Here's something to chew on.Apple is a company with a long and colorful history and an ownership structure that has changed frequently. However despite having "invented the PC", it has not delivered much value to shareholders. The stock traded in the low 20's (split adjuested) in 1987, and is currently around 34, a CAGR of less than 3%, not counting dividends (they haven't paid a dividend since 1995). MSFT's has been around 27% during that time.No Apple insider owns more than a token amount of shares. Jobs has the largest insider position at about 1.67%, but it is based almost solely on a 5 million share grant by management (i.e. none of his own money is at risk). Virtually all of the other insider ownership is by virtue of stock options. Apple is not and has never been a shareholder oriented company.Throughout its history Apple has pursued business policies that seem geared to ensure that Apple never expands its markets and always caters to a very small minority of the market (typically 4-6%). While they have always innovated, they have always pursued "closed" technologies that render their hardware and software incompatible with that of other vendors. Their pattern has been to innovate a new product, reap the success for a few years, and then lose their advantage as other vendors copy their product and pursue open architechtures. Apple has recently seen a lot of success with both the iPod and iTunes. They were the first mover in these markets and to date is the only vendor that has put serious money into advertising (there was a good article about this in Friday's WSJ). As a result, they are selling more iPods than comptuers. All of the numbers for iTunes aren't available, but it looks like Apple is either breaking even or making a modest profit. The iTunes sales seem to drive the sales of their iPod.However, many other heavy hitters are getting into both markets. Microsoft, Yahoo, Real Networks, Sony, etc. are all making plans to sell music online and sell gizmos that play the music.In typical form, Apple's iTunes and iPod products are based on a closed architecture -- Apple has their own file format incompatible with mp3's. Also typical is that most of their competitors are rolling out products based on standards -- not only the mp3 standard, but Windows as well (Apple's iPod works with Windows but in an inferior fashion).I think that Apple's profits from iTunes and iPod are cresting and they are or near the peak of their "sawtooth function". I think the new entrants will figure out the forumla that will take away Apple's market share and in a few years Apple will be back to their typical 5-10% of the market (they are currently the market leader for handheld mp3 players).How is their core business doing? Well the market seems to have forgotten that Apple recently reported manufacturing problems that will prevent them from rolling out a new iMac. This has to do with both IBM and Intel having trouble breaking the 90 nm barrier. This will cause them to miss the very lucrative and important back to school market this year.Why is the stock up? It seems to be up because of Apple's recently announced partnership with HP to manufacture iPods.However I've seen this play before. About 10 years ago, when Steve Jobs ran a company called NeXT, he manufactured high end workstations with their own proprietary software and hardware. Sales never went beyond a token amount, but at the very low peak of what sales there were, Jobs signed a partnership with HP. HP agreed to manufacture NeXT-branded workstations. The deal was a complete flop, and it turns out that it was struck right when the market's limited interest in the technology was peaking.While the iPod is doing far better than any NeXT product ever did, HP has brand new to the mp3 player market. Why didn't Apple team up with a heavy hitter like Sony or Yahoo? Probaby because of their famous inability to open up their architectures for the "rest of the world" to use.I don't think the partnership will do anything to either expand Apple's sales base or fend off the new competition. Most likely it will cannibalize their existing sales channels.Despite all of this, AAPL is trading at a P/E of 62. It is arguable whether or not they are actually producing any cash since their cap ex typically runs at more than net income + depreciation.I think it's likely that AAPL will post disappointing results over the next two quarters since they are missing the back to school market and have yet to resolve their manufacturing problems. I also think both the profits and the hype of their online music products is cresting and will diminish over the next few quarters. And because I see not only a lack of growth but a possible contraction, the 62 P/E seems absurdly high.So, not that I like shorting stocks, but AAPL is on my "short list"...Comments?T
nice write up !I'm sure apple has no value. i have a tendency not to short companies that make stuff people love. I know people who can't look at a PC anymore after they get a mac. Ipod - who doesnt love that thing. Shorting needs a catalyst. So if apple comes u with new exciting products all the time, and wall street loves jobs, the stock won't go down that fast. I'd much rather short something that has no sex appeal. It's probably gonna go down anyway though :) with the rest of this market. How about your 62 P/E? I assume you got it on yahoo. What's their "adjusted P/E" according to the most optimistic scenario? Maybe it's closer to 20 or 30. how bout a quick DCF calculation? I guess it's probably pretty overvalued if you were to do that. Actually..it probably has no value..if the CAGR is less than 3%. But they arn't going BK are they...bottom line IMO sex appeal a tough short.vg
Forbes just had a write-up on Apple, saying the market cap was around $11 billion and the breakup value was around $15 billion.With $5 billion in cash it seems like they'll be able to hang around for a while.I think you're 100% correct that it's overvalued, but I don't see why that couldn't continue for a while.
Shorting needs a catalystWell, let's discuss the valuation before getting into the risks of shorting. That said, I think that at least one of the next four quarters is going to be pretty disappointing for Apple.How about your 62 P/E? I assume you got it on yahoo. What's their "adjusted P/E" according to the most optimistic scenario? Well, TTM P/E according to Yahoo is 62. Their last 10-Q shows $170M of net income over the prior 9 months. Annualized that on a market cap of $13.26B and you get a P/E of around 58.The top line for their PC sales has been about flat for 3 years. It's the iPod that has provided the growth, about 145% YoY from 2002 to 2003. My premise is that the fun times for iPod sales are shortly going to come to an end as major new competition comes in over the next two quarters.Maybe it's closer to 20 or 30I don't see net income doubling or tripling over the next 12 months if that is what you mean.how bout a quick DCF calculation?Remember that Apple is both a manufacturer and a retailer, has substantial cap ex for both of those segments. In 2003, net income was $69, depreciation/amortization $113, and cap ex $164M. Using just those numbers that is $18M of free cash flow in 2003... with a market cap of $13.26B, that is 736x free cash flow...In the "don't get me started" category, $92M of the cap ex was to maintain their museum-like retail store facilities. If you have been into an Apple store, you know that they must be among the least efficient retail locations in terms of sales per square foot. They sure look nice though...But they arn't going BK are they...No, but what is a fair value for $250M of net income with modest growth? I don't think it's $13B.T
you have to adjust the market cap for the cash on the books.....
you have to adjust the market cap for the cash on the books..... This is an interesting topic. So I'll ask: why?What are the chances that shareholders will ever see that cash, either in the form of a dividend, share buyback, or accreditive acquisition? I think the answer is, very low. This goes back to the shareholder orientation (or lack thereof) of Apple management and their attitude towards cash reserves.So, unless something very unusual happens in Apple's executive team or strategic direction, I'm valuing the surplus cash on the books as nought.T
This is an interesting topic. So I'll ask: why?ahhh careful, we are looking at AAPL as a potential short, not a potential long, so you have to reverse everything.Normally, in a long position, conservatism means assuming:- that management is not as nice as one would hope. - that they won't return cash to shareholders unless they really said so and mean it- that they won't have any great products in the future (unless you got clear proof that the pipeline is full)So with a short position, conservatism means assuming:- that management are not as bad as it looks- that they might after all hand over the cash- that they might all of a sudden have a great idea and come up with a good product- that they might decide to take less stock options next yearetc etc..so if you do that with apple, and mix in this crazy place called wall street that has loved steve jobs for so long, i don't see what's so attractive here. I'm not talking about "the risks of shorting" - I'm talking about "the risks of shorting AAPL".ok ok...sorry...let's go on to valuation.Well, TTM P/E according to Yahoo is 62. Their last 10-Q shows $170M of net income over the prior 9 months. Annualized that on a market cap of $13.26B and you get a P/E of around 58.I don't see net income doubling or tripling over the next 12 months if that is what you mean.no no..what i mean is, for example, taking their P/S ratio and dividing it by an average net margin number appropriate for AAPL (because earnings are volatile). P/S is 1.73. Assuming a net margin of 4%, that's a P/E of 40+. So I agree, it's pretty overvalued. vg
umm every company has a value even the ones you hate. the textbooks say add back the cash on the books. btw, I agree with your thesis. however, that cash is real and would be used by an acquier to help buy the company outright. it could also be used to acquire another company or pay a dividend or buy back shares. It is a part of the valuation. even in the worst of times, apple didn't burn a lot of cash. another problem for the shorts is that the ITUNES/IPOD service could continue to get a "funny" valuation from the bubble heads cuz it sure is cuhl.
http://www.guardian.co.uk/microsoft/Story/0,2763,1296442,00.htmlhttp://www.reuters.com/newsArticle.jhtml?type=internetNews&storyID=6138532Going head to head with Microsoft AND Wal-Mart has GOT to make the Apple execs optimistic...T
Jeez glad I didn't put my money where my mouth was.But the higher the stock gets, the more interesting it gets as a short...T
there is some bubble blowing going on right now. You can see this in the new issues market. This makes aapl a dangerous short right now. Its a story stock now with IPOD, and investors think Jobs walks on water right now. To be fair, he HAS hit a home run in Music, doing a much better job than his competition. And he has a track record of success with Pixar, a stock that has confounded the shorts for years. I think IPOD/ITUNES has about an 18mo lead on the competition, which are at about win 3.1 right now. ;-) So, as long as they have a sexy story they can latch onto, investors could care less about the problems on the computer side. And Music is it. Having said that, if you are pretty adept at identifying frothy tops, aapl seems an ideal target to exploit the downside when this echo bubble pops.
Okay I'm glad I didn't short Apple.The product announcements today are interesting. They announced a "Mac Mini", which is headless (i.e. PC only, no monitor or keyboard) for $500. And it is a little square 6.5" on a side, only a little bigger than a CD player.They also announced a mini iPod (even smaller than the previous mini iPod) for $100, which works by USB. This eliminates one restriction imposed by the iPod which needs a firewire port.These are both solid entrants into the low end of the market IMHO. The Mac Mini is intended to get people to switch from Windows (i.e. they should already have a keyboard and monitor).This really fills out their product suite, and there are a lot of integrated products in the $100-600 range. This is a big departure from the "high right" marketing strategy that Apple pursued up until a few years ago.I still don't think they are worth 100x earnings (or even 70x earnings), but it should be interesting to see how things play out over the next year or two...T
just got an ipod mini and was surprised to learn thatit comes with a usb 2.0 connector for use on my PC....
just got an ipod mini and was surprised to learn thatit comes with a usb 2.0 connector for use on my PC.... I am a little behind the times, but I recently came across this:http://www.memoryxflash.com/store/catalog/1GB-USB-20-Flash-Drive-1GB-USB-Pen-Drive-Memory.htmlImagine, a 1GB drive that plugs into your USB port and fits in your pocket, and which has no moving parts, for $90. I've seen them cheaper too. If you took one of these back 10 years, nobody would believe it. So you can probably store every file you've edited over the past 5 years on one of these drives.I don't know how durable these are, but this makes for an interesting backup solution. Buy two of them and keep one in a safety deposit box, and swap them every few weeks.T
T,I don't short anything, but Value Line projects AAPL will be worth 25-40 in 3-5 years, and I regard that as a generous assessment.AAPL closed today at 64.56.But hey, I own LVLT so what do I know?Mark
In August I wrote:Well, TTM P/E according to Yahoo is 62. Their last 10-Q shows $170M of net income over the prior 9 months. Annualized that on a market cap of $13.26B and you get a P/E of around 58Here are some numbers from the past 5 quarters. Apple's fiscal year ends in September, so the quarter ended 12/25/2004 is actually Q1 2005. Dollar amounts in millions, unit volume in thousands. Q1'04 Q2'04 Q3'04 Q4'04 Q1'05 12/27/03 3/27/04 6/26/04 9/25/04 12/25/04 -------- ------- ------- ------- --------Total Net Sales 2006 1909 2014 2350 3490Total Net Income 63 46 61 106 295total mac net sales 1269 1160 1263 1231 1605ipod net sales 256 264 249 537 1211mac units (000's) 829 749 876 836 1046ipod units (000's) 733 807 860 2016 4580diluted share count (M) 372 378 393 387 419pp&e cap ex 44 35 38 59 58As amazing as it is, Apple sold more iPods in Q1 2005 than they did in all of Q4! The same is true of net income -- $295M in Q1 2005 and $276M in all of 2004.iPod net sales as a % of total sales has gone from 12% to 35%. PP&E cap ex went from 70% of net income to 20%. So PP&E is not ramping up with iPod sales, so this shows true owner earnings. iPods are a huge profit center.So I guess this explains the jump in Apple's stock price. The most recent quarter looks like a totally different quarter than Q1 2004.It is a good thing I didn't short two quarters ago, because never in a million years would I have predicted this kind of growth in iPod sales. The gains so far have been nonlinear.The primary question then is how sustainable iPod sales are. If they can maintain this level of sales and earnings, $295M of recurring income is $1.2B per year, putting their forward P/E at just 30.While I'm amazed at the growth in iPod sales, I do not think this is sustainable. I am very curious to see what happens over the next couple of quarters.T
Q1'04 Q2'04 Q3'04 Q4'04 Q1'05 12/27/03 3/27/04 6/26/04 9/25/04 12/25/04 -------- ------- ------- ------- --------Total Net Sales 2006 1909 2014 2350 3490Total Net Income 63 46 61 106 295total mac net sales 1269 1160 1263 1231 1605ipod net sales 256 264 249 537 1211mac units (000's) 829 749 876 836 1046ipod units (000's) 733 807 860 2016 4580diluted share count (M) 372 378 393 387 419pp&e cap ex 44 35 38 59 58
Well, with today's news about Steve Jobs retiring as CEO and with Apple briefly reaching the world's largest market cap status, maybe Tiddman wasn't wrong just early by about 7 years.Sorry for the jab T, just poking some fun on a dead board.JuntoWisdomAAPL - P.O.S. to Zero
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