“It may not appear to be the case, but throughout this volatile period [2005-today], the investment thesis remained fairly constant: Apple is a rather small collection of product bets. Owning Apple meant riding the iPod or the iPhone or the iPad as waves of growth. As soon as one growth wave was seen to start to fade, investors would say the same thing: Apple is done,” Horace Deidu writes for Asymco. “The investment thesis is the same today. I’ve had dozens of conversations with fund managers and if anything, it’s even more about betting on products. The iPhone and the iPad make up such a large part of profits that the company seems to be nothing but those two things. So if there is any hint that those products might slow down, the stock is sold off.”
“What intrigues me about this investment thesis is not whether the signals of growth are interpreted correctly or not, but rather that an investor in Apple in 2006 was considered perfectly rational valuing Apple as an iPod company as much as an investor today is perfectly rational valuing Apple as an iPhone company,” Deidu writes. “Why would anyone buy Apple for any other reason? There is no evidence that Apple can be anything more. Any fund manager positing a different point of view would surely be limiting her credibility.”
Deidu writes, “The consensus is that the value of future, unknown products is zero. Not only that but the probability that there will be any products at all is equally zero. Not only that but whatever Apple does to create new products is not perceptibly valuable. The company is simply the sum-of-the-product-parts and nothing more. Cash flows from current products can easily be shown to be more than the current valuation so even these products are deeply discounted. If and when a new product shows up, it will be considered and maybe if it shows promise, the stock will reflect that, briefly.”
“That’s like valuing Pixar on the box office revenues of its current movie,” Deidu writes. “If Cars 2 is not beating records, Pixar is suddenly nearly worthless. The fact that Pixar repeatably creates blockbusters would be seen as meaningless. The way they built a reliable pipeline with predictable cost structures for movie-making is not interesting.”
Much more in the full article – very highly recommended – here.
[Thanks to MacDailyNews Reader “Fred Mertz” for the heads up.]
I have recently began to work in a major investment firm and one of the most striking character handicaps shared by the vast majority of my colleagues is a singular lack of curiosity and imagination (and, consequently, of big picture thinking). Everyone has their noses glued so close to their screens that anyone with the ability for decent insight begins to appear like a visionary genius in contrast (along the lines of Mary Meeker).
Ignoring Apple’s capacity to innovate, therefore, is highly unfortunate but hardly surprising. If it cannot be adequately integrated into a valuation model, it does not exist…
The devaluation of the company itself, outside of product revenue streams, is a vestige from when the company did, in fact, have little value. Popular products popped up, people bought, believed, and invested in them, but there’s something about the company that people continue to perceive as luck, which is perishable.
After Steve Jobs died, more than one pundit posited the company itself as his greatest invention. Only time will tell if there’s something to that. There are a lot of signs that there is, but you can’t ignore the insecurity percolating around the Apple minus its leader and products (i.e. the future).
The next few years will probably be key.
Running a TOST analysis (taking emerging markets and potential new products into account), adjusted for PBAJ can sometimes go beyond even an exhaustive BACN analysis. I suppose thing thing to remember is incorporating everything from LATTE to PEA curves, so that ephemeral data is expressed in more than descriptive notes. I find a CAKE graph particularly helpful.
Could your post be any more opaque? There are words there that I recognise, and letters, but the overall meaning is totally lost on me. Must be the use of technical acronyms that have zero meaning outside of a particularly narrow discipline, rendering the whole post utterly meaningless.
I like the whole idea of considering cake while i think of AAPL, since PIE and CBLR are not my dessert or choice….
Sorry. Occupational hazard.
Essentially, Apple, like every company, has an intrinsic value. On top of that, the product lines have a value, and many things impact the value.
Initially, Apple’s intrinsic value was very low. Product lines acquired value, although the intrinsic value remained anachronistically low.
This is an insightful article because it points that out. You’d expect the value of the underlying company to increase more than it has based on the value of its products.
Imagine, for example, boats rising on a sea, but the sea not rising as fast as the boats. That’s Apple.
OUCH
It seems to me that the real value of a tech company is the ingenuity of its people. Apple is rich in this area. I guess the fact that the suits don’t see it will create investment opportunities for the rest of us?
Horace Deidu is a rational thinker. That’s quite refreshing in the modern, knee-jerk, follow your gut mentality of reporting, finance, and politics. One size does not fit all, nor does one solution. Reward hardly ever comes without risk, and then only when someone screws up. You get the picture. I am in favor of rational judgment and a willingness to test your own beliefs and theories against the facts and reality.
Form hypothesis.
Test hypothesis.
Evaluate results.
Repeat.
You Sir are a radical! That kind of thinking is just unheard of!!!!
But to be serious for a moment. The hypothesis part does require a bit of intuition. The problem with so much of the fractured world we live in is that NO ONE IS WILLING TO RETHINK THEIR OWN THINKING!!!!!! No one is willing to say hey, there are these binary points of view and maybe, just maybe a synthesis of the two makes the most sense.
You’re either Artsy or a Geek but god forbid that you are a synthesis both!!! You either go with your gut or product test the thing into blandness.
I think that Apple, despite Job’s ability to call something crap or the best thing he’s ever seen, is very capable of taking what seems like a binary choice between art and technology and synthesized something new which at it’s core explains their success.
The same can be said for how these “professional” investors are looking at AAPL. All they can see are the numbers and the trends that they signal. They don’t know how to quantify the none-binary choices that Apple keeps making.
” The problem with so much of the fractured world we live in is that NO ONE IS WILLING TO RETHINK THEIR OWN THINKING!!!!!”
This. Excellent point. The social and institutional inertia that helps gives society stability is an anathema to moving forward intellectually, to the point where correct ideas are suppressed to keep the status quo. Throw in politicians pandering to fears of change and the comfort of “traditional” yet flat out wrong ideologies and you have a recipe for the.current US political situation.
Fund managers don’t give a damn about innovation or quality. They’re just greedy jackasses. It’s plain to see that they’re only interested in their own money-grubbing ideas about products and what they mean to consumers. If it were up to fund managers, they’d have companies selling the cheapest crap that wouldn’t last longer than a couple of months use. Hedge funds are ruining the American economy due to their short-sightedness. They don’t seem to like to wait for companies developing long-term strategies. Instantaneous huge market share is the only thing that matters to them so they can turn quick profits. I wish those hedge funds would go away but those people are running the country’s financial movement and there’s no way to stop them from having control.
I honestly don’t see how they can see a company like Amazon as being a better investment than Apple, but they do. Amazon’s fortunes could be as fleeting as any other company if some other company came along and started undercutting its prices. Apple has been more resistant to being undercut by cheaper products as far as profitability is concerned. I suppose fund managers are only interested in making money and they don’t really care at all about the companies and individuals that make up a company.
Sadly, our financial culture doesn’t reward innovation. The only sure way for Apple to please those greedy assholes would be to start laying off people.
Windows boxes= value
Innovation=nothing
This thinking is ruining the country.
The economic model of this country is flawed. It only values what appears in the income statements. You can’t put a price on Apple future development so it’s non-existant. For another example look at a wetland. It cleans air and water. Provides habitat for fish and wildlife. Offers a place for outdoor recreational activities. And produces $0.00 to the GDP. Now drain that land and put up a strip mall and now you have something America can put value in.
These asshats still worship Bill Gates and look at M$ for leadership.
Stupid as stupid goes. Hell, 85% of the world population haven’t been able to extract their head out of Ballmers rectum.
Apple has so much documented facts regarding their innovations, right down to the very icons that everyone has aped, or how files are moved around to be placed in folder or the hard drive. A good site is folklore.org
Where is MS that shows what BG, Balldy and their team details their innovation?
The full article is very well thought out and a great read to think about.
Steve Jobs was a very detailed driven future thinking person. Does anyone really think Steve Jobs didn’t build and plan out the future of Apple knowing he had only a short time to live? Really! No plans worked out. No people trained and in place? No map to Steve Jobs vision of where Apple is going? Really! These talking heads really do not understand who Steve Jobs was? It isn’t like he was taken out by a heart attack or a bus.
Apple’s products, devices and services have a great future. Value it or don’t, like a tsunami, it is here with more to come!
The current investor view is driven by digital gaming where a false move sends you back a level. Risk management at funds is very tricky these days. And AAPL is a popular stock for shorting. And how can mere mortals that can only play games and not invent them understand that Apple can innovate endlessly? TV is next. Movies and gyms Apple could then buy AT&T with their checkbook and totally control the cloud. Apple hasn’t touched autos, refrigerators, home environment and safety, banking (buy Visa, Apple!), VOTING!! . Fund managers’ imaginations run to the dreaded scenarios not the optimism scenarios. If you look at most funds, they just can’t beat the market. Apple beats the market in everything. How can they expect to understand that kind of thinking?
Fund managers have the Wall Street complex. They are well-schooled in the use of financial gimmicks and other questionable evaluation techniques to rate the viability of a company. Apple have not followed the gospel of Wall Street education that says that companies should: 1) need to be highly leverage; 2) should assume huge debts to pursue growth; 3) should be a commodity producer to gain market share; 4) should place accountants on a higher pedestal than relevant managers and engineers; 5) should make human assets as commodity.
It’s no wonder the US is slipping down the totem pole of innovation and leadership. The blind are leading the blind on to the path of mediocrity and irrelevancy.