Apple Inc. (AAPL)

[GOB]

When consumer sentiment to this type of electronic changes and as competitors produce at increasing scale and decreasing cost. We can already see that Samsung has reached this scale now and is selling as many smartphones as Apple.

Android now has double the market of Apple worldwide after starting from nil in 2009.

The competitors have already caught up to the point that Apple devices are not superior anymore in any major way according to many of the review sites.

Anyhow, my argument is largely historical - it has happened to every other device in consumer electronics. There are no real moats in this field. Something is hot for awhile and then something else comes along and steals a good chunk of the market. I think Motorola has had about 3 cycles on top of this market and maybe they'll rise again now that they are being absorbed within Google.

This is obviously the overhang on this stock. Otherwise growth stocks don't trade with these metrics - it never happens. It has happened because the market doesn't believe Apple's dominance and margins will be sustainable in the long run. This belief keeps this stock down.

The problem with your argument is that Apple has never settled for average market margins for any of their product lines. The iPhone is now over 5 years old and getting higher margins than ever. There is no basis to forecast a drastic drop in margins - people have been doing this for years and continue to be wrong. How long has Apple been selling computers and laptops and how are their margins on those doing? Still fantastic last time I checked. The phrase that all devices suffer from margin compression may be true but it doesn't happen in a couple of years, and there are always iterations and the odd revolutionary update that justifies maintaining margins, at least in Apple's case.

Apple most certainly does have a moat. It is total product integration. There is no better experience than owning a Mac, iPhone and iPad (and AppleTV, possibly iTV?) that all work seamlessly together with iCloud and iMessage. People will say you can create an equivalent experience with Android but even if true I doubt more than a tiny fraction know how or would even bother. The appeal of Apple products is how well and how effortlessly they work to provide a meaningful user experience. This is a very real moat - billions of dollars have been put into its creation and I don't think there is a single company that has the resources to match it. Every time an Apple device is sold, or a song or app on iTunes is bought, it creates a huge incentive for that user to buy another Apple product, either in addition to or to replace their existing device. The strength of Apple's moat is highly undervalued.

Some people prefer Android because it is more "open" but this benefit to some creates huge fragmentation issues and inhibits a complete vertical integration strategy from being possible. Citing Android marketshare numbers is a silly argument. It's like saying Toyota doesn't do well because they don't sell more cars than all other vendors combined. Apple's marketshare is what it is - they sell every phone they can make and that's all that really matters. Marketshare jumps every time there's a new release because they have built up some inventory for a huge launch. This shows that demand far outweighs supply and that margins are likely to stay high for the foreseeable future.

Another thing that can throw a wrench into Android is the ongoing litigation. There is a very real chance Android loses important patent battles against Oracle or Apple and has to either strip features or pay royalties. These royalties will be passed on to the vendors forcing them to increase cost and reducing their competitiveness.

[PMREdmonton]

If I am wrong, why is Apple's PEG so ridiculously low for an established technology company?

[GOB]

A low PEG does not prove you right - there can be any number of other reasons why it may be so.

- inefficient market
- people are unsure of Apple without Jobs (and with a sick Jobs when he was alive)
- people have never seen a megacap grow so fast so don't know how to value it
- people are equating Apple with the tech bubble a decade ago, not understanding that P/E ratios were astronomical back then and below historical averages right now
- people take market share numbers much too seriously without realizing Apple has 80% of the profit share of the smartphone market
- people equate the phrase "Apple cannot grow forever" (true) with "Apple will stop growing immediately" (false)
- Apple's enormous growth has forced index rebalancing which has had an effect on share price

A low PEG just shows what a solid investment AAPL is right now. PEG was low $200 ago and you would have made the same argument back then. I'm not saying Apple has zero risks, but they are far more secure than most other companies. The low PEG is absolutely unjustified. Apple is priced as if they will stop growing immediately - it isn't priced for a perfect situation with ridiculous high margins and growth in perpetuity.

If you are justifying your argument based on Apple's low PEG you are basically saying the market is completely efficient and always correct. If that's the case, what are you doing here?

There has never been a company this big that grows this fast. Understandably, some people are worried and think it's a bubble, unsustainable, etc. The numbers say otherwise. As the money continues to roll in, the stock will rise accordingly. It will probably always have a lower than appropriate PEG, but that just makes it a safer investment in my eyes.

These are very simple concepts to me, and you might wonder why the professionals don't get it. It's a real head scratcher, but they have been off the mark consistently for years on end. Their thoughts and valuations on Apple are basically meaningless at this point.

[MrMatt]

Apple most certainly does have a moat. It is total product integration. There is no better experience than owning a Mac, iPhone and iPad (and AppleTV, possibly iTV?) that all work seamlessly together with iCloud and iMessage.
....
Some people prefer Android because it is more "open" but this benefit to some creates huge fragmentation issues and inhibits a complete vertical integration strategy from being possible. Citing Android marketshare numbers is a silly argument. It's like saying Toyota doesn't do well because they don't sell more cars than all other vendors combined.
.....
Another thing that can throw a wrench into Android is the ongoing litigation. There is a very real chance Android loses important patent battles against Oracle or Apple and has to either strip features or pay royalties. These royalties will be passed on to the vendors forcing them to increase cost and reducing their competitiveness.

Apple has 2 moats, coolness and what you call product integration.
Apple is really cool, they manage their image exceptionally well. They told people they have cool easy to use product, and people believe it.
I personally find their products expensive, very difficult and confusing to use.

The product integration is ok, netflix on my phone or computer keep the same list and monitor the positions, netscape would sync bookmarks and browsing history between different computers, and that was long before people talked about "the cloud".
The product lock in is a big one, and today nobody seems to think that's an issue, but it's growing. Microsoft has benefited hugely from the MS office lock in, which has been preventing serious competition for decades. But there are groups fighting this, and they're starting to have real success now. This type of moat makes the company greedy and lazy, and that's the second largest risk to Apple, the first is when they become uncool.

Android is partially open, but look at Microsofts success, a relatively open IBM, with Microsoft software led to a huge mess of different hardware companies running their software. It is only now that Apple is looking competative, most other competitors dropped away years ago. Counting Android market share by number of devices makes sense for people selling to Android devices. If they were selling to Samsung Android devices maybe that would matter, but they're selling to Android in General. Even BluRay vs DVD marketshare they talk about the format penetration, not which companies device they have.
The other thing with multiple venders, there are hundreds of different Android based options to fit different needs. You want a larger phone, a smaller one, one with a keyboard, a waterproof and ruggedized one, you're only option is to get an Android based one because Apple doesn't make them.

Litigation is a distraction. Oracle wants money, they don't want to kill Google and give Apple the computer industry. Apple would like to kill their competition, but that simply won't happen

[PMREdmonton]

Apple gets a low PEG because the market does not believe it is sustainable in the long-term.

Yes, I know markets are often inefficient but this is what the market is saying and the market although occasionally inefficient does have this tendency to be right most of the time.

Apple will see margin compression in the next couple of years but their stock will not get crushed too much because they are starting off with a low EV/EBITDA ratio unlike most growth stocks so I am happy to ride along when I think the valuation is proper. It got a bit frothy recently when it went up into the early 600s and I had to hop off. It is now getting back to a more justifiable valuation and I may jump back on soon. However, I am skittish with this one because history has always shown that consumer electronics is a commodity market. Apple has brand recognition and vertical integration but so does Google and now that Jobs is gone I think Google's people are better than Apple's and will eventually dominate the field. Their move to take over Motorola was a high stakes bid to get in and vertically integrate in the mobile sphere and they along with Samsung now have the ability to compete with Apple.

I see Mororola and Samsung growing in the mobile sphere and challenging Apple and their will be major price compression in the mobile electronics field. Once stronger competitors are available it will not make sense for the telcos to subsidize the iphone to the extent that they do and they are bleeding hard right now from it and I'm sure resent it. This will be tough on Apple's stock valuation. In regions of the developed world without telco subsidies Apple holds a 9% market share, not a 30% share in the smartphone market.

Don't get me wrong - I like the stock, it was a double for me. I think it still has some legs but it got very frothy with a very quick 70% gain from 360 in November to 640 in April and got extremely overbought. Some air had to come out. Some has come out and some more may come out depending on earnings. However, I am cautious long-term about Apple's pricing powers and thus its future market cap. I'm not the only one - this is the opinion of most of the market at some level as reflected by not giving Apple a proper PEG for a reliable, profitable, high FCF, low debt growth company. They should have a PEG of about 1.3 or so instead of a PEG of 0.3 or so. The market says they don't believe the growth will be there long-term in profits. Only time will tell but there is that saying about the 5 most dangerous words in investing - this time it is different.

Good luck. I may be hopping on via put tomorrow with the April 27 strike at 550.

[kcowan]

This belief keeps this stock down.

What is your forecast for the market top then?

[GOB]

Apple gets a low PEG because the market does not believe it is sustainable in the long-term.

Yes, I know markets are often inefficient but this is what the market is saying and the market although occasionally inefficient does have this tendency to be right most of the time.

Apple will see margin compression in the next couple of years but their stock will not get crushed too much because they are starting off with a low EV/EBITDA ratio unlike most growth stocks so I am happy to ride along when I think the valuation is proper. It got a bit frothy recently when it went up into the early 600s and I had to hop off. It is now getting back to a more justifiable valuation and I may jump back on soon. However, I am skittish with this one because history has always shown that consumer electronics is a commodity market. Apple has brand recognition and vertical integration but so does Google and now that Jobs is gone I think Google's people are better than Apple's and will eventually dominate the field. Their move to take over Motorola was a high stakes bid to get in and vertically integrate in the mobile sphere and they along with Samsung now have the ability to compete with Apple.

I see Mororola and Samsung growing in the mobile sphere and challenging Apple and their will be major price compression in the mobile electronics field. Once stronger competitors are available it will not make sense for the telcos to subsidize the iphone to the extent that they do and they are bleeding hard right now from it and I'm sure resent it. This will be tough on Apple's stock valuation. In regions of the developed world without telco subsidies Apple holds a 9% market share, not a 30% share in the smartphone market.

Don't get me wrong - I like the stock, it was a double for me. I think it still has some legs but it got very frothy with a very quick 70% gain from 360 in November to 640 in April and got extremely overbought. Some air had to come out. Some has come out and some more may come out depending on earnings. However, I am cautious long-term about Apple's pricing powers and thus its future market cap. I'm not the only one - this is the opinion of most of the market at some level as reflected by not giving Apple a proper PEG for a reliable, profitable, high FCF, low debt growth company. They should have a PEG of about 1.3 or so instead of a PEG of 0.3 or so. The market says they don't believe the growth will be there long-term in profits. Only time will tell but there is that saying about the 5 most dangerous words in investing - this time it is different.

Good luck. I may be hopping on via put tomorrow with the April 27 strike at 550.

The market can believe what they like. History has shown that the market does not understand Apple. The market is giving LNKD a 1000 P/E - are you going to hop on board? Surely they must know something, right? I am in the investing game to find opportunities in stocks that are mispriced by the market - aren't you? Again, the low PEG has been there for a while, before the latest leg up. If you stayed out of the stock because of that, you'd be regretting it. This is the first time I've heard of a low PEG being a negative - it's ridiculous. Are you saying you'd be more comfortable owning AAPL if the PEG was 2? It's silly. I am not saying Apple is going to grow infinitely, but it's quite clear the growth isn't over by a long shot, and the stock can easily double from here.

According to your logic, any stock that is reflecting extreme undervaluation should be avoided or shorted because the market is doing it for a reason. If that's the case, investing would be a lot easier than it is. I gave you several reasons why the PEG may be low that is not related to future growth - do you not believe any of them may be a factor?

Again, your prediction of margins coming down significantly in two years has zero basis. Macs and laptops have been around over a decade and haven't seen margin compression. iPhones have been around 5 years and haven't seen it. iPads are the only desirable tablet on the market and are just a couple of years old. What exactly is going to catalyze a sudden rapid compression of margins? It's not like there hasn't been competition already. Many of Apple's competitors are already surviving on razor thin margins and can't afford to drop prices much further. This in turn allows Apple to maintain their pricing. They simply operate much more efficiently that everyone else and that is a huge factor in their high margins. It's not like their phones sell for twice as much as everyone else's - any phone that can be compared to the iPhone is priced around the same.

Regarding the acquisition of Motorola - I'd say that's a move that reeks of desperation. Who in their right mind would pay $11 billion for a company that lost $80 million last quarter in the mobile sector? Apple would never do such a stupid thing, because they trust that their people are better than anyone else's. The only acquisitions they make are for smallish or startup companies with unique technologies or moves to enhance their supply chain. That sounds like a much better strategy to me - and they have yet to drop $1 billion on a single acquisition. History has shown large mergers and acquisitions usually do not turn out well - why are you choosing to ignore history here but pound it in case of Apple?

[humble_pie]

ummm ... edmonton ... the april options expired 2 days ago. Option expiry occurs on the 3rd friday of each month.

[GOB]

I think he's referring to the weekly option

[humble_pie]

you're probably right.

it wouldn't normally occur to me that an option newcomer would commence by fooling around with a close-to-the-money weekly put ...

however, he has thought of buying a hedge, so that's good.