Apple was never priced like a growth stock, even when it was rapidly growing. Now that it's flatlined it's as if people expect it to shrink. Even if recent growth trends aren't good, they aren't terrible, and that company spits off so much free cash flow.
This reminds me of a "memo" I wrote to myself in June 2013. AAPL was going down for a year for no "real" reason until it hit $385.10 (before the 2014 7:1 split).
I found it odd and since the numbers told another story (record high earnings, consistently decreasing debt, etc), I wondered what was the reason, so I made a prognostic about what I thought made sense and wrote it down to learn, tracking my thought process and prediction (verba volant, scripta manent)..
You can just look AAPL up to 5 years and see what I was looking at Sep 2012 peak to Jun 2013).
If you follow the link at the bottom of the chart you should see the other chart I made back in 2013 but which got totally ruined because the website could'nt handle the split 7:1 correctly. A shame, what a great "told you so" punchline I could have by now:D
The word "hype" is very appropriate. If people in the "market prediction" business were paid based on the accuracy of the predictions coming out of their mouth, there would be no food going into their mouth.
They'd resort to other ways to scrounge for a living using their previous skillset, such as becoming Fortune Tellers; that is until someone starts tracking their predictions too.
If you're an "analyst" and your predictions are worse than tossing a coin, what on earth is the use of you?
The whole jumpiness of the people in that line of work is quite interesting. As if the goal is to drink large volumes of coffee, be stressed, run around with papers and be excited about what a bank thinks about a stock. Yes, but what do you think about that stock and are you aware that tickers represent real companies with real people in an economic context with real problems needing real solutions? That's similar to starting a startup just for the sake of wearing a hoodie and being a "startup guy" and talking about Heroku and Docker and code and exit strategies and forgetting to solve a problem.
I'd be scared about if I were making BRK-sized bets as to what percentage APPL's cash flow is correlated with "cool" or "visionary".
Apple's great at reaping rewards for 5-10 years when they crack a new market. They're less great at winning over the longer-term in mature market categories. (That's probably the bigger problem with industrial design-based brands though -- they're far more susceptible to copycatting over a long enough period. All the perils of fashion without the agility to change things as quickly)
I don't think they are succeeding in the PC market. As software professionals we have a warped view of the market. 90% of devs does not translate to any metric at market scale.
They are missing the VR wave completely, or in the very least very late to market. This almost categorically removes them from consideration in the gaming market.
Windows is making huge UX improvements year-over-year while OSX updates are incremental at best.
Some recent flops:
- fitness tracking
- high end pcs (MacPro still has fundamental hardware/driver issues years later. It was never worth its absurd cost. 5k iMac features a mid-range GPU from 2012)
- voice assistants
- business productivity software (iWork)
They are the only PC maker making money. In what sense do you see them failing?
The VR wave is just starting. The only VR devices that will matter in 10 years will be standalone mobile devices in the $500 price range. When I look at Oculus's technical achievements I don't see anything difficult for Apple to copy. On the contrary, I think Apple's mobile chip design expertise, vertical integration, and developer base put them in a great position to release a great mobile VR device. Apple is probably the strongest company out there in power efficiency, which is the central limiting factor for mobile VR.
Frankly, I think Apple should sit out this generation, and let Facebook/Microsoft et al spend the money to do free market research for them. They can just do R&D behind closed doors until they have something special. VR with a cable tied to a giant PC is cool, but it will never be a big market by Apple standards.
Where will Apple be when there are VR devices in everyone's Christmas stockings? That's the question.
When the 5k iMac was introduced, it was a market-priced $3000 5k display with a computer thrown in for free. I just bought one a couple months back when I realized they had dropped below $2k. I don't know anything about GPUs, but it's certainly not overpriced in the way that you might be able to argue the trashcan Mac Pro was.
As for missing VR; VR hasn't gotten off the ground yet. It's barely taxiing. Frankly, if Apple were to jump in anytime in the next year or two, it would probably fit their usual MO for when they join a market.
While they've been profitable in the PC space (laptops/desktops) to call them successful is a bit of stretch. They maintain =<10% of that market category which is hardly continuing success and more like continuing to survive.
The top player in the PC space, Lenovo, maintains about a 20% share. So Apple is not doing so badly at 10%. They are a top-5 computer manufacturer by share.
In the most recent financial data I could find, Lenovo reported total company revenue of almost $13 billion, and Apple reported Mac-only revenue of just over $5 billion. So again: not the leader but doing a lot more than just surviving in the PC space.
Revenue is an iffy yardstick anyway. If you're the only player who is squeezing blood from that stone, it is not to the credit of the other players that they're squeezing harder. Apple still capture almost all profits in the sector, they take the meat and leave bones to the others. If there were more meat, they would be taking it, but there isn't.
Since that has probably increased eg "Mac laptop revenues rose by 10.9 percent during the first six months of 2015, year over year, while Windows PCs fell by 9 percent, and Chromebooks contracted by 9.5 percent."
That doesn't really matter, does it? Non-Apple laptop manufacturers are trapped in the low margins that commoditization results in. Apple's margins are rumoured to be a large multiple of that of other laptop makers.
>While they've been profitable in the PC space (laptops/desktops) to call them successful is a bit of stretch.
You say
>Apple's margins are rumoured to be a large multiple of that of other laptop makers.
So we agree they're profitable but you are simply arguing they are so more profitable their volumes don't matter.
So do they? If we want to break out numbers [1] from March 2016 quarterly report. Mac (Laptops/PC's) accounts for $12.5bil Net Sales, which is 9.4% of quarterly sales totally <11 million units.
The funny thing about this is their Services category (iCloud, iTunes, App Store, Apple Health Kit) has (more then) doubled in 6 months and its now ~$3bil of Net Sales of their Mac category. At current growth rate's it'll eclipse it sometimes this year.
The Mac sector is quickly becoming the lowest selling division of the company. Currently only under performed by the Other category (Beats, AppleTV, AppleWatch, Cables, WatchStraps, Keyboards, Mice, etc., etc.). This is what I mean by surviving not thriving. The division is a very small corner of the company, and getting smaller.
> The Mac sector is quickly becoming the lowest selling division of the company. Currently only under performed by the Other category (Beats, AppleTV, AppleWatch, Cables, WatchStraps, Keyboards, Mice, etc., etc.). This is what I mean by surviving not thriving.
I don't think that matters when you're looking at it from a value perspective, as BH does. The margins are the best out of anyone in that sector and it's making tons of cash. And, as you said, that's one of the lowest performing divisions of the company. They're basically the BMW of laptops and you're acting like that's a bad thing.
Apple computers were 10.9% of FY 2015 revenue. That percentage has been steadily dropping pretty much ever since the iPhone came out and revenue has not been growing.
- Non-trival amount of resources go into hardware R&D and OSX development
- Desktop and laptop computer market is increasingly shrinking
- Revenue growth is flat
It's not as simple as "well we make $x for every iOS developer, $x/2 for every OSX developer and that's going to be $x/3 in 5 years" but that's the general gist of it. Consumers are not buying computers and Apple has never been a major business player.
1. A very large portion of their OS X development is directly applicable to what goes into iOS. And it's becoming more so. The same for their hardware R&D and what ends up being usable in their mobile products.
2. The consumer desktop and laptop market has been shrinking, because consumers have switched to mobile. Which is most of Apple's income.
3. Growth may be flat, but the margins are good, which exactly what BH is looking for.
Finally, and most obviously, Apple needs computers in order to make software for mobile. They own pretty much the whole stack and are able to make a hefty profit by selling their tools (hardware and software), that they would need anyways, to the rest of the world. This is classic vertical integration and it makes alot of sense business-wise.
So those points do not answer the question, which makes your answer seem like a deflection.
Furthermore Apple's revenue growth may be flat, but their competitors are in actual decline.
Consumers are increasingly buying apple computers instead of any other, and this is increasingly true in enterprises as well as consumer spaces.
The percentage of Apple's business that is represented by PCs will obviously decrease as they add other business lines. What does that have to do with anything?
You only need enough volume to compete. If that lets you command a premium and skim off the bulk of the profits, who cares about marketshare?
It turns out you can enjoy network effects as well: at one point iPods accounted for over half of the global flash memory market. That was surely useful in bringing the iPhone and MacBook Air to market, no? I'd also say the PA Semi investment is paying off since Apple has owned the mobile SoC performance crown for a while now, with no competition in sight.
I agree the "sufficiently large" scale argument is probably valid, for both developer attraction and component pricing.
But high margins without a monopoly is a tough course to chart indefinitely. I think if Apple is still the incredible player it is in another 30 years, it'll probably be because they've integrated cloud accounts + hardware + security to the extent user abandonment of their platform is almost unheard of.
PS: Surprised no one pointed out my incorrect Apple ticker *AAPL
Apple has high margins and has been slowly but steadily (I think roughly during the last decade or so, maybe for longer) outgrowing the rest of the PC industry.
They are very successful despite not selling the most units and not seeing explosive growth.
I assume you realize that market share is not a measure of success - profit is.
Also, comparing the Mac business to Apple's other businesses is irrelevant - you may as well compare it with Pharmaceuticals - the relevant comparison is to other PC vendors, wherein you will find that they are highly profitable.
They're revolutionized 3 industries (consumer PC, portable music player, mobile PC) and whiffed on several others that went to similar competitors (business PC, servers, "cloud" SaaS). In every case there's two things in common: a consumer electronics market, and they had by far the best product when the market was first being established (Apple IIe, iPod, iPhone). In every case they made an absolute killing at first only to eventually level off and get passed by competitors once it becomes commoditized.
I attribute this to a very top-down design approach that only worked due to a visionary leader. Steve Jobs was able to predict what consumers would want before it was even remotely feasible, and would demand it from his engineers so that Apple could win the market while it was still in its infancy. A more bottom-up approach a la Microsoft or Google is more successful at the long game, because it's more efficient at spending its resources (i.e. focusing on the software and outsourcing the hardware on Android). In that time Jobs already had Apple cranking away on the Next Big Thing. Hit on one market every decade or two and you have a successful company. Hit on two in a row and you have the GDP of a small country.
In a post-Jobs Apple however, they're going to have to bet on either still having that same predictive power, or changing strategies to be more bottom-up. My bet is on the latter since a) Jobs was a generational business talent b) they now have an established premium brand and c) basically infinite money to spend on talent/resources.
All that combines to a very successful foundation for a company, but don't bet on them having the same playbook as the last 30 years.
