone, Linux has been widely ported. The most popular processor for all such devices, whether iPad or clones, will almost certainly be ARM.
This spells big trouble for Intel. The more difficult question is the extent to which Chrome/Chromium, once these software platforms take root in iPad-like devices, will make their way into garden-variety PCs. Were it not for the issue of application portability between Windows and Linux, the prospects for Chrome/Chromium to replace Windows as the preferred OS for PCs, would be much greater. But given enough time, this transition is likely to occur.
But after I contemplate what I just wrote, I am reminded that I must be crazy, because only a crazy person would ever desire to post a comment to this forum. Not so much because it is mostly people who don't know anything at all and who are drawn to Apple products because it mitigates their feelings of personal inadequacy, but rather because the people who run this web site behave like fascists.
On a different, purely technical note, I was not logged in when I first visited commenced to submit that post, but then after logging in, I started to write. When I attempted to preview the post, I was denied the preview page. The message said that it was because I had logged in after opening the page. Duh. If someone who is logged in submits a post while logged in, it is their post. If someone logs in at a public station and then leaves the browser open and remains logged in, and someone else comes along and submits a post pretending to be the person who was legitimately logged in, then the page will have been opened after the log. If this scenario occurs, the sequence of logging in vs. opening the page will be the reverse of the sequence that triggers this behavior. Duh.
By the way, there is reasonable likelihood that the iPad will have disastrous consequences for Microsoft, and more so for Intel. The specific reason may not be obvious, and it isn't because Apple's iPad is going to replace the PC. The reason is that many clones will follow, and most of them will not be running Microsoft software on Intel processors. Given the way that Android is sweeping the smart phone market, it is likely that the greater majority of iPad clones, that will come crawling out of the woodwork in the foreseeable future, will be running Android or else Chrome/Chromium. Devices of this sort will outnumber iPads by probably 5-to-1 if not 10-to-1. Whereas Windows has not been officially ported to any processor other than Intel and the AMD clone, Linux has been widely ported. The most popular processor for all such devices, whether iPad or clones, will almost certainly be ARM.
You are describing competitors to Apple devices, not clones. It doesn't matter which is more successful. Intel and MS are unlikely to share the bounty.
I thought that this was an excellent article, and I am surprised at the number of people who, judging from their comments, seemed not to "get" it.
I would not want to try and reduce something expressed this eloquently to a few simplistic "takeaways", but with apologies to Mr. Zaky:
The market valuation of any stock on any given day is poorly correlated to the intrinsic value of the stock.
The notion of "intrinsic value" is itself a shaky proposition. For any high-tech stock, to the extent that "intrinsic value" is tangible, it is based on the expectation of future earnings, and more particularly, on growth in future earnings.
The market valuation of any particular stock on any given day is highly subject to the market perception of the health of the overall economy. There is no amount of studying of the data that is specific to a given stock, that is going to predict how its market valuation on a given day, week, month, quarter or year will be affected by the market perception of the overall health of the economy.
Even if the overall economy were high predictable, there remains the fact that in high-tech, there are routinely factors that hardly anyone sees coming, that alter the landscape in a way that fundamentally alters the playing field.
By the way, there is reasonable likelihood that the iPad will have disastrous consequences for Microsoft, and more so for Intel. The specific reason may not be obvious, and it isn't because Apple's iPad is going to replace the PC. The reason is that many clones will follow, and most of them will not be running Microsoft software on Intel processors. Given the way that Android is sweeping the smart phone market, it is likely that the greater majority of iPad clones, that will come crawling out of the woodwork in the foreseeable future, will be running Android or else Chrome/Chromium. Devices of this sort will outnumber iPads by probably 5-to-1 if not 10-to-1. Whereas Windows has not been officially ported to any processor other than Intel and the AMD clone, Linux has been widely ported. The most popular processor for all such devices, whether iPad or clones, will almost certainly be ARM.
This spells big trouble for Intel. The more difficult question is the extent to which Chrome/Chromium, once these software platforms take root in iPad-like devices, will make their way into garden-variety PCs. Were it not for the issue of application portability between Windows and Linux, the prospects for Chrome/Chromium to replace Windows as the preferred OS for PCs, would be much greater. But given enough time, this transition is likely to occur.
This first half of this post, before you get into the iPad, is exactly what I'm saying. You've summarized it well.
"The market valuation of any particular stock on any given day is highly subject to the market perception of the health of the overall economy. There is no amount of studying of the data that is specific to a given stock, that is going to predict how its market valuation on a given day, week, month, quarter or year will be affected by the market perception of the overall health of the economy." - Very key to understanding how the markets function.
This first half of this post, before you get into the iPad, is exactly what I'm saying. You've summarized it well.
"The market valuation of any particular stock on any given day is highly subject to the market perception of the health of the overall economy. There is no amount of studying of the data that is specific to a given stock, that is going to predict how its market valuation on a given day, week, month, quarter or year will be affected by the market perception of the overall health of the economy." - Very key to understanding how the markets function.
Perhaps you could clarify your views of valuations. Perhaps I read it wrong, but it seemed that elsewhere you were endorsing the idea that AAPL is undervalued.
Perhaps you could clarify your views of valuations. Perhaps I read it wrong, but it seemed that elsewhere you were endorsing the idea that AAPL is undervalued.
To which I'd add, in the long term we'll all be dead. I'm not being flippant here. A great many long-term participants in the equity markets have seen close to zero or worse returns over a ten year period. So I think any discussion which involves the long term also has to address the macro forces facing the economy, which are scary indeed, and even less subject to accurate forecasting than AAPL's one year projected stock price.
Thank you for this post which has clarified a lot of my own thoughts and experiences. No matter how good a company/stock may be, it's vulnerable to overall market trends.
To which I'd add, in the long term we'll all be dead. I'm not being flippant here. A great many long-term participants in the equity markets have seen close to zero or worse returns over a ten year period. So I think any discussion which involves the long term also has to address the macro forces facing the economy, which are scary indeed, and even less subject to accurate forecasting than AAPL's one year projected stock price.
Ok. Basic argument...
2007 - Apple is worth $250 on a 2-year price target
2008 - Apple touches $80 a share
2009 - Apple surpasses $200 a share.
2010 - Apple touches $278 a share.
So...
Someone who had a 1-year horizon would have lost their ass in 2008 if they had bought in 2007. However, if he or she had a 2-year horizon, he or she would have avoided any losses in the worst financial collapse since the great depression.
Here's what I'm saying here. I think that there's a very high probability of another event occurring sometime this fall. In fact, I think 2011 will be generally a rough year much like 2008. Yet, if someone has a 2-year horizon from here, then regardless of what happens in 2011, they'll be profitable in 2012.
That's the way I'm viewing it right now. What I will never ever say or suggest that anyone should do is go out and buy shares. That's something that every individual needs to consider in close consultation with their financial advisors.
This article is suppose to help in providing a portion of the research that might aid the advanced investor in making decisions. The article makes a factual conclusions. That IF Apple sees the same P/E in 2012 that it sees today, there's a very very high likelihood that Apple will be trading at $400. Why? Because one thing I'm pretty sure about is EPS will be in the $20 range in 2011. Thus, what investors should take from this article is that sometime in the future, Apple will likely see much higher prices. But it may experience significantly lower prices in the short term. That's basically it. If you like this piece, you can read the second piece to this article here:
Andy, thanks for the detailed response, and I will take a look at part II when I get a chance.
I've been in AAPL since 1997, so obviously I've done well by it. Still I've been through some extremely long-term droughts that hammered the stock value down 50% and more over astonishingly short time spans, and where it stayed hammered down for years on end. At one point AAPL was selling for little more the value of its cash on hand, which meant that effectively everything else the company owned, and its entire business, was being judged as being totally worthless by the markets.
I'm not discrediting your work, which is very useful, but what I am saying is that the last ten years have certainly taught me something about valuations. Sometimes the markets just ignore fundamentals entirely.
. Sometimes the markets just ignore fundamentals entirely.
Agreed. I think they ignore fundamentals more than the market pays much attention to them. Its those small windows when Apple reaches $270 a share or $400 a share that investors should consider bailing out.
The iPhone and the iPad are a long way from being saturated in the US, let alone worldwide at it has been mentioned already. The main reasons why Android gained market share are:
1. Supply constraints - None of the ATT stores I checked have the iPhone 4.0. Will take 2 weeks for me to get get mine after I ordered. The stores got no inventory and no demo! Worse for the iPad. The MacMini that I ordered must be a slow boat from China. Finally got my 27" Quad Core i7 iMac that took time too. Worse in foreign countries... especially in Asia. I imagine eventually supply will improve for XMas.
2. Limited distribution - Apple is not even selling or selling in limited quantities in many countries, particularly in Asia.
3. Carrier limitations - Many carriers like VZ do not sell the iPhone. It is good that Apple did not cave in VZ. I am still not sure about the economies of making CDMA phones. Worldwide it is a marginal market. Also, loss of exclusivity has economic trade-offs.
Once these issues are resolved, Apple could well exceed the $4.45/s Q4 that Zacky in predicting. XMas could see even higher profits. Meanwhile the cost of components will continue to fall.
Agreed. I think they ignore fundamentals more than the market pays much attention to them. Its those small windows when Apple reaches $270 a share or $400 a share that investors should consider bailing out.
Finally got a chance to read your other article. Very interesting. The time series for P/E I think is a very good way to gage market sentiments over time, but it's a chart I have a hard time finding in any of the usual places. I would have liked to see a longer time series for AAPL's P/E. As a holder of the stock over the long term I have been witnessing this so-called compression of P/E for AAPL over a number of years. Your explanation for this is as comprehensible and reasonable as any I have heard.
One question I'd have is over the value calculation of Apple's cash hoard. In my experience neither cash nor debt (unless it's a lot of debt and presents a service risk) is rarely figured into actual investment decisions. The takeover cost is extremely theoretical for a huge company like Apple. My personal theory is that this mountain of cash does Apple no practical good if it's not invested in growing the company's business. It may even have a negative impact on investor sentiment if it seems that Apple has reached a point where they accumulate cash at a much faster rate than they are able to capitalize it. The cash suggests the need to start or buy new businesses in order to maintain an earnings growth rate commensurate with the past.
Comments
I would not want to try and reduce something expressed this eloquently to a few simplistic "takeaways", but with apologies to Mr. Zaky:
The market valuation of any stock on any given day is poorly correlated to the intrinsic value of the stock.
The notion of "intrinsic value" is itself a shaky proposition. For any high-tech stock, to the extent that "intrinsic value" is tangible, it is based on the expectation of future earnings, and more particularly, on growth in future earnings.
The market valuation of any particular stock on any given day is highly subject to the market perception of the health of the overall economy. There is no amount of studying of the data that is specific to a given stock, that is going to predict how its market valuation on a given day, week, month, quarter or year will be affected by the market perception of the overall health of the economy.
Even if the overall economy were high predictable, there remains the fact that in high-tech, there are routinely factors that hardly anyone sees coming, that alter the landscape in a way that fundamentally alters the playing field.
By the way, there is reasonable likelihood that the iPad will have disastrous consequences for Microsoft, and more so for Intel. The specific reason may not be obvious, and it isn't because Apple's iPad is going to replace the PC. The reason is that many clones will follow, and most of them will not be running Microsoft software on Intel processors. Given the way that Android is sweeping the smart phone market, it is likely that the greater majority of iPad clones, that will come crawling out of the woodwork in the foreseeable future, will be running Android or else Chrome/Chromium. Devices of this sort will outnumber iPads by probably 5-to-1 if not 10-to-1. Whereas Windows has not been officially ported to any processor other than Intel and the AMD clone, Linux has been widely ported. The most popular processor for all such devices, whether iPad or clones, will almost certainly be ARM.
This spells big trouble for Intel. The more difficult question is the extent to which Chrome/Chromium, once these software platforms take root in iPad-like devices, will make their way into garden-variety PCs. Were it not for the issue of application portability between Windows and Linux, the prospects for Chrome/Chromium to replace Windows as the preferred OS for PCs, would be much greater. But given enough time, this transition is likely to occur.
On a different, purely technical note, I was not logged in when I first visited commenced to submit that post, but then after logging in, I started to write. When I attempted to preview the post, I was denied the preview page. The message said that it was because I had logged in after opening the page. Duh. If someone who is logged in submits a post while logged in, it is their post. If someone logs in at a public station and then leaves the browser open and remains logged in, and someone else comes along and submits a post pretending to be the person who was legitimately logged in, then the page will have been opened after the log. If this scenario occurs, the sequence of logging in vs. opening the page will be the reverse of the sequence that triggers this behavior. Duh.
By the way, there is reasonable likelihood that the iPad will have disastrous consequences for Microsoft, and more so for Intel. The specific reason may not be obvious, and it isn't because Apple's iPad is going to replace the PC. The reason is that many clones will follow, and most of them will not be running Microsoft software on Intel processors. Given the way that Android is sweeping the smart phone market, it is likely that the greater majority of iPad clones, that will come crawling out of the woodwork in the foreseeable future, will be running Android or else Chrome/Chromium. Devices of this sort will outnumber iPads by probably 5-to-1 if not 10-to-1. Whereas Windows has not been officially ported to any processor other than Intel and the AMD clone, Linux has been widely ported. The most popular processor for all such devices, whether iPad or clones, will almost certainly be ARM.
You are describing competitors to Apple devices, not clones. It doesn't matter which is more successful. Intel and MS are unlikely to share the bounty.
I thought that this was an excellent article, and I am surprised at the number of people who, judging from their comments, seemed not to "get" it.
I would not want to try and reduce something expressed this eloquently to a few simplistic "takeaways", but with apologies to Mr. Zaky:
The market valuation of any stock on any given day is poorly correlated to the intrinsic value of the stock.
The notion of "intrinsic value" is itself a shaky proposition. For any high-tech stock, to the extent that "intrinsic value" is tangible, it is based on the expectation of future earnings, and more particularly, on growth in future earnings.
The market valuation of any particular stock on any given day is highly subject to the market perception of the health of the overall economy. There is no amount of studying of the data that is specific to a given stock, that is going to predict how its market valuation on a given day, week, month, quarter or year will be affected by the market perception of the overall health of the economy.
Even if the overall economy were high predictable, there remains the fact that in high-tech, there are routinely factors that hardly anyone sees coming, that alter the landscape in a way that fundamentally alters the playing field.
By the way, there is reasonable likelihood that the iPad will have disastrous consequences for Microsoft, and more so for Intel. The specific reason may not be obvious, and it isn't because Apple's iPad is going to replace the PC. The reason is that many clones will follow, and most of them will not be running Microsoft software on Intel processors. Given the way that Android is sweeping the smart phone market, it is likely that the greater majority of iPad clones, that will come crawling out of the woodwork in the foreseeable future, will be running Android or else Chrome/Chromium. Devices of this sort will outnumber iPads by probably 5-to-1 if not 10-to-1. Whereas Windows has not been officially ported to any processor other than Intel and the AMD clone, Linux has been widely ported. The most popular processor for all such devices, whether iPad or clones, will almost certainly be ARM.
This spells big trouble for Intel. The more difficult question is the extent to which Chrome/Chromium, once these software platforms take root in iPad-like devices, will make their way into garden-variety PCs. Were it not for the issue of application portability between Windows and Linux, the prospects for Chrome/Chromium to replace Windows as the preferred OS for PCs, would be much greater. But given enough time, this transition is likely to occur.
This first half of this post, before you get into the iPad, is exactly what I'm saying. You've summarized it well.
"The market valuation of any particular stock on any given day is highly subject to the market perception of the health of the overall economy. There is no amount of studying of the data that is specific to a given stock, that is going to predict how its market valuation on a given day, week, month, quarter or year will be affected by the market perception of the overall health of the economy." - Very key to understanding how the markets function.
This first half of this post, before you get into the iPad, is exactly what I'm saying. You've summarized it well.
"The market valuation of any particular stock on any given day is highly subject to the market perception of the health of the overall economy. There is no amount of studying of the data that is specific to a given stock, that is going to predict how its market valuation on a given day, week, month, quarter or year will be affected by the market perception of the overall health of the economy." - Very key to understanding how the markets function.
Perhaps you could clarify your views of valuations. Perhaps I read it wrong, but it seemed that elsewhere you were endorsing the idea that AAPL is undervalued.
Perhaps you could clarify your views of valuations. Perhaps I read it wrong, but it seemed that elsewhere you were endorsing the idea that AAPL is undervalued.
It is. But only for the long term.
It is. But only for the long term.
To which I'd add, in the long term we'll all be dead. I'm not being flippant here. A great many long-term participants in the equity markets have seen close to zero or worse returns over a ten year period. So I think any discussion which involves the long term also has to address the macro forces facing the economy, which are scary indeed, and even less subject to accurate forecasting than AAPL's one year projected stock price.
To which I'd add, in the long term we'll all be dead. I'm not being flippant here. A great many long-term participants in the equity markets have seen close to zero or worse returns over a ten year period. So I think any discussion which involves the long term also has to address the macro forces facing the economy, which are scary indeed, and even less subject to accurate forecasting than AAPL's one year projected stock price.
Ok. Basic argument...
2007 - Apple is worth $250 on a 2-year price target
2008 - Apple touches $80 a share
2009 - Apple surpasses $200 a share.
2010 - Apple touches $278 a share.
So...
Someone who had a 1-year horizon would have lost their ass in 2008 if they had bought in 2007. However, if he or she had a 2-year horizon, he or she would have avoided any losses in the worst financial collapse since the great depression.
Here's what I'm saying here. I think that there's a very high probability of another event occurring sometime this fall. In fact, I think 2011 will be generally a rough year much like 2008. Yet, if someone has a 2-year horizon from here, then regardless of what happens in 2011, they'll be profitable in 2012.
That's the way I'm viewing it right now. What I will never ever say or suggest that anyone should do is go out and buy shares. That's something that every individual needs to consider in close consultation with their financial advisors.
This article is suppose to help in providing a portion of the research that might aid the advanced investor in making decisions. The article makes a factual conclusions. That IF Apple sees the same P/E in 2012 that it sees today, there's a very very high likelihood that Apple will be trading at $400. Why? Because one thing I'm pretty sure about is EPS will be in the $20 range in 2011. Thus, what investors should take from this article is that sometime in the future, Apple will likely see much higher prices. But it may experience significantly lower prices in the short term. That's basically it. If you like this piece, you can read the second piece to this article here:
http://bullcross.blogspot.com/2010/0...entals_12.html
I've been in AAPL since 1997, so obviously I've done well by it. Still I've been through some extremely long-term droughts that hammered the stock value down 50% and more over astonishingly short time spans, and where it stayed hammered down for years on end. At one point AAPL was selling for little more the value of its cash on hand, which meant that effectively everything else the company owned, and its entire business, was being judged as being totally worthless by the markets.
I'm not discrediting your work, which is very useful, but what I am saying is that the last ten years have certainly taught me something about valuations. Sometimes the markets just ignore fundamentals entirely.
. Sometimes the markets just ignore fundamentals entirely.
Agreed. I think they ignore fundamentals more than the market pays much attention to them. Its those small windows when Apple reaches $270 a share or $400 a share that investors should consider bailing out.
1. Supply constraints - None of the ATT stores I checked have the iPhone 4.0. Will take 2 weeks for me to get get mine after I ordered. The stores got no inventory and no demo! Worse for the iPad. The MacMini that I ordered must be a slow boat from China. Finally got my 27" Quad Core i7 iMac that took time too. Worse in foreign countries... especially in Asia. I imagine eventually supply will improve for XMas.
2. Limited distribution - Apple is not even selling or selling in limited quantities in many countries, particularly in Asia.
3. Carrier limitations - Many carriers like VZ do not sell the iPhone. It is good that Apple did not cave in VZ. I am still not sure about the economies of making CDMA phones. Worldwide it is a marginal market. Also, loss of exclusivity has economic trade-offs.
Once these issues are resolved, Apple could well exceed the $4.45/s Q4 that Zacky in predicting. XMas could see even higher profits. Meanwhile the cost of components will continue to fall.
Agreed. I think they ignore fundamentals more than the market pays much attention to them. Its those small windows when Apple reaches $270 a share or $400 a share that investors should consider bailing out.
Finally got a chance to read your other article. Very interesting. The time series for P/E I think is a very good way to gage market sentiments over time, but it's a chart I have a hard time finding in any of the usual places. I would have liked to see a longer time series for AAPL's P/E. As a holder of the stock over the long term I have been witnessing this so-called compression of P/E for AAPL over a number of years. Your explanation for this is as comprehensible and reasonable as any I have heard.
One question I'd have is over the value calculation of Apple's cash hoard. In my experience neither cash nor debt (unless it's a lot of debt and presents a service risk) is rarely figured into actual investment decisions. The takeover cost is extremely theoretical for a huge company like Apple. My personal theory is that this mountain of cash does Apple no practical good if it's not invested in growing the company's business. It may even have a negative impact on investor sentiment if it seems that Apple has reached a point where they accumulate cash at a much faster rate than they are able to capitalize it. The cash suggests the need to start or buy new businesses in order to maintain an earnings growth rate commensurate with the past.
Or it does to me. I'd be interested in your take.