Apple Sales Gain Slowest Since ’09 as Competition Climbs
bloomberg.com
bloomberg.com
For whatever reasons, there seems to be little confidence in Apple lately, but it can't be denied that they're still making substantial growth quarter over quarter. Is this current situation not unsustainable?
Edit: thanks everyone for the explanations, it's very much appreciated
All other things being equal, their stock will be more valuable (and hence market cap higher) because each share also controls a share of all that cash. If they have more cash than market cap, something is wrong. Either you should buy Apple, or they have a lot of debt.
If growth begin to stall with their reserves there probably would be a pressure from those with voting rights in the company for the company to pay more dividends on the profit. If that do not happen the company could announce a buyout of all its shares and if everyone agrees it can go private if it wishes.
EDIT: Adjusting the 2nd paragraph.
Apple is owned by its shareholders. That cash pile ultimately belongs to them. To "buy itself", it would have to purchase itself from its owners. It can't use their money to do that, can it?
(NB: Don't get confused by stock buybacks: they keep the value of the company the same, they just concentrate it in fewer shares. It doesn't transfer the ownership from shareholders to "Apple")
I've bought houses on credit cards, you just need the right paperwork and the knowledge of how financial leverage works.
The primary reason why APPL can't buy itself back with $500 billion in the bank is because not everyone wants to sell, and would only sell if they were offered a premium such as $750 billion.
If AAPL wanted to buy itself it would use a leveraged buyout. It's certainly in a position right now to buy itself. GS, etc would love to issue an interest paying loan and/or bond to AAPL for $750 billion instead of having it in T-bills paying nothing.
And the leveraged buyout, yes, the board could pretty much raise the cash to buy control -- but, and this is the point, they couldn't do it with Apple's cash pile, which is what the OP was suggesting.
That's revenue and can't buy anything with revenue since you have to pay for the salaries, hardware, stores etc.
You should look at profit which is $13B/quarter right now.
And this is presumably an overestimate because its current stock price probably has further growth priced into it, so either Apple will reach that target sooner as a result of an increase in profits or, if profits remain the same, their market cap will fall further? I'm just not sure I understand the implications of a company acquiring so much cash that it matches its own market cap.
I ask because, this fact alone, seems to suggest to me that they're very much undervalued right now. But I'm not sure if I'm missing something.
Keep in mind that earnings != cash. If you look at their full SEC filing, their net increase in cash was $5.4 billion. Some of that money will be directed towards future R+D, some toward a dividend, and some will stay in the bank or used for acquisitions.
Companies with a healthy balance sheet and a lot of cash, like Apple, will either pay a dividend or buyback shares long before the book value of the company (cash + other assets - debt) is greater than their market cap. The market cap is more likely to be close to the book value for a struggling company, in which case the company is at risk for a private buyout + liquidation.
Stocks seldom trade under the book value of the company, but it sometimes happens. The business may be bad and the stock is just anticipating, or the book value may be hard to realize in cash (hard to cash in on goodwill)[1]. None of that applies in Apple's case.
[1] And very occasionally there is something that is just that much undervalued.
But you're forgetting one other possibility and that is there income starts to trend downwards due to falling sales and falling market share.
Under that scenario they would eventually start to loose money and start burning into their cash pile.
Emotions play a big factor in the movements of share price and at the moment there is a fear Apple will continue to lose market share to players like Samsung and Google.
Will that happen? Only time will tell.
But don't think it can't happen. You need to look no further than companies like Research in Motion, Sony or Nokia to find companies that had massive market share only to see it eaten away by competition.
So, yeah, I guess I'm kind of confused now by the market reaction. Perhaps you can explain to me again the rationale? But perhaps I shouldn't be confused, really. I should finally learn from history to not overestimate humanity.
If a company made $1m last year and is expected to stay flat for the next decade, it's worth $10 million.
If a company made $1m last year and profits are expected to grow 10% annually, it's worth $16 million.
If a company made $1m last year and profits are expected to grow 100% annually, it's worth $1 billion.
The implicit model for stock pricing is more complicated, but you can see correlations even in a simple model like this.
Nobody knows what will happen several years into the future, so it's mostly bets and speculations. Especially in high-growth companies, where many of the bettors appear to believe that trees grow to heaven, and the company's yearly profits will soon exceed the world GDP.
So the stock of high-growth companies sell at an enormous markup compared to current profits. By the same token, that markup can evaporate very quickly if a formerly-high-growth company shows any sign of slowdown.
In terms of the simple model above: If traders used to think that the $1m-profit company would grow 60% annually for the next decade, and something happens that makes them believe that it won't be more than 40%, the value of the company would immediately drop by more than 60%.
So at least according to the "a company is worth X years of future earnings" model, Apple is priced as a company that will grow even less than IBM and Microsoft over the next X years. Or perhaps it's priced to grow a bit more in the immediate future, but to start declining after that.
There are certainly other factors at play as well, but I don't know them well enough to enumerate them.
My main point was simply that when you think of "present company value" as the integral (the area under the graph) of the earnings graph far into the future, and add growth rates and fluctuating uncertainty, several non-intuitive aspects of company pricing start to make more sense. Even if it doesn't explain everything.
Apple has had a few quarters where year-over-year growth was around 100% (last in Q1 2011), that hasn't been the case in the last few quarters.
The market may be overreacting, but given that investors look at graphs like this and try to project the growth trajectory from the past few quarters several years into the future, pricing Apple a bit below Microsoft in terms of P/E doesn't seem all that unreasonable.
Joe Bull thinks maybe Apple will have a super blowout beat $60 bln quarter the way last xmas quarter beat estimates by a mile. If so the stock will go north of $600 fast, maybe push $700. Didn't happen so he sells.
But to justify a higher price today you would have to believe that apple is more competitive in the overall market this year than it was last year and I don't think it is.
Also, growth of growth is flat, not actual growth which is still quite positive.
Last year they made $25 billion, this year they made $41. But of course the rate of growth is smaller than the year before last when they only made $14 billion. This according to Wall St means they are failures.
Lets put it this way, APPL's earnings growth is twice GOOG's total earnings.
No, it doesn't. (edit: they are failures when it comes to keeping up their growth rate, yes.) But if previous stock price was arrived at by assuming rate of growth would stay constant, the stock will drop if rate of growth drops, as according to best available prediction the company will be worth less in the future than you had previously expected.
Stock prices are influenced by all kinds of predictions, guesses, and voodoo for present and future. It's a good idea to not to attach too many personal feelings or judgments like "winner," "best," or "failure" to the stock for this reason.
1. Revenue slightly below estimates. Analysts knew that this quarter was a week short and built that into the estimates.
2. Profit MARGIN way down from year-ago-quarter. It doesn't matter that this quarter is short, it's the ratio of profit to revenue, not the gross amount of profits. Also, profits short of expectations, and, again, the short quarter was built into expectations.
Apple may do better in tablets than Samsung, or Microsoft, or LG, or Toshiba, or whoever. Apple may do better in phones than Nokia. Apple may do better in laptops than Dell or Asus.
Sadly, that isn't enough--with sufficiently tight margins, they need to do better than !Apple (better than all competitors, not any competitor), and in the long run, that's not going to happen. They're going to get pushed out by more competitors in hardware, and honestly I don't think their software play is good enough to save them.
It's still their game to lose but they really need to nail a lot of things in iOS 7 and so far I don't see any sign of the kind of leadership that would require.
As of 29 October 2012 - Eddy Cue in charge of maps/cloud services, Craig Federighi in charge of iOS/OSX, Jony Ive in charge of human interface and hardware design. It'll be interesting to see how iOS 7 pans out, because these guys are very good at what they do.
Contrast this to Google which has a strong, stable team in place that's been doing superb work for the last few Android releases and you can see why people are a little gun shy about APPL right now.
Is it though? Apple, kinda like Intel or Nvidia (ATI? Are they still relevant?), is advancing the limits of what humans can produce for mass consumption. Every new chip fab process from Intel/Nvidia/ATI/TSMC advances not just the front-line ability of one company, but of humanity's capabilities as a whole.
Apple is the one spending un-stevely amounts on custom manufacturing processes while everybody else is still using plastic shells on phones/tablets/phablets cranked out by the hundreds of millions.
You can make all the Geo Metros you want, but some [1] people still want a Model X [2].
[1]: a heckuvalot of
[2]: imagine if the Model X was only $5,000 more than a Mazda 3 5-door. For $little more, you get the best designed thing in the world. Not everybody will pick that, but countless (well, about 50 million per holiday quarter) will.
I didn't downvote you, by the way.
But, why? It didn't happen with iPods even though you can build an mp3 player on your desk from parts ordered online.
It's not always about hardware-hardware-hardware-nerd-spec-wars -- Apple is a desirable brand and people want to be associated with it.
>Apple is a desirable brand and people want to be associated with it.
That's irrelevant since, if we're talking about iPod and "is", we're talking about 5-10 years ago. Apple produced a great product, but their brand was not great at that time. It was certainly on the mend and they were a small player in a giant market, but it was a PC-ish market and they weren't all that.
>>They're going to get pushed out by more competitors in hardware
[The grandparent] Completely agree. My wife has a very nice Moto Xyboard and our kids call it an "iPad". It's much like "kleenex" or "xerox". My kids are not more likely to buy an iPad because they say "iPad". They're equally capable and, AFAICT, uncaring about whether they're using an iPad, Xyboard, Verizon Fascinate, Nexus 4, Galaxy Nexus or Ubuntu laptop. Further, a particular friend of mine who is a crazy Apple fanboi can't stop talking about how much he likes his Nexus 4. As the rhyme gets longer, it gets more familiar...
Hmmm? Apple still sells iPods. And I wouldn't be surprised if Apple still took the lion's share of the profit in that market. They sold 12.7 million of them last quarter (including Touches). Surely if consumer hardware headed towards commoditization in the fashion you describe, someone would have released a quality 16GB MP3 player for far less than $150 and been able to push Apple out of the market.
hardware-hardware-hardware-nerd-spec-wars is a funny reference--for quite some time in the desktop space, Apple was the performance leader, right? And it did not save them. Compaq and other vendors destroyed their market share.
Apple is a desirable brand among people that can afford it and aren't concerned with bleeding-edge tech--do not overgeneralize here. Most people (the rest of the market!) bought iPods and iPhones because there wasn't a good competitor at the time; this is no longer the case.