(11-09-2012, 10:34 PM)Musicwhiz Wrote: [ -> ] (11-09-2012, 07:00 PM)serjing Wrote: [ -> ]Hi,
My very first post here and it will be on the company which represents my largest holding in my personal portfolio due to capital appreciation. I wonder how many of you here at this wonderful forum owns Apple? It is fascinating - a growth company masquerading as a value play. Compounded annual growth rate of 67% for its earnings over the last 5 years, but yet trading at a current PE of 16. Looks to me like a 'too good to be true' Peter Lynch stock or Davis Double Play.
I personally think Apple has a few more years to grow at 15-20% in both sales and revenue as it gears up for a monstrous entry into China. I recognise that China might be having economic troubles and that Apple's plans can ultimately falter. However, these are as yet unknowns (I have never been able to do macro-economic analysis properly). What I do know is that Apple's sales in China grew by 60% for the three quarters of FY2012 compared with the comparable period in FY2011. The facts are quite amazing to be honest.
Now, the story is that Apple is really too big to grow. Is that true? I wouldn't know. What I see is that Macs have a huge potential to occupy more market share in the PC market. Remember, Mac sales have been increasing even though the overall PC market sales have been decreasing. If the PC market sales trend continues, the Mac line will be happy! The tablet market is continually growing and even though I see Android and Amazon tablets gathering more marketshare from iPad, I see the iPad exhibiting great overall sales growth with falling market share (a ballooning tablet market is a big win for Apple, Android and Amazon). I do not personally think that it will be a case of 1 winner and 2 casualties, but rather, a communal prosperity for quality tablet makers.
Any one thinks Apple has run out of steam? Would love to hear a different side to my bullish story. It always pays to listen to quality bear thesis. Sharpens the argument for people on both sides of the fence.
Cheers,
Ser Jing
Hi Ser Jing and welcome.
I'd like to provide my analysis of what you mentioned, and my angle is coming from the question "what has been priced in" by Mr. Market? Fabulous historical growth of CAGR 67% for the last 5 years is all well and good, but the question now for an investor should be - will there be growth present in the future, the magnitude of this expected growth and how much of this growth has already been priced in?
A few questions for consideration:-
1) You mentioned Apple is trading at a current PER of 16x - does this refer to LTM historical PER, last financial year's PER or forward PER?
2) Also curious as to how expensively competitors are trading at? Closest comps I can think of are RIM and probably Samsung Electronics in the mobile phone space.
3) You said Apple has a "few more years to grow at 15% to 20% in sales and revenues" - aren't sales and revenues the same thing? Also, what is your basis for the forward projection? Did you read it in Apple's presentation slides or was it a projection based on what the Street thinks?
4) Besides the fact that China is experiencing a slowdown (on almost all fronts), Apple must also consider any incumbents within the country if it decides to make inroads into this market. How strong are the incumbents and what market share do they possess? How easy will it be for Apple to gain a foothold there? I understand that in certain markets (e.g. Indonesia), RIM has the lion's share of the market with their BlackBerry devices. So what makes Apple think they can grab a significant slice of the pie in China?
5) Apple's sales may have grown by 60% in 9M 2012 compared to 9M 2011 (a bit curious on this as 9M 2012 isn't even over yet!), but is the China division still profitable yet? Does Apple give any breakdown or indication of geographic divisional performance in the segmental reporting? Normally when a company enters new markets, quite a bit of A&P expenses have to be spent and it normally takes about 1-2 years to break even. Any info on whether Apple's China division has turned profitable?
6) The tablet market may be growing larger, but competition is also getting stronger from other players. With the upcoming launch of the iPad Mini, what are the chances that it can sell as well as The New iPad? Also, with more competitor products flooding the market (and also priced more cheaply in terms of ASP), what are the chances of Apple being able to maintain market share?
7) With the iPhone 5's impending release tomorrow, I've already read some reports on why one should NOT get the iPhone 5 - it seems the hype is rapidly dying down and it remains to be seen if sales can top the iPhone 4S.
8) In investing, I feel it's not a matter of "Apple running out of steam". Absolute performance may not count for how the share price would react over the long-term - it's more of expectations of growth and whether this will be met. Aggressively optimistic and lofty expectations means that a lot has already been priced in, and an investor should realize that should the Company falter in any way (e.g. product defects, sales not as good as expected, competition heating up causing lower ASPs - price wars etc), this would mean a drastic revaluation of the share price downwards. Margin of safety would require that expectations of growth be pessimistic or realistic rather than optimistic.
So my reply would be - it depends on whether Apple can maintain its breakneck growth pace. But seeing that most of it would have been priced in, I doubt I would be a buyer at this valuation.
My 2-cents.
Hi Musicwhiz,
Thanks for the detailed reply. I’ll try my best to answer them one by one.
1) Apple’s PER of 16 is its Trailing Twelve Month (TTM) PER.
2) Amazon, Google and Samsung are the strong competitors in the tablet market, in my opinion. Amazon PER – 300, Google PER – 20, Samsung PER – 11.
Nokia and Samsung are the strong competitors for phones. I would discard RIM from the equation. Nokia PER – N/A (operating at a loss)
Dell, HP are the competitors for computers. Dell’s at PER of 6.
3) I meant to say ‘sales and earnings’. Sorry for the mistake. The 15-20% figure are entirely my guess-timates. It would seem reasonable for Apple to be able to capture more sales (note: I did not say market share) in the growing smartphone and tablet market. Furthermore, the familiarity with Apple’s OS from the iProducts might induce more conversions to Macs. Macs currently are a very small percentage of the entire PC market, yet make up something like 80% of the profits for the entire PC market – more room to grow? Aye!
4) I have no idea who the incumbents in China are to be honest. But yes, Apple does break down its results by Geography. The numbers for the Asia-Pac region look very promising. I do not claim to be prescient as to how/why Apple thinks they can grab a siginificant share of the pie in China, but based on historical precedent, Apple did grab marketshare in huge style. Note: Apple released the iPhone 4S in China in Q2 Fiscal Year 2012. Let me show the community the numbers from Apple’s 10Q:
9 months for FY 2011: Sales – $16 billion, Earnings – $6.8 billion
9 months for FY 2012: Sales - $25 billion, Earnings - $11.4 billion
Apple does not break down the Asia-Pac region into countries, but looking at the numbers, I would tend to think China has been pretty nice to Apple so far. I cannot foresee with accuracy how well the new iProducts can do in China, but based on historical precedents, it does look promising, doesn’t it? That risk of not-knowing is mitigated, in my opinion, by Apple’s valuation. A TTM PER of 16 for a company that has superb historical growth and 1/6 of its market cap in cash with no debt, does not seem to me to be ridiculously over-priced or hyped.
Besidse, Apple has signed agreements with China’s LARGEST mobile phone carrier a few months ago to allow the iPhone on its network. That is 600 million new customers. How many will buy the iPhone? I cannot give you a crystal-ball answer, but would 5% be that unbelievable?
5) I believe I answered your query above. Fiscal Years do not always coincide with Calender Years. Apple’s FY runs from October to September – weird, I know.
6) The iPad mini is still a rumour, I believe (please correct me if I’m wrong). What are the chances it can sell as well as the new iPad? I have no idea. Again, I would use historical precedents to try and give a reasonable guess-timate for the future. Its compeititors in this space includes Kindle’s HD Fire, Samsung’s Tablets and Google’s Nexus (I only mentioned the credible ones). All are priced cheaper than the iPad, with slightly inferior or some might say even better specs. For this, I would play the ‘wait and see card’ – I have no crystal ball!
7) Reports fall on both sides of the fences. The iPhone 4S was considered a ‘disappointment’ but yet sold like the hottest of hot-cakes. Historical precedent – can iPhone 5 do it again? Of course, it remains to be seen regarding sales. That is where valuation of Apple comes into play again, as I mentioned earlier.
8) If we take the PE to be a rough gauge for future value, it would seem the Street is pricing Apple to grow at 16%. 16% is admittedly too high, if taken in a vacuum. However, considering Apple’s huge push into China (which MIGHT fail miserably, but historical precedent gives me a little faith ), iPhone5, huge cash load, and historical growth – it does not seem terribly optimistic. In fact, I would think Apple’s priced a tad negatively. Of course, its just my personal opinion.
Great discussion!!
Cheers,
Ser Jing