Tag Archives: AAPL

what’s wrong with AAPL?

January 15, 2013 By in growth vs value, Industry Analysis, Stock ideas, Technology, Wireless Tags: , , , , , , , Leave a comment

AAPL shares have been steadily underperforming the S&P 500 since late September, losing 30% of their value relative to the index over this span.

I think several factors are involved:

1.  potential income tax law changes.

In the recent debate over increasing tax rates, suggestions were circulating that the tax preference on long-term capital gains vs. ordinary income should be eliminated.  That would have raised the Federal tax on long-term gains from 15% to over 40%.  The worry that this would happen was the trigger for taxable AAPL holders with large profits (meaning just about everyone) to realize at least part of their gains in 2012.

I think this was a big reason for downward pressure on AAPL shares during 4Q12.  However, the relative weakness has continued pretty consistently so far in 2013, other than during the first couple of hours of trading in the new year.  So it can’t be the whole reason.

2. a slowdown in iPhone 5 sales?

 Component suppliers to AAPL have been saying for a month or so that the company is deferring orders for iPhone 5 parts.  The latest such announcement comes in the Nikkei newspapers in Japan, usually an extremely reliable source.  AAPL orders to Japanese makers of  iPhone 5 screens for 1Q13 have supposedly been halved to 33 million (I read about it online and in the WSJ and FT).

In itself, this is not such a big deal, in my view.  It’s not clear whether AAPL has excess inventories or whether it’s shifting business to alternate suppliers in, say, Taiwan or mainland China.  And it’s also possible that any slowdown will only last a quarter or two.  I don’t know, but it’s possible.

3.  Who are the new buyers?    

This is one of those odd stock market phenomena.

Individuals and hedge funds caught on to the AAPL  story before many mutual funds.  But the damage to relative performance from not owning AAPL, or from having less than the market weighting became so severe that virtually every mainstream professional has already been forced to build a huge position in the stock.

So who’s left to buy?  Almost no one, in my view.

In fact, early supporters, who have enjoyed outperformance for most of a decade from holding a lot of AAPL must be thinking that the way to distinguish themselves from rivals today is to be underweight the stock.  This can happen in two ways–either by selling shares of AAPL or by just not buying any more as new money comes in.

Maybe this sounds a little crazy to you, but I think this is the main issue the stock is struggling with today.

4.  Is the AAPL growth story “broken”?  

Typically as a growth stock continues to report surprisingly strong earnings, its stock price moves sharply higher.

Two reasons:

–the market adjusts to the higher level of profits and

–the price earnings multiple expands, as investors raise their expectations for future growth.

As earnings begin to disappoint, as they sooner or later must, this process goes into reverse.  The stock price adjusts to lower current earnings and the price earnings multiple, usually sky-high by this time, begins to contract.  Multiple contraction is, in my view, the worse of the two.

AAPL’s case is unusual, however (in fact, it’s the only stock I’ve seen exhibit this behavior).

The company’s earnings are 10x what they were five years ago.  During the entire earnings expansion, however, AAPL’s PE has been contracting.  Yes, an accounting change may have caused part of this.  Still, the stock traded at 30x earnings in 2008 and trades at 12x now!  In other words, a slowdown in growth has been baked into this Wall Street cake for a long time.

I don’t think there’s any expectation in today’s stock price that AAPL will ever produce another spectacular product like the iPod or the iPhone.  As I read it, the current quote expresses doubt that AAPL will be able to defend its market position against competitors like Samsung.  That seems a little harsh to me   ..but I haven’t done careful research to convince myself that this is the case.

 

 

 

 

demise of the e-reader: implications

December 27, 2012 By in Current Market Thoughts, e-readers, Entertainment, Industry Analysis, Publishing, Stock ideas Tags: , , , , , , , , , , Leave a comment

e-reader sales

A Christmas Eve Financial Times article indicates that while e-reader sales in 2012 will still be robust, the category may be on the brink of a rapid decline in popularity.  Its source is IHS iSuppli.   I’ve found the data in a graph from emarketer.com (note the convoluted chain of attribution–PSI cites emarketer, which in turn cites CNET citing IHS).

The reason for the falloff?   …the rise of light, powerful cheap multi-function tablets, which can serve as e-readers as well as do a lot of other stuff, for within a reasonable distance of the price of a dedicated e-reader alone.  This development wouldn’t be surprising, since the multi-function smartphone has replaced the dedicated music player for many users.

(The above is what I see as the consensus view. It’s not a unanimous one, though.   The Market Intelligence and Consulting Institute, which presumably has special insight into the Taiwanese companies that actually make the e-readers, predicts a bounceback in sales for 2013.  So we should at least keep in mind that the consensus may not be correct.)

Implications, if the FT is right?

In a world where the decision on what merchant to buy an e-book from hinges on what dedicated e-reader you own, the firm with the largest number of e-readers in circulation (Amazon) should be the dominant factor.  Other, non-compatible e-reader makers, like Barnes and Noble, should have small relative market shares.  Other would-be booksellers are footnotes, at best.

The game changes substantially, I think, if the key decision becomes what app the potential buyer has on his tablet.  That’s because any customer can download a new book app with a couple of taps.  Unlike the case with music, where users may want to construct playlists, it probably doesn’t matter much whether one’s entire library is on one app or several.  So the key factor in the purchase decision probably comes down to price.

It’s possible that AMZN can develop a tablet that’s the full equivalent of a Samsung or Google offering.  The performance of the Kindle Fire suggests that’s not likely.  But, if it can, perhaps AMZN can preserve its “ecosystem” with avid readers for a while longer.  And in doing so it would be able to bar the download of other booksellers’ apps onto its machines.

Personally, I doubt Barnes and Noble will be able to create a viable tablet.  Yes, it does have its alliance with MSFT.  But that only seems to me to guarantee that BKS can have the Zune of tablets.

AAPL is in an unusual position.  Its strategy has been to generate superior profits by selling up-market devices at premium prices.  Does it want to compete in the (eventual) $100 tablet market?  My off-the-cuff guess is that it doesn’t.  By default, this makes AAPL less of a player in the e-book market.

On the one hand, this would make the big publishers’ alliance with AAPL of a few years ago look extremely short-sighted.  On the other, it creates the opportunity for them to have a common app that bypasses both BKS and AMZN.

the stocks?

Any restructuring book distribution by cutting out dedicated e-readers is obviously not a reason for the companies that control the e-reader market to celebrate.  The biggest single loser, I think, is potentially BKS, since AMZN has 3x the market share in e-books that BKS has.  It isn’t that AMZN escapes the change unscathed.  But it already has lower prices than BKS; its large relative size gives it another big advantage in the price-drive. environment I think will develop.  Also, it’s not clear that AAPL will abandon the up-market strategy that snatched it out of the jaws of bankruptcy to become a serious competitor in the mass tablet market.

All in all, I score the situation as a net plus for AMZN.

The wildcard is potential new competitors who might be able do offer superior app performance.

AAPL: problems of size

October 9, 2012 By in Constructing a Portfolio, Current Market Thoughts, Portfolio management, Position sizes, Securities regulation, Stock ideas Tags: , , , , , , Leave a comment

the behemoth

APPL shares now make up about 5% of the capitalization of the S&P 500.  A single share of AAPL sells for over $600.  Both characteristics present headwinds for AAPL’s performance, in my view.  The latter is a minor one, the former somewhat more serious.

Let’s start with the stock price.

the round lot syndrome

Individual investors in the US prefer to buy shares in round lots, normally 100 shares.  A generation ago, when the commission on odd lots (anything less than a round lot) was higher than for round lots, this made a modicum of sense.  Not so now, when flat $7 or $8 commissions are the norm for any number of shares bought or sold through discount brokers.

Professional investors, who think in terms of dollar amount rather than share count, don’t have this hangup.

Nevertheless, the psychological allure to individuals of buying 100 shares remains, as well as the stigma attached to purchasing 8 or 27 or some other “strange” amount.  And the reality is that AAPL has to a large extent been driven by individuals.  For investors unwilling to commit $60,000+ to one stock, then, AAPL shares are priced out of their reach.

a stock split?

There’s a simple, practical solution to this issue.  AAPL could have a stock split, something it did in 1987, 2000 and 2005.

My guess is that a 2:1 or 3:1 (or 10:1) split would add 10% to the stock price.

Why?  The shares would be more affordable to individuals with the round lot mentality.  In addition, the company would be signaling that it cares about its shareholders.

Why is AAPL hesitating?  Who knows.  My take is that management wants to be seen as obsessively focused on creating new products, not on catering to the whims of Wall Street.

professional investors’ position sizes

Growth investors in the US typically hold 50 or so stocks in their portfolios.  Their value counterparts usually have at least 100.  This means that for a professional growth investor, holding a S&P 500 index weighting in APPL requires making the position 2.5x the size he’s accustomed do.  For a value investor, a market weight for AAPL in the portfolio is a whopping 5x his average position size.

To be sure, all professionals have overweights–positions whose portfolio size exceeds the benchmark index weighting.  But these are usually a 3% or 4% position for growth investors, and 1.5% or 2% positions for value investors.

For almost everyone a 5% position is off-the-charts risky.  It’s conceptually very easy to underweight the name, but very hard to overweight it.

not a problem outside the US

Investors in non-US markets don’t have this psychological/operational problem.  Most other markets have at least one giant corporation whose weight can easily be 10% of the index.  Many times, it’s higher.

In most cases, the very large company is also very mature and slow-growing.   A typical strategy is to “neutralize” or equal-weight the stock in the portfolio (so that nothing the stock does will either harm of benefit the portfolio vs. the index) and attempt to make money elsewhere.

I suspect this is the tack US professionals are increasingly taking toward AAPL–equal-weight and forget.

the 5% rule

The 5% rule is an SEC-mandated diversification requirement for equity mutual funds.  It has two provisions:

1.  A manager can’t make a purchase of a stock that would cause the position size to exceed 5% of the fund assets.  This is only about buying.  There’s no need to reduce the position if it goes up a lot or if other positions shrink (which could happen either all by themselves or from the manager selling).  You just can’t add to a 5% position.

2. 25% of the portfolio is exempted from this requirement.  This exception is big enough to drive an 18-wheeler through.  The manager can basically do anything he wants in one-quarter of the portfolio, but is bound by the 5% rule for the rest.

Psychological issues aside, this should leave lots of room for mutual fund managers to hold a ton of AAPL. While that’s true, the other side of the coin is that the SEC has in effect linked prudent investing with having positions that are 5% of assets or smaller.  Bigger is bad.  Plus, the actual 5% rule sounds weird and is hard to explain.

The result has been that the idea of having no positions bigger than 5% has leaked into fund operating and monitoring procedures.  It’s also become part of the descriptions of investment process given to potential investors.  And it’s also in contracts with institutional investors (I don’t know how widely, though).  So the manager may be buying a lot of headaches if he continues to grow his AAPL position.

to sum up

AAPL can fix the round lot issue.

On the position size score, old habits die hard.  The 5% size is institutionalized as a maximum.  No one wants to rewrite contracts, primarily for fear the client will also want to rewrite the fee structure downward.

I don’t think any of this means AAPL will necessarily be a bad stock, either.  But I do think we’re at the point where the tailwind of professional investors having to build AAPL positions or else underperform is changing into a headwind caused by the stock’s large size.

There’s stuff AAPL can do to address this issue, too, but let’s see a stock split before taking up that topic.

thinking about the iPhone 5 launch

September 28, 2012 By in Current Market Thoughts, Industry Analysis, internet, Stock ideas, Technology, Wireless Tags: , , , , , , , Leave a comment

Thinking about the iPhone 5 is, for me, a good way of focusing on the question of where APPL goes from here.  My conclusions in this post are preliminary enough that I haven’t documented what I’m writing in the way I would usually.

Here goes:

importance of the iPhone

The iPhone is by far APPL’s largest and most profitable product, accounting for over half the company’s gross  income.  It generates huge upfront cash from device sales (Industry estimates are that the iPhone 5 costs about $200 to make.  It sells for $650.).  In addition, APPL gets a percentage of the recurring fees the wireless networks charge their iPhone customers.  It also gets a big chunk of the money iPhone users spend on apps, books and periodicals.

On top of all that, the iPhone has replaced the iPod and the Mac as the iconic APPL device–the one that powers the brand name and motivates customers to buy the newest/best in the whole range of AAPL products.

the iPhone 5

–in many ways, it’s a “me, too” product.  Its most important new features, like larger screen size and LTE network access, have already been available on Android phones for a while.  Yes, Siri is apparently better (could she be worse?) and you can take panoramic photos, but still…

I don’t think this is necessarily a bad sign.  It probably signals, instead, that AAPL thinks that significant future hardware changes will be harder to come by, and easier to copy, than ever before.  Therefore, competition between iOS and Android (Google/Samsung) will play out on other fronts.

–AAPL is offering proprietary mapping services, provided by a wholly-owned, newly acquired, subsidiary.   GOOG maps are gone.

All the initial publicity is about how the new AAPL maps are, at present, not up to snuff.  I think they soon will be.  One might say that Safari and iWork aren’t great confidence builders, but they’re parts of what is now a small legacy business for AAPL.  I think there will be a lot more emphasis 1 Infinite Loop on getting maps right.

More important, AAPL may see proprietary apps as the next big phone differentiator.  This could be the way AAPL would like to steer the smartphone business, or it could simply be the way it diagnoses the competitive environment will evolve, whether the company wants it that way or not.

If so, rapid improvements with Siri and maps, as well as new proprietary apps will be keys to watch for.

–the iPhone 5 appears to have fewer Samsung parts in it.  If so, this is probably another facet of the intercompany competition highlighted by recent copyright litigation between the two.  To me, this would imply making a foundry-like deal with INTC as the logical next step.  For INTC, this might mean a better chance to have its proprietary processors (not just foundry output) appear in AAPL phones.

–the iPhone 5 appears to work on more networks than the one a customer contracts with.  According to one report I’ve read, changing the tiny sim card inside the phone will enable it to work on either T or VZ networks.  It may be capable of working on other networks as well.

If so, why have this feature?

There may be some manufacturing efficiencies, but I don’t imagine that’s the reason.

As the smartphone business matures, and assuming APPL wants to retain its upscale image, the company faces the issue of motivating customers in the developed world to buy a new $650 phone every two years.  At the same time, the price of the iPhone is far too high for all but the wealthiest users in the developing world to afford.  So the biggest growth area for smartphones would seem to be closed out to it.

Suppose, however, you could “recycle” used iPhones by buying them from T or VZ for, say, $100, replacing the sim card and furnishing them to a telecom carrier in the developing world?  Then you could expand your user base–and the associated income stream from carrier charges and apps etc.–without being forced to manufacture a cut-rate phone for the developing world that would threaten to dent your upmarket image.  You’d also be giving the developed world user a $$$ reason to upgrade.

Something to watch.

my bottom line

The best growth companies re-invent themselves every few years.  AAPL has already gone through several evolutions, from Mac company to iPod company to iPhone/iPad company.  The next turn of the wheel may be to become predominantly a software developer and usage royalty generator.  If that process is already under way–and if it’s successful–there may still be a lot more growth in AAPL than the consensus expects.

I don’t think there’s anything built into today’s AAPL price for the possibility.  I don’t think may people are thinking about it, either.  There’s a temptation to conclude that owning AAPL gives you a free call on the potential upside. In assessing downside risk if something like this doesn’t happen, however, the relevant question is whether AAPL becomes a MSFT (and just drifts) or a RIMM (and plummets).

thinking about tablets–and ecosystems

August 9, 2012 By in Industry Analysis, internet, Publishing, Technology, Wireless Tags: , , , , , Leave a comment

my tablet

I’ve owned a iPad for several months.  I use it much more than I expected.  I’d use it even more than I do, but the AAPL “walled garden” prevents me.

My only real complaint is that the wi-fi chips AAPL uses in its tablets appear to be relatively weak, so mine (a “new” iPad) often wants to make a cellular connection.  My wife’s (an iPad 2) has the same problem.  Here on my back porch, my Macbook hooks up to our wi-fi without a problem; my iPad can’t make a connection.  Design defect  …or concession to the mobile network operators?

One more thing–I’ve spent much too much time playing Kingdom Rush.

in the schools

The iPad has picked up momentum in areas I hadn’t really thought about.  For instance:

–AAPL commented in its 3Q12 earnings call that it is beginning to sell a ton of iPads to schools.  They’re all iPad 2s, which apparently have hit a price point low enough to trigger mass orders.

–an interesting article in the Financial Times from late July outlines changes tablets are making in the scientific/medical press.  It’s short and worth reading.

professional journals

Its message is that there is a surprisingly quick transition to online delivery going on with professional journals.   For doctors’ publications, the positive points of online are:

-most physicians have and use tablets, especially for reading between patient appointments;

-doctors read close to double the amount of a journal’s content when they access it online rather than in print;

-they appear happy to watch video advertisements imbedded in the online articles; and

-the publisher has precise data to show advertisers about what online ads have been seen.  For print, the publisher has to rely on surveying users–and who’s going to say he doesn’t read the journal from cover to cover?

Googling “tablets and medical journals”

My results were mostly about the perils of sleeping pills.  But I did come across a medical student’s blog post on the merits of various tablets.   Steven Chan’s conclusions are about what you’d expect, with one exception:

–using a tablet is a lot better than carrying files around with you

–if you’re hopeless with tech, get an iPad.  It’s easy to use, but limited by the AAPL “walled garden”

–Android tablets are harder to get up and running but are much more useful

–the iPad is too big to fit into a standard white lab coat pocket.  If you use an iPad you should get a new iPad-friendly model (this is the one I didn’t think about).

my investment point?

It’s about ecosystems.   In a world of cloud storage, where individuals own multiple devices–smartphones, tablets, laptops–that they may want to function for both personal and work tasks, the choice of what products to use becomes less about how cool the individual device is and more about how the device allows one to access, share and save data.

Yes, everyone believes this, to one degree or another.  In a “cloud” world, though, AAPL has two (well-known) weaknesses, I think.  One is its “walled garden” approach, which makes it seem a little like AOL when the WorldWide Web was opening up in the 1990s.  The other is how weak AAPL’s browser and productivity software are.

Again, no secrets here.

What’s interesting, though, is how this leaves the door open for MSFT, even after more than a decade of bungling, to become relevant again.  It has an adequate browser, which seems to be losing its my-way-or-the-highway attitude.  Its productivity suite is the world standard.  More than that, MSFT seems to me to understand the new opportunity its position is giving it, and (for once) to be taking intelligent steps to exploit it.

Anyway, I’m starting to think I may have to take MSFT more seriously as a potential investment, for the first time this century.  If I only thought MSFT had good management…