I don't have any serious doubts about Cook's ability to run Apple. In fact, the evidence is, for all intents and purposes, that he has been running Apple for the last couple of years possibly. I'm saying that it's beginning to look like Steve will try to hang on until it's obvious to everyone that Apple needs to have a CEO who can be on campus full time, and the issue gets forced. This is not a radical idea -- it's an entirely normal and pragmatic one for business. Lots of talented businesspeople had to know when the time was right to allow someone else to step up. The message we're getting from Apple now is "not yet." So the natural question is, "why not yet?"
I hear what you are saying, but I don't think that's really the prime influence on the stock, do you? I think it pales in comparison to what I was speaking of. I think that most people believe Apple's daily operations are fine in the hands of the management team sans Steve. But I think not enough people realize that Apple won't need another killer product for several years in order to grow earnings. (This harkens back to the earlier topic.) People actually believe that another killer product is required in order for Apple to keep it's mojo, and many people believe that Steve is required for the genesis of killer products. (The truth of the matter is not as important as the perception, when it comes to the stock market.)
Quote:
Originally Posted by Dr Millmoss
I felt I was quite specific in my suggestions.
I do too, which is what I ultimately said, and is why I addressed them. (The other comment about people not being specific was aimed at all of those folks - most of them actually - that are not being specific.)
Quote:
Originally Posted by Dr Millmoss
I'm concerned not with tomorrow or next week or even next month. If Apple announced tomorrow that Cook is now CEO and Steve is staying on as the chair of the board, I suspect that the initial market reaction would verge on panic. But over a matter of months, if not less, the reality would sink in that maybe Apple isn't really a cult of personality dressed up as a corporation, that it really does have a solid culture and talented leadership team, which has been overshadowed by Steve and his rock star status.
I believe that, and you believe that, but I think a significant enough fraction of people don't believe it strongly enough, so...
Quote:
Originally Posted by Dr Millmoss
I think all this fretting, which is being artificially prolonged, would come to an end.
I disagree, regardless of any communication we get from Apple management. Not as long as Steve's health issues are hanging over our heads. There will still be enough worriers that the stock will be depressed compared to what might have been. (That's not to say I think it's going down from here. It will go up... just perhaps not as much as if Steve's health was good.)
Eventually, Steve will be gone from Apple (hopefully long from now, but regardless...) and then people will see how strong the company truly is. But for now, the fear of that imminence is hanging over the stock, and no words about titles and succession plans post-Steve are going to calm those fears.
I don't think it's fully appreciated how much Steve's health issues have taken over the narrative about Apple. Every company, even one as high-profile as Apple, gets only so much bandwidth to get their message across. In Apple's case, you can see how much of it is absorbed by speculation about Steve's condition. Just look at the recent stories about their earnings report -- half of most of them don't talk so much about products or profits, as about Steve's cancer. Over time, that has a corrosive affect, as the story that Apple is nothing without Steve sounds more and more valid, and is virtually endorsed by Apple through its actions and inactions.
I think we mostly agree in general but this is an area where I wholeheartedly agree. It's not just the company narrative that is drowned out but also attention potentially diverted from product launches.
I am still hoping that Steve's absence will be short and that he will pass the reins shortly after his return. It is interesting to imagine what type of chairman Jobs will be without also holding the CEO title.
I disagree, regardless of any communication we get from Apple management. Not as long as Steve's health issues are hanging over our heads. There will still be enough worriers that the stock will be depressed compared to what might have been. (That's not to say I think it's going down from here. It will go up... just perhaps not as much as if Steve's health was good.)
Eventually, Steve will be gone from Apple (hopefully long from now, but regardless...) and then people will see how strong the company truly is. But for now, the fear of that imminence is hanging over the stock, and no words about titles and succession plans post-Steve are going to calm those fears.
I wish they'd worry a bit more. The day Apple announced Steve's leave, I said that I'd be 'in' big if the stock hit $310. I'm still waiting.
I have great confidence in Apple long-term but I think this year is likely to be a roller coaster ride.
I wish they'd worry a bit more. The day Apple announced Steve's leave, I said that I'd be 'in' big if the stock hit $310. I'm still waiting.
I have great confidence in Apple long-term but I think this year is likely to be a roller coaster ride.
$310 may be a bridge too far. While a stock price seems arbitrary, it is actually fairly loosely connected to the performance of the company. And given Apple's earnings performance, $310 would put the stock price at the all time Apple low relative to performance. Simply put, there's not much negative juice to squeeze out of that lemon for any reason. The Steve Jobs' handicap as well as the "Law of Large Numbers" handicap are already in full force, as amply demonstrated by last week's announcement and rapid recovery.
I hear what you are saying, but I don't think that's really the prime influence on the stock, do you? I think it pales in comparison to what I was speaking of. I think that most people believe Apple's daily operations are fine in the hands of the management team sans Steve. But I think not enough people realize that Apple won't need another killer product for several years in order to grow earnings. (This harkens back to the earlier topic.) People actually believe that another killer product is required in order for Apple to keep it's mojo, and many people believe that Steve is required for the genesis of killer products. (The truth of the matter is not as important as the perception, when it comes to the stock market.)
Not the prime influence, no -- but arguably the principal one which keeps the valuation down. I mean, I think some theory is needed to explain it. I can't think of another that accounts for the last several years of declining multiples. It isn't a short-term trend, and about the only major theme I can find which persists over that period of time is the anxiety over Steve's health. It's the only constant detractor in what has otherwise been a picture so rosy that it's almost ridiculous.
I'm not thinking two years out as much as I'm thinking two or three back. If AAPL today had even the very modest PEG of 1.0, then the stock would be selling for well over $400 a share right now. I'm not sure it's possible to find a historical chart of PEG, but I'm guessing it hasn't been much over 1.0 at any time in the last three years, which means that investors are consistently discounting earnings growth. It's becoming the AAPL storyline, and storylines are hard to change.
Quote:
I disagree, regardless of any communication we get from Apple management. Not as long as Steve's health issues are hanging over our heads. There will still be enough worriers that the stock will be depressed compared to what might have been. (That's not to say I think it's going down from here. It will go up... just perhaps not as much as if Steve's health was good.)
Eventually, Steve will be gone from Apple (hopefully long from now, but regardless...) and then people will see how strong the company truly is. But for now, the fear of that imminence is hanging over the stock, and no words about titles and succession plans post-Steve are going to calm those fears.
Well, I think you may agree with me more than you realize. My thinking is that Apple should take the health issue off the agenda by making it a moot point. At the moment I think the markets are concerned that Apple isn't taking the issue of leadership seriously, as something demanding attention. The lizard brain of the market is always looking for signs of weakness, a chink in the armor. This slow twisting in the wind sure looks like one, even to me, and I wish I could think otherwise.
I think we mostly agree in general but this is an area where I wholeheartedly agree. It's not just the company narrative that is drowned out but also attention potentially diverted from product launches.
I am still hoping that Steve's absence will be short and that he will pass the reins shortly after his return. It is interesting to imagine what type of chairman Jobs will be without also holding the CEO title.
A relatively powerful one, I suspect. The board was effectively picked by him, and I believe would remain quite deferential. Perhaps too much so, in fact.
I don't think it's fully appreciated how much Steve's health issues have taken over the narrative about Apple. Every company, even one as high-profile as Apple, gets only so much bandwidth to get their message across. In Apple's case, you can see how much of it is absorbed by speculation about Steve's condition. Just look at the recent stories about their earnings report -- half of most of them don't talk so much about products or profits, as about Steve's cancer. Over time, that has a corrosive affect, as the story that Apple is nothing without Steve sounds more and more valid, and is virtually endorsed by Apple through its actions and inactions.
But this is exactly the point. Apple are keeping the Job's health story as minimal as possible. Can you imagine the media furore that would/will erupt if/when Cook was/is announced as CEO?
It may may be the topic of conversation of serious investors but in the real world it is not having an effect on sales. Apple is not particularly focussed on investors - as long as growth is maintained that's pretty much the end of their obligations as far as they are concerned.
AAPL is at 338 right now. With the all time high at 348, it's down less than three percent from that. Sure it may go up even more, but it seems a bit ridiculous to paint the current price as a low somehow.
2024 rolls around... 20 fantastic new products and services have been added since 2011... Apple still adds 50% year over year... forward p/e = 12.37, trailing p/e = 14.94
One analyst to another analyst,
"hmmmm... AAPL sure looks like a good buy but I remember when they tanked a couple of times in the 80s and 90s and I'm not sure if the 12 years that has passed since Jobs was CEO is enough time to see if the new management team has the right stuff..."
In your 2024 scenario, Apple will have over $19 trillion in revenue. The absurdity of that number alone should tell you why Wall Street does not believe that the growth rate is sustainable. The only way they hit $19 trillion in revenue is if the dollar collapses and we have high double digit inflation, which would also make Wall Street rather unhappy. No one in their right mind would buy AAPL thinking it will sustain 50% annual growth for the next 10+ years.
I wasn't estimating the size of the investment world, just the size of the investment community that is not already highly invested in AAPL. Funds are not allowed (by their own bylaws, by federal law, and/or by their risk ratings) from putting more than X% into any given security. And a lot of folks have taken money out of securities since the big recession. And there's a lot less leverage out there to run up bubbles than there was 10 years ago. That means that the perceived risk of having "all your eggs in one basket" starts to be a greater and greater reason any given fund chooses not to invest in Apple. Since that risk has nothing to do with Apple's fundamentals, I would expect to see the stock price growth increasingly diverge from the earnings growth.
Yes, you are massively underestimating the size of the investment world. There are thousands of funds that do not hold a single AAPL share. Equity markets alone are hundreds of trillions even today. To reach a point where they run out of potential investors, they would need to be 100 times bigger than they are today.
But this is exactly the point. Apple are keeping the Job's health story as minimal as possible. Can you imagine the media furore that would/will erupt if/when Cook was/is announced as CEO?
It may may be the topic of conversation of serious investors but in the real world it is not having an effect on sales. Apple is not particularly focussed on investors - as long as growth is maintained that's pretty much the end of their obligations as far as they are concerned.
If that's the plan, it sure isn't working. When information is lacking, rumor and speculation fills the void -- and that's exactly what's happening here. Then questions arise as to whether Apple has provided accurate information to investors, what little they have provided. The SEC is investigating that one now. So not necessary.
Investors appreciate companies with stable leaderships. In Apple's case, that calls for a change. Putting it off is not wearing well, especially after three years of questions without answers. If Apple named Cook as CEO and Steve as chair, the markets might gasp, but they'd get over it pretty quickly. Steve wouldn't be going away, just moving to a position that better suits his ability to work. Stories would be written about how Cook is one of Steve's hand-picked lieutenants, his heir apparent, and has been actually running the company for years now. It wouldn't take long for the storyline to change. As the song goes, the waiting is the hardest part.
In your 2024 scenario, Apple will have over $19 trillion in revenue. The absurdity of that number alone should tell you why Wall Street does not believe that the growth rate is sustainable. The only way they hit $19 trillion in revenue is if the dollar collapses and we have high double digit inflation, which would also make Wall Street rather unhappy. No one in their right mind would buy AAPL thinking it will sustain 50% annual growth for the next 10+ years.
I think it's fairly funny that you actually took the time to calculate the earnings in my scenario...
I'm not thinking two years out as much as I'm thinking two or three back. If AAPL today had even the very modest PEG of 1.0, then the stock would be selling for well over $400 a share right now. I'm not sure it's possible to find a historical chart of PEG, but I'm guessing it hasn't been much over 1.0 at any time in the last three years, which means that investors are consistently discounting earnings growth. It's becoming the AAPL storyline, and storylines are hard to change.
Well, using the PEG as a guideline makes sense only if you assume that one can extrapolate growth into the future. I think that there are two reasons why investors are reluctant to do that:
(1) They fear the law of large numbers, so they are reluctant to assume further growth, and
(2) They fear that Steve is going to die relatively soon (there, I said it) and that Apple will then stop banging out killer new products to grow the business.
Both of these premises are wrong on so many levels (even if, God forbid, Steve does indeed pass) but these fears exist and are the primary reasons, IMO, why Apple's multiple is being compressed. Neither will be addressed by the communication you seek. Both uncertainties will remain.
Quote:
Originally Posted by Dr Millmoss
Well, I think you may agree with me more than you realize.
Oh, I agree with you a great deal. There is only one thing I disagree with, and it makes all of the difference in our conclusions. Here it is...
Quote:
Originally Posted by Dr Millmoss
My thinking is that Apple should take the health issue off the agenda by making it a moot point.
My thinking is that the market's true fear is not one of "leadership" in the traditional sense, i.e. one that can be addressed by succession plans, titles, declared job descriptions, etc. I believe that the market fears that Jobs brings something intangible, unique, and utterly irreplaceable to Apple's future earnings.
In other words, I think that there is nothing that Apple can do to make this issue moot.
Time will bring the truth, and IMO time will show that Apple will continue to grow earnings tremendously for the next few years, in spite of the two fears I listed above. The market will, in turn, retroactively reward AAPL with a higher share price, but I don't think the multiple will get much higher. (Not unless the entire market goes into hype mode again, like the dot com era, or the housing boom.) The good news is that if you are a person with some additional spending cash, and you realize that the market is not forward looking enough, you can capitalize on the situation by buying a little AAPL along the way (while it is still under appreciated). Dollar cost averaging will work nicely through the Jobs health-related dips and put you ahead on the other side.
Investors appreciate companies with stable leaderships. In Apple's case, that calls for a change. Putting it off is not wearing well, especially after three years of questions without answers. If Apple named Cook as CEO and Steve as chair, the markets might gasp, but they'd get over it pretty quickly. Steve wouldn't be going away, just moving to a position that better suits his ability to work. Stories would be written about how Cook is one of Steve's hand-picked lieutenants, his heir apparent, and has been actually running the company for years now. It wouldn't take long for the storyline to change. As the song goes, the waiting is the hardest part.
Who doesn't already believe that Tim Cook would be a superb CEO, in the traditional sense of the title? Who doesn't know that he has already been performing in such a capacity for years, with Steve pulling the duties of Grand Master Strategist unmatched by any other CEO? Who doesn't already believe that Tim Cook IS the heir apparent? Who believes that Apple without Jobs will be as good as Apple with Jobs?
It is the last question that is really debatable, really matters, and is the source of all of the uncertainty. The other questions are posed because people want to be polite and not come out and say it: investors are afraid Steve Jobs is going to disappear completely... and relatively soon.
Who doesn't already believe that Tim Cook would be a superb CEO, in the traditional sense of the title? Who doesn't know that he has already been performing in such a capacity for years, with Steve pulling the duties of Grand Master Strategist unmatched by any other CEO? Who doesn't already believe that Tim Cook IS the heir apparent? Who believes that Apple without Jobs will be as good as Apple with Jobs?
It is the last question that is really debatable, really matters, and is the source of all of the uncertainty. The other questions are posed because people want to be polite and not come out and say it: investors are afraid Steve Jobs is going to disappear completely... and relatively soon.
Thompson
Since this essentially summarizes your other points... Let me say I think we can read the same tea leaves different ways and neither of us will know who was right until the thing happens. That said, my approach tends to be historically biased, so take that as you will. To wit:
Every successful company goes through a transition from founders to successors. The ones that make the transition smoothly go forward to further success. Others never figure this out and fade. We've seen both scenarios play out with Apple, as it happens. Their first attempt was botched and nearly fatal. Apple is now getting a rare second chance to do it right. If you ask me, they're presently getting at best a C- for their efforts. It seems the hand on the tiller is weak, and perhaps that they're trying too hard to keep Steve in the CEO spot even though everyone who cares to knows that he hasn't really been filling that office for some time. That looks indecisive, no matter how you cut it. Maybe even indifferent, which is much worse.
As for PEG, I was looking backwards, not forwards. The PEG for AAPL has been low for years. Investors began to discount earnings growth a long time ago, when earnings were probably half or less what they are now. As you say, it only gets harder to keep earnings growing at this rate. I'm afraid much of the appreciation we might have seen over the last few years has already been lost.
Ticonderoga Securities' $550 price target is based on an earnings per share estimate plus net cash per share of $63.98. White's numbers equate to a straight price-to-earnings ratio of 22x....
The average P/E ratio for Apple prior to the Great Recession was 30. The Friday before their Q1 2011 earnings, Apple hit $348/share and had a P\\E of 23. Today, their shares were about $341/share but the P/E ratio has dropped to 19.
It doesn't take a lot of analysis to figure out that Apple's shares are devalued primarily because of the recession. As the recession clears, I look for Apple's shares to revalue back towards 30.
Note that I said "towards". Right now, to regain a P/E ratio of 23 the stock price would have to increase by 21%. But Apple's not just sitting around. Next quarter they will add both to their earnngs and their cash, probably by the traditional blowout.
The question is, how is it even going to be remotely possible to catch up to that historic P/E of 30, if this is the earning power of Apple at the tail end of the worst recession since the Great Depression? And yet, until it does, the market will by definition by vastly discounting Apple stock.
And don't fool yourself; the smart money is acutely aware of this. There will be plenty of investment capital to drive Apple well past $1,000/share.
Comments
I don't have any serious doubts about Cook's ability to run Apple. In fact, the evidence is, for all intents and purposes, that he has been running Apple for the last couple of years possibly. I'm saying that it's beginning to look like Steve will try to hang on until it's obvious to everyone that Apple needs to have a CEO who can be on campus full time, and the issue gets forced. This is not a radical idea -- it's an entirely normal and pragmatic one for business. Lots of talented businesspeople had to know when the time was right to allow someone else to step up. The message we're getting from Apple now is "not yet." So the natural question is, "why not yet?"
I hear what you are saying, but I don't think that's really the prime influence on the stock, do you? I think it pales in comparison to what I was speaking of. I think that most people believe Apple's daily operations are fine in the hands of the management team sans Steve. But I think not enough people realize that Apple won't need another killer product for several years in order to grow earnings. (This harkens back to the earlier topic.) People actually believe that another killer product is required in order for Apple to keep it's mojo, and many people believe that Steve is required for the genesis of killer products. (The truth of the matter is not as important as the perception, when it comes to the stock market.)
I felt I was quite specific in my suggestions.
I do too, which is what I ultimately said, and is why I addressed them. (The other comment about people not being specific was aimed at all of those folks - most of them actually - that are not being specific.)
I'm concerned not with tomorrow or next week or even next month. If Apple announced tomorrow that Cook is now CEO and Steve is staying on as the chair of the board, I suspect that the initial market reaction would verge on panic. But over a matter of months, if not less, the reality would sink in that maybe Apple isn't really a cult of personality dressed up as a corporation, that it really does have a solid culture and talented leadership team, which has been overshadowed by Steve and his rock star status.
I believe that, and you believe that, but I think a significant enough fraction of people don't believe it strongly enough, so...
I think all this fretting, which is being artificially prolonged, would come to an end.
I disagree, regardless of any communication we get from Apple management. Not as long as Steve's health issues are hanging over our heads. There will still be enough worriers that the stock will be depressed compared to what might have been. (That's not to say I think it's going down from here. It will go up... just perhaps not as much as if Steve's health was good.)
Eventually, Steve will be gone from Apple (hopefully long from now, but regardless...) and then people will see how strong the company truly is. But for now, the fear of that imminence is hanging over the stock, and no words about titles and succession plans post-Steve are going to calm those fears.
Thompson
I don't think it's fully appreciated how much Steve's health issues have taken over the narrative about Apple. Every company, even one as high-profile as Apple, gets only so much bandwidth to get their message across. In Apple's case, you can see how much of it is absorbed by speculation about Steve's condition. Just look at the recent stories about their earnings report -- half of most of them don't talk so much about products or profits, as about Steve's cancer. Over time, that has a corrosive affect, as the story that Apple is nothing without Steve sounds more and more valid, and is virtually endorsed by Apple through its actions and inactions.
I think we mostly agree in general but this is an area where I wholeheartedly agree. It's not just the company narrative that is drowned out but also attention potentially diverted from product launches.
I am still hoping that Steve's absence will be short and that he will pass the reins shortly after his return. It is interesting to imagine what type of chairman Jobs will be without also holding the CEO title.
I disagree, regardless of any communication we get from Apple management. Not as long as Steve's health issues are hanging over our heads. There will still be enough worriers that the stock will be depressed compared to what might have been. (That's not to say I think it's going down from here. It will go up... just perhaps not as much as if Steve's health was good.)
Eventually, Steve will be gone from Apple (hopefully long from now, but regardless...) and then people will see how strong the company truly is. But for now, the fear of that imminence is hanging over the stock, and no words about titles and succession plans post-Steve are going to calm those fears.
I wish they'd worry a bit more. The day Apple announced Steve's leave, I said that I'd be 'in' big if the stock hit $310. I'm still waiting.
I have great confidence in Apple long-term but I think this year is likely to be a roller coaster ride.
I wish they'd worry a bit more. The day Apple announced Steve's leave, I said that I'd be 'in' big if the stock hit $310. I'm still waiting.
I have great confidence in Apple long-term but I think this year is likely to be a roller coaster ride.
$310 may be a bridge too far. While a stock price seems arbitrary, it is actually fairly loosely connected to the performance of the company. And given Apple's earnings performance, $310 would put the stock price at the all time Apple low relative to performance. Simply put, there's not much negative juice to squeeze out of that lemon for any reason. The Steve Jobs' handicap as well as the "Law of Large Numbers" handicap are already in full force, as amply demonstrated by last week's announcement and rapid recovery.
Thompson
I hear what you are saying, but I don't think that's really the prime influence on the stock, do you? I think it pales in comparison to what I was speaking of. I think that most people believe Apple's daily operations are fine in the hands of the management team sans Steve. But I think not enough people realize that Apple won't need another killer product for several years in order to grow earnings. (This harkens back to the earlier topic.) People actually believe that another killer product is required in order for Apple to keep it's mojo, and many people believe that Steve is required for the genesis of killer products. (The truth of the matter is not as important as the perception, when it comes to the stock market.)
Not the prime influence, no -- but arguably the principal one which keeps the valuation down. I mean, I think some theory is needed to explain it. I can't think of another that accounts for the last several years of declining multiples. It isn't a short-term trend, and about the only major theme I can find which persists over that period of time is the anxiety over Steve's health. It's the only constant detractor in what has otherwise been a picture so rosy that it's almost ridiculous.
I'm not thinking two years out as much as I'm thinking two or three back. If AAPL today had even the very modest PEG of 1.0, then the stock would be selling for well over $400 a share right now. I'm not sure it's possible to find a historical chart of PEG, but I'm guessing it hasn't been much over 1.0 at any time in the last three years, which means that investors are consistently discounting earnings growth. It's becoming the AAPL storyline, and storylines are hard to change.
I disagree, regardless of any communication we get from Apple management. Not as long as Steve's health issues are hanging over our heads. There will still be enough worriers that the stock will be depressed compared to what might have been. (That's not to say I think it's going down from here. It will go up... just perhaps not as much as if Steve's health was good.)
Eventually, Steve will be gone from Apple (hopefully long from now, but regardless...) and then people will see how strong the company truly is. But for now, the fear of that imminence is hanging over the stock, and no words about titles and succession plans post-Steve are going to calm those fears.
Well, I think you may agree with me more than you realize. My thinking is that Apple should take the health issue off the agenda by making it a moot point. At the moment I think the markets are concerned that Apple isn't taking the issue of leadership seriously, as something demanding attention. The lizard brain of the market is always looking for signs of weakness, a chink in the armor. This slow twisting in the wind sure looks like one, even to me, and I wish I could think otherwise.
I think we mostly agree in general but this is an area where I wholeheartedly agree. It's not just the company narrative that is drowned out but also attention potentially diverted from product launches.
I am still hoping that Steve's absence will be short and that he will pass the reins shortly after his return. It is interesting to imagine what type of chairman Jobs will be without also holding the CEO title.
A relatively powerful one, I suspect. The board was effectively picked by him, and I believe would remain quite deferential. Perhaps too much so, in fact.
I don't think it's fully appreciated how much Steve's health issues have taken over the narrative about Apple. Every company, even one as high-profile as Apple, gets only so much bandwidth to get their message across. In Apple's case, you can see how much of it is absorbed by speculation about Steve's condition. Just look at the recent stories about their earnings report -- half of most of them don't talk so much about products or profits, as about Steve's cancer. Over time, that has a corrosive affect, as the story that Apple is nothing without Steve sounds more and more valid, and is virtually endorsed by Apple through its actions and inactions.
But this is exactly the point. Apple are keeping the Job's health story as minimal as possible. Can you imagine the media furore that would/will erupt if/when Cook was/is announced as CEO?
It may may be the topic of conversation of serious investors but in the real world it is not having an effect on sales. Apple is not particularly focussed on investors - as long as growth is maintained that's pretty much the end of their obligations as far as they are concerned.
AAPL is at 338 right now. With the all time high at 348, it's down less than three percent from that. Sure it may go up even more, but it seems a bit ridiculous to paint the current price as a low somehow.
2024 rolls around... 20 fantastic new products and services have been added since 2011... Apple still adds 50% year over year... forward p/e = 12.37, trailing p/e = 14.94
One analyst to another analyst,
"hmmmm... AAPL sure looks like a good buy but I remember when they tanked a couple of times in the 80s and 90s and I'm not sure if the 12 years that has passed since Jobs was CEO is enough time to see if the new management team has the right stuff..."
In your 2024 scenario, Apple will have over $19 trillion in revenue. The absurdity of that number alone should tell you why Wall Street does not believe that the growth rate is sustainable. The only way they hit $19 trillion in revenue is if the dollar collapses and we have high double digit inflation, which would also make Wall Street rather unhappy. No one in their right mind would buy AAPL thinking it will sustain 50% annual growth for the next 10+ years.
I wasn't estimating the size of the investment world, just the size of the investment community that is not already highly invested in AAPL. Funds are not allowed (by their own bylaws, by federal law, and/or by their risk ratings) from putting more than X% into any given security. And a lot of folks have taken money out of securities since the big recession. And there's a lot less leverage out there to run up bubbles than there was 10 years ago. That means that the perceived risk of having "all your eggs in one basket" starts to be a greater and greater reason any given fund chooses not to invest in Apple. Since that risk has nothing to do with Apple's fundamentals, I would expect to see the stock price growth increasingly diverge from the earnings growth.
Yes, you are massively underestimating the size of the investment world. There are thousands of funds that do not hold a single AAPL share. Equity markets alone are hundreds of trillions even today. To reach a point where they run out of potential investors, they would need to be 100 times bigger than they are today.
But this is exactly the point. Apple are keeping the Job's health story as minimal as possible. Can you imagine the media furore that would/will erupt if/when Cook was/is announced as CEO?
It may may be the topic of conversation of serious investors but in the real world it is not having an effect on sales. Apple is not particularly focussed on investors - as long as growth is maintained that's pretty much the end of their obligations as far as they are concerned.
If that's the plan, it sure isn't working. When information is lacking, rumor and speculation fills the void -- and that's exactly what's happening here. Then questions arise as to whether Apple has provided accurate information to investors, what little they have provided. The SEC is investigating that one now. So not necessary.
Investors appreciate companies with stable leaderships. In Apple's case, that calls for a change. Putting it off is not wearing well, especially after three years of questions without answers. If Apple named Cook as CEO and Steve as chair, the markets might gasp, but they'd get over it pretty quickly. Steve wouldn't be going away, just moving to a position that better suits his ability to work. Stories would be written about how Cook is one of Steve's hand-picked lieutenants, his heir apparent, and has been actually running the company for years now. It wouldn't take long for the storyline to change. As the song goes, the waiting is the hardest part.
In your 2024 scenario, Apple will have over $19 trillion in revenue. The absurdity of that number alone should tell you why Wall Street does not believe that the growth rate is sustainable. The only way they hit $19 trillion in revenue is if the dollar collapses and we have high double digit inflation, which would also make Wall Street rather unhappy. No one in their right mind would buy AAPL thinking it will sustain 50% annual growth for the next 10+ years.
I think it's fairly funny that you actually took the time to calculate the earnings in my scenario...
I'm not thinking two years out as much as I'm thinking two or three back. If AAPL today had even the very modest PEG of 1.0, then the stock would be selling for well over $400 a share right now. I'm not sure it's possible to find a historical chart of PEG, but I'm guessing it hasn't been much over 1.0 at any time in the last three years, which means that investors are consistently discounting earnings growth. It's becoming the AAPL storyline, and storylines are hard to change.
Well, using the PEG as a guideline makes sense only if you assume that one can extrapolate growth into the future. I think that there are two reasons why investors are reluctant to do that:
(1) They fear the law of large numbers, so they are reluctant to assume further growth, and
(2) They fear that Steve is going to die relatively soon (there, I said it) and that Apple will then stop banging out killer new products to grow the business.
Both of these premises are wrong on so many levels (even if, God forbid, Steve does indeed pass) but these fears exist and are the primary reasons, IMO, why Apple's multiple is being compressed. Neither will be addressed by the communication you seek. Both uncertainties will remain.
Well, I think you may agree with me more than you realize.
Oh, I agree with you a great deal. There is only one thing I disagree with, and it makes all of the difference in our conclusions. Here it is...
My thinking is that Apple should take the health issue off the agenda by making it a moot point.
My thinking is that the market's true fear is not one of "leadership" in the traditional sense, i.e. one that can be addressed by succession plans, titles, declared job descriptions, etc. I believe that the market fears that Jobs brings something intangible, unique, and utterly irreplaceable to Apple's future earnings.
In other words, I think that there is nothing that Apple can do to make this issue moot.
Time will bring the truth, and IMO time will show that Apple will continue to grow earnings tremendously for the next few years, in spite of the two fears I listed above. The market will, in turn, retroactively reward AAPL with a higher share price, but I don't think the multiple will get much higher. (Not unless the entire market goes into hype mode again, like the dot com era, or the housing boom.) The good news is that if you are a person with some additional spending cash, and you realize that the market is not forward looking enough, you can capitalize on the situation by buying a little AAPL along the way (while it is still under appreciated). Dollar cost averaging will work nicely through the Jobs health-related dips and put you ahead on the other side.
Thompson
Investors appreciate companies with stable leaderships. In Apple's case, that calls for a change. Putting it off is not wearing well, especially after three years of questions without answers. If Apple named Cook as CEO and Steve as chair, the markets might gasp, but they'd get over it pretty quickly. Steve wouldn't be going away, just moving to a position that better suits his ability to work. Stories would be written about how Cook is one of Steve's hand-picked lieutenants, his heir apparent, and has been actually running the company for years now. It wouldn't take long for the storyline to change. As the song goes, the waiting is the hardest part.
Who doesn't already believe that Tim Cook would be a superb CEO, in the traditional sense of the title? Who doesn't know that he has already been performing in such a capacity for years, with Steve pulling the duties of Grand Master Strategist unmatched by any other CEO? Who doesn't already believe that Tim Cook IS the heir apparent? Who believes that Apple without Jobs will be as good as Apple with Jobs?
It is the last question that is really debatable, really matters, and is the source of all of the uncertainty. The other questions are posed because people want to be polite and not come out and say it: investors are afraid Steve Jobs is going to disappear completely... and relatively soon.
Thompson
Who doesn't already believe that Tim Cook would be a superb CEO, in the traditional sense of the title? Who doesn't know that he has already been performing in such a capacity for years, with Steve pulling the duties of Grand Master Strategist unmatched by any other CEO? Who doesn't already believe that Tim Cook IS the heir apparent? Who believes that Apple without Jobs will be as good as Apple with Jobs?
It is the last question that is really debatable, really matters, and is the source of all of the uncertainty. The other questions are posed because people want to be polite and not come out and say it: investors are afraid Steve Jobs is going to disappear completely... and relatively soon.
Thompson
Since this essentially summarizes your other points... Let me say I think we can read the same tea leaves different ways and neither of us will know who was right until the thing happens. That said, my approach tends to be historically biased, so take that as you will. To wit:
Every successful company goes through a transition from founders to successors. The ones that make the transition smoothly go forward to further success. Others never figure this out and fade. We've seen both scenarios play out with Apple, as it happens. Their first attempt was botched and nearly fatal. Apple is now getting a rare second chance to do it right. If you ask me, they're presently getting at best a C- for their efforts. It seems the hand on the tiller is weak, and perhaps that they're trying too hard to keep Steve in the CEO spot even though everyone who cares to knows that he hasn't really been filling that office for some time. That looks indecisive, no matter how you cut it. Maybe even indifferent, which is much worse.
As for PEG, I was looking backwards, not forwards. The PEG for AAPL has been low for years. Investors began to discount earnings growth a long time ago, when earnings were probably half or less what they are now. As you say, it only gets harder to keep earnings growing at this rate. I'm afraid much of the appreciation we might have seen over the last few years has already been lost.
Ticonderoga Securities' $550 price target is based on an earnings per share estimate plus net cash per share of $63.98. White's numbers equate to a straight price-to-earnings ratio of 22x....
The average P/E ratio for Apple prior to the Great Recession was 30. The Friday before their Q1 2011 earnings, Apple hit $348/share and had a P\\E of 23. Today, their shares were about $341/share but the P/E ratio has dropped to 19.
It doesn't take a lot of analysis to figure out that Apple's shares are devalued primarily because of the recession. As the recession clears, I look for Apple's shares to revalue back towards 30.
Note that I said "towards". Right now, to regain a P/E ratio of 23 the stock price would have to increase by 21%. But Apple's not just sitting around. Next quarter they will add both to their earnngs and their cash, probably by the traditional blowout.
The question is, how is it even going to be remotely possible to catch up to that historic P/E of 30, if this is the earning power of Apple at the tail end of the worst recession since the Great Depression? And yet, until it does, the market will by definition by vastly discounting Apple stock.
And don't fool yourself; the smart money is acutely aware of this. There will be plenty of investment capital to drive Apple well past $1,000/share.