Apple Case Study (ft. Amzn and FB)

In early 2015, Apple’s stock price hit all time highs (around $130/share) and the market cap was over $700B. The company had achieved $183B of revenue in 2014, and a net income of almost $40B. Their PE was somewhere around 18.

Fast forward 1 year. In early 2016 the stock has been down ~30% from the highs of a year ago. But 2015 revenue was UP – by an astounding 28%! Their net income in 2015 was 53M – a phenomenal 33% increase from the year prior. But the PE has languished around 10, and as Robert Frost has said, “that has made all the difference.”

It really is all about the future on Wall Street. The past quarter is ancient history.

I’m sure there are many details to the story, but to me it seems like what happened to Apple was a pretty clear case of running into the law of big numbers. Or market saturation, if you prefer that term. As I understand it, practically everyone in the world who stood a chance of owning an iPhone, owned an iPhone.

Let me take a step back and ask if that’s even true. When the iPhone 7 comes out, will sales exceed that of even the 6? I don’t know…but the PE of 10 suggests almost the opposite.

Lastly, my real reason for bringing this up is to ponder about FB and AMZN. These companies had what I would consider to be incredible, blowout Q1’s. But they each got a modest bump in stock price (less than 10% – and basically only reaching, not meaningfully surpassing, all time highs), because the valuations already suggest that they should have a blowout quarter, every quarter. Sure, if you can do that every quarter, things will be fine…maybe great. But these kind of results simply can’t be maintained forever. When will these companies run into the law of big numbers? How big are their TAM’s? When will that market be saturated? What happens when everyone who stands a chance of having a prime membership, has a prime membership? And the thing that I hear when FB has 1.65B MAU’s is, how many more people on the planet are “addressable” for that market?

Lastly, one other thing that strikes me is that these are questions that SKX, LGIH, and INFN don’t have to answer. Maybe they are questions that don’t apply to any small or mid cap company. Sure there may be bigger fish…but one thing that means is that there’s someone to take market share from.

I hope this will start a discussion, because while I stand by the points I am making, the questions I am posing are equally sincere. I really don’t know how close Amazon is to running into the law of big numbers. I know they can’t grow revenue at 20% forever…the world is only so big. But how big is big?

-Bear

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Interesting set of questions. I agree that it is a good topic for discussion.

I own a little bit each of Amazon and Facebook. I used to own some Apple. I sold the Apple (at a decent profit) because of some of the very issues you brought up. I can’t visualize a path forward for Apple to realize the size of gains they have experienced in the past. Their products are huge markets, but ones I don’t see growing as dramatically going forward. When they first released the iPhone and then the iPad, they had revolutionary products that created markets. I don’t see that happening any more. Incremental accessories like their watch seem more like trivial gimmicks than items capable of carrying the company forward in a meaningful way. New iterations of the iPhone aren’t really revolutionizing the smartphone experience. They seem pretty interchangeable with cheaper Android-based phones like the ones I’ve used for years. Mac? Slogging it out with Windows and linux in a decreasing market.

I don’t see where their next whole new category of products is going to come from where they would have that innovator’s edge and substantial headstart over the competition. iCar? Tesla. I don’t see Apple TVs having anything much better than a cheap Samsung.

I’m sure some of you disagree with me on the future of Apple. That is fine. Invest accordingly. But my perceptions of Apple and their future direct my choices. For me, that was to sell.

Now, going to your other two huge companies. I’ll admit that I don’t really get Facebook. I don’t use it, other than having an account so the Facebook-focused of my friends can send me messages if they want. For me, it functions as an alternate form of e-mail. While I am a “social networking” Luddite, I do have a pretty strong belief in the growth of our culture’s digital narcissism. While I think the trend of sharing every little moment of your life publicly and electronically is idiotic, I acknowledge that it is everywhere. Facebook is foundational to that massive phenomenon, so I put a little money in it.

On to Amazon. One of the things I like most about Amazon is the very difficulty in defining the company. What is Amazon? The days of “online bookseller” are long gone. Sure, they still do that, but they have outgrown that. “Online retailer” seems too limited now as well. Amazon Web Services is a rapidly growing beast of a business. Amazon is also morphing into a ubiquitous platform where third parties become retailers through it. Factories are shipping straight to Amazon as their retail and distribution channel. And the ability to provide that logistics and delivery is growing into a massive competitive advantage.

I illustrated my thoughts on Amazon and Facebook, not to sway anyone or in an attempt to be authoritative. I’m certainly not that. I explained to show how differently I see the addressable markets of the companies. That perception ties in to where the company measures up against that personal view. I see Apple mostly matured and bumping up on their limit of growth. I see Facebook dominant in a cultural shift of epic scope. Amazon is growing like mutant kudzu, sprouting new businesses and redefining how things can be done. With Amazon and Facebook, I still see long runways for growth, so I’m still invested. Apple, not so much, hence the sale.

A company being a small cap doesn’t automatically mean that it has the room to eventually grow into the size of an Apple, Amazon or Facebook. Many (most?) will hit some size limited by their markets and stagnate. And that is the well-run companies that don’t end up getting their markets redefined and eliminated.

I don’t see everyone on the planet eventually wearing Sketchers. Or banking with SBNY. But I can visualize more people doing both of those in the future than do them now. The relative disparity between where they are and where I think they could go represents their future. How likely they are to accomplish it and how much money I think there is to be made in doing it defines how much I am willing to pay to own a chunk of that future.

This post is long, rambling and noticeably short on numbers. But you asked a question that is more philosophical than quantitative. And we will all have different views on the prospects of the various companies. Your conclusions are likely to be very different than mine. And the top-down navel-gazing hits the bottom-up numbers-crunching in future growth rates. The present value depends dramatically on what number you put in for future growth. And being the future, it is a guess. The guess is based on perception of the company and opportunity.

Justin

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Amazon and Facebook are very, very different businesses than Apple. Apple is a device manufacturer, and as you note, is reaching market saturation for its products. That paints a dismal future for the company as an investment, with declining growth rates (or even declining revenues) starting a downward spiral in the stock price.

Facebook is a social networking platform. It boasts a very ‘capital light’ business model that generates high margins. While it may be nearing saturation in terms of unique users, it can always increase engagement and diversify its revenue streams. I see a dynamic leadership team with a massive opportunity to keep growing an already outstanding business. What is the potential upper limit for a company like facebook in terms of revenues and market cap? I don’t see it approaching that limit anytime in the next decade.

Amazon is an ever-changing company, now apparently morphing into a global e-commerce giant that is also an e-commerce enabler for other businesses. It is using its core strengths in building efficient data centers to spawn the most successful (in terms of time-to-a-billion in revenue) tech company EVER in AWS, has turned its expertise in distribution into a money-making proposition in FBA, and is now eyeing the last of its big expenses, shipping, as another opportunity to turn a cost center into a profit center. What is the limit to growth of a company like Amazon? Your guess is as good as mine, but there are no inherent ‘brakes’ to its growth that I can see.

So, I agree with you. Amazon and Facebook look like giant “small caps” with plenty of room to grow market cap further. Apple? Not so much; it looks more like Microsoft.

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iPhone sales by year:
2012 - 125 million
2013 - 150 million
2014 - 169 million
2015 - 231 million

Is the iPhone reaching market saturation? So far, there doesn’t seem to be much evidence of this. There will be periods of slower growth, but I think it premature to predict growth days are over. Something else to consider; even though it’s still a relatively small part of AAPL, service income is growing rapidly. Expect AAPL to put more emphasis on services going forward.

Another thing I like about an investment in AAPL at today’s price is the cash flow yield which is about 10%. That, along with $160 billion of net cash on the balance sheet could make AAPL a prolific dividend payer for years to come.

Don

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Bear, you are on the right track but you are invoking the wrong statistic. It’s not the Law of Large Numbers but the Sigmoid Growth Curve or “S” Curve for short.

The Law of Large Numbers is what rules casinos and insurance. You can’t tell the next number in roulette but play long enough (have a long series of numbers) and the outcome will match the expected probability quite closely. You don’t know when someone is going to die but insure a million people (a large number) and actuaries can predict the mortality rate quite accurately save for force majeure which is why things like war are excluded from basic coverage.

The growth rate of many things in nature as well as the price of stock of growth companies tends to follow the “S” curve, so called because it looks like the letter “S”.

https://www.google.com/search?q=Sigmoid+Growth+Curve&num…

The growth does not apply to a company but to a product and not to just one brand but the the whole product like (i.e. smartphones). A company like Apple can have a series of “S” curves in its price: iPad, iPod, iPhone. Disk companies have “S” curves for the various sizes: 5.25, 3.5, 2.5, 1.8, etc. 3M might have an “S” curve for various of its sticky products: scotch tape, making tape, EKG electrodes, stickies, etc.

Generally speaking, the life of a technology (cars, computers, smart phones) can be divided into three equal parts, from inception to 15% market penetrations, fast growth from 15 to 85% market penetrations and another third after that. 15% and 85% mark the inflection points, the curve in the hockey stick and the top of the “S”. Of course these numbers are just guidelines, approximations.

When you invoke the Law of Large Numbers you don’t really know what “large” is but market penetration is more manageable and you don’t have to be precise, just aim for the center of the “S”, say from 30% to 70%. Don’t bet on long shots, wait for the market to tell you it likes the technology. Don’t overstay your growth welcome, by the end the stock becomes a “value play” as it often remains a cash cow for a long time but stock price growth dwindles as the P/E ratio is compressed as in Apple. A P/E of 10 means that Mr. Market does not see any additional growth in the stock.

I don’t like FaceBook and I think Apple is past its prime so I won’t comment on them. Amazon is quite amazing.

The first difficulty with Amazon is defining what it is. It’s a retailer, it makes gadgets, it’s a market place, it’s cloud computing. I believe that things like the robot company and freight services can be ignored for this analysis but they could become meaningful in time. I’m going to concentrate on retail and cloud with a special mention of Amazon Prime.

Amazon Internet Retail

I’ve been salesman for most of my professional life. Not a particularly brilliant one but I did learn a lot about the trade. It’s all in the method. Amazon is to the Internet what Sears Roebuck was to railroads. You might want to read a few pages of how Sears got started. There was a niche for the taking and Sears took it. Take note of the furious expansion of Sears Roebuck during its first two decades and it was just getting started. Amazon is 22 years old.

http://www.searsarchives.com/history/history1886.htm

The fastest growing segment of all the retailers I have followed (except Ross Stores that does not do online at all for reasons of their own) is online sales. But they only sell their own stuff. Amazon started reselling books and with its market place it grew to sell everything. And Amazon is growing vigorously outside the USA. It could well become the first truly global retailer. We don’t have Amazon in Venezuela but I order from the US and get it delivered by currier. Amazon could experience a bunch of “S” curves as it carves out niches in country after country (now going after China and India) and as it adds more merchants to its marketplace. Asking what is too big is the wrong question. The right question is market share by niche. When the world’s internet markets are 75% to 80% saturated it’s time to abandon AMZN.

Amazon Cloud Computing (AWS)

I can’t claim any familiarity with AWS but it seems to me that the notable difference with more traditional servers is flexibility and price. In traditional data centers you buy or rent a fixed amount of hardware, storage, and bandwidth in one of several modalities from co-location to virtual servers to shared servers and you pay a fixed price. When you exceed your allotment service stops. Typically you buy twice as much memory that you typically need. With email you have to beware of multi-mega incoming junk that gums up the works. With AWS you pay for what you use and increasing or decreasing resources is very easy.

I believe AWS was born to take advantage of the extra resources that Amazon had at their disposal. This is typical Amazon, when they needed robots for the warehouses they didn’t just buy them, they bought the company that makes them. Now they are buying (or leasing) trailers and freight airplanes for delivery.

By the looks of it, AWS is giving traditional hosting a run for the money and it’s an expanding world wide market that is nowhere near saturation.

Amazon Prime

The appeal of Amazon Prime for Amazon is that it creates a float that boosts cash flow. Float is money prepaid by customers for future delivery of products or services. Until the products or services is delivered, Amazon gets free use of the money. Float is one of the (not so) secret weapons of Warren Buffett with the insurance business being the prime supplier of float.

Back to Sears

Who would have imagined during the first two decades of the 20th century that Sears would be one of the anchors of suburban shopping malls? The Interstate Highway System that promoted suburbs was not built until Eisenhower came along. Believing that Amazon is already up against unsurmountable limits is a terrific misunderstanding of the business. I’m not saying that there are no risks. I’m saying that Amazon is nowhere near being too big. Careful monitoring of market penetration is key to investing in Amazon.

Denny Schlesinger

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Amazon is an ever-changing company, now apparently morphing into a global e-commerce giant that is also an e-commerce enabler for other businesses. It is using its core strengths in building efficient data centers to spawn the most successful (in terms of time-to-a-billion in revenue) tech company EVER in AWS, has turned its expertise in distribution into a money-making proposition in FBA, and is now eyeing the last of its big expenses, shipping, as another opportunity to turn a cost center into a profit center. What is the limit to growth of a company like Amazon?

I was just about to post almost the same thing, and it I think it is worth drilling down even a little more on your thought. Amazon is rumored to be considering buying an airport in Germany:

http://www.businessinsider.com/amazon-may-buy-german-hahn-ai…

And apparently already has an air freight service in Europe:

http://www.businessinsider.com/amazon-has-launched-air-freig…

I’d say if they are thinking about buying an entire airport they are dead serious about this air freight thing. UPS should be quivering in their boots because Amazon doesn’t care if they make money. They just need it to costs less than UPS is charging them.

We all know that Amazon is also a hardware company, Kindles and such. But I was surprised at Bezos comment that Amazon devices are the biggest selling items on Amazon. Think about that for a second. Amazon’s biggest sales items are internal Amazon products, which in turn are designed to drive sales at Amazon. That’s one helluva feedback loop. Kindle Fire tablet sales have doubled over last year, and they can’t manufacture the Echo fast enough to keep it in stock.

Amazon said they were also going to “significantly increase content spend” for original content TV series and movies. Sounds like they are dead serious about that, too. They are going straight after Netflix with the monthly Prime membership as well.

That’s just stuff we know about. So yeah, I think they can and will keep growing for a long time.

That said, the stock trades at a crazy, crazy multiple.

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UPS should be quivering in their boots because Amazon doesn’t care if they make money. They just need it to costs less than UPS is charging them.

Wow, great point. And after some other great points, you concluded:

That said, the stock trades at a crazy, crazy multiple.

One point I forgot to make in the OP is that while this is true of P/E (even more so for AMZN than FB), AMZN’s P/S ratio is actually quite reasonable. It’s right around 3, while FB’s is close to 20!

This goes back to what we have all heard many times: that Amazon can turn a couple wrenches and be profitable (which seems to be playing out). In other words, FB has a lot LESS untapped margin growth than Amazon. How much AMZN can improve margins is an interesting question, but we all know they will shoot up from less than 1% pretty quickly. Can Amazon get to a 10% Net Margin? 20%? Lay aside that they’re a LONG way away from this and maybe they don’t even need to get there, and just consider for a moment: for 2015 20% would have been more than 20B. Which would put their PE at about 15. Even a 10% Net Margin would give them a PE of 30. That’s about what Google sports. Amazon had more 2015 revenue than Google…and Amazon has grown faster…Google just had much better margins.

In other words, margin improvement alone could make Amazon look more valuable than Google (around a 500B market cap today). But after margins stagnate, it’s all about who can keep growing. Can Amazon keep growing revenue at 20%+ like they’re a startup? That’s the question. Maybe the answer is no. But…wow…maybe the answer is yes.

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I wonder how much the exact price effects sales at Amazon. They know the answer for a 9.5% price increase, because that is what happened in Tennessee when they made a deal with the state to start charging sales tax. That exact kind of information is available to few companies.

The price boost has made few changes in my purchase pattern . It is still easier to shop from my chair than to drive around looking for things.

Moving atoms is a lot more expensive than moving bits. Take that into account when predicting margins. AWS can be priced like Google. Retail can’t.

Denny Schlesinger

Six positive things happened for me today.

First: AMZN is one of my largest positions. And then: I added to 5 other positions at close to the exact bottom of todays downturn…purely by chance, of course… but worth a smiley face because it won’t likely happen again.:slight_smile:

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Something else to consider; even though it’s still a relatively small part of AAPL, service income is growing rapidly. Expect AAPL to put more emphasis on services going forward.

This.

Apple is pivoting to become a services company, more here from the excellent Stratechery:

https://stratechery.com/2016/apples-organizational-crossroad…

-Chris

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that Amazon can turn a couple wrenches and be profitable (which seems to be playing out). In other words, FB has a lot LESS untapped margin growth than Amazon.

I’d say just the opposite. (Ignoring AWS for the moment), Amazon is in a low leverage business. Every transaction requires warehouse space, human beings to package, UPS (or whoever) to ship. It’s like a car manufacturer: every car requires more steel, more glass, more rubber. Don’t get me wrong it can be a very good business, especially if you catch it during the initial hyper growth phase (as Amazon did with online retailing), and yes Amazon can “turn a few wrenches” and be profitable, but margins on anything that requires hard inputs is most limited than something that is not.

For instance: a TV station has the same costs whether it reaches 10 viewers or 10 million. That’s high leverage, because once you cover your costs every dollar is margin, (ignoring deminimus sales commissions.) Facebook is high leverage: they have some fixed costs (bandwidth, servers, etc.) but everything after that they can keep. Now Zuckerman is choosing not to do that (like Bezos) and is expanding worldwide with crazy schemes like blimps and free access India, shot down by regulators), but all he would have to do is … nothing and his margins would skyrocket. Cripes, his users and his advertisers provide the content. How sweet! Better than network TV, better than Hulu, better than Sirius.

(One of the reasons for Google’s success is that it’s a high leverage business; (I know this is not true, but) they could get rid of the coders, they don’t have a sales staff (it’s DIY for advertisers) and milk it dry. They have chosen not to be so extreme, obviously, but that’s not something “a car factory” or Amazon could do.)

IF I may add to the comment about “Amazon Prime” upthread, it’s much much more than “float”. If anything it’s “moat”. I’m a member. You think I’m going to pay another site like Jet or anywhere else for the privilege of shopping there? Not likely. YOu think I’m going to buy a lot from other sites that charge for shipping? Even less likely. You think I don’t see the “free shipping” baked into the retail price when that other website does offer it? Sure. Bezos says Prime customer spend more than FOUR times as much as non-Prime customers. There’s a reason for that. And if I don’t buy from Amazon’s competitors (because I have the so-called “free shipping”) how do those competitors strip me away from Amazon when I don’t even bother looking at what they offer? Thart’s Moat with a capital M.

PS: Apple is trading like a bond, practically. An absurdly low P/E, which tells me that the market doesn’t have a lot of confidence in “growth” going forward. They thought the same about Microsoft for the past 20 years, but never afforded it the kind of growth multiples that their sales might otherwise deserve.

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Incremental accessories like their watch seem more like trivial gimmicks than items capable of carrying the company forward in a meaningful way.

JustinFields

When I first read this statement two days ago it seemed right. I just didn’t see the Apple watch as a big deal. Today I got a surprise reading an article following a link in another Saul board post Re: Facebook “crisis” by CMFdrdm (Number: 18723) about the Chinese social network app “WeChat.”

What stood out for me is the app integration achieved by WeChat which lets the user navigate all over the map while seemingly stay within WeChat. This kind of integration – on a much smaller scale – was touted by TripAdvisor (TRIP) to let visitors book and pay rooms without leaving the TRIP website. For TRIP this was an add-on. For WeChat it seems to be the original design concept. This transforms WeChat from being just an app to being, to quote the article: “WeChat is actually more of a portal, a platform, and even a mobile operating system depending on how you look at it.”

What does this have to do with the Apple watch? Further down the article there is this reference to Tim Cook:

And finally, it’s worth noting that WeChat is, according to Tim Cook on Apple’s most recent earnings call, one of the top 3rd-party apps used on the Apple Watch. The possibilities for online-offline integration through wearables haven’t really begun to be explored yet.

Maybe we are with wearables where IBM founder Tom Watson Sr. was with computers when he said that there might be a market for five of them worldwide. When the IBM PC was launched in 1984 we could not see what a home computer could be used for besides writing letters, balancing the checkbook, and playing games. We just don’t know how to think about things we don’t know. Only SciFi writers seem to have that ability.

Author: CMFdrdm
Subject: Re: Facebook “crisis”
http://discussion.fool.com/we-spent-several-weeks-in-china-recen…

When One App Rules Them All: The Case of WeChat and Mobile in China
http://a16z.com/2015/08/06/wechat-china-mobile-first/

Denny Schlesinger

Note: Red China was so late entering the modern era that they practically bypassed the “cooper cage” stage of telephony going directly into mobile phones. Maybe Red China will become the biggest market for Apple watches adding another “S” curve to their stock price.

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Denny,

The biggest reason I am skeptical about the Apple watch is that it is an accessory to the iPhone. Without the connected phone, it doesn’t do much. So the “wow, wearable computing!” is a parlor trick at this point. If they could cram an iPhone’s worth of computing components into a watch and have voice control or something, it becomes a genuine stand-alone device.

Maybe you are right and that the watch is going to be big, but is just near the inception point of the S-curve. But I’m not sold on the idea. It could just be my personal take on money and personal spending getting in the way. If I can’t see buying something because of a ridiculous price or low value, I have trouble seeing how other people do. But they do, often in droves.

For example, I never invested in Starbucks, because I thought their prices were absurd. They are asking people to pay how much, for a cup of coffee? Just like coffee they could make at their home or office? And they expect people to go there all the time for a snobby hipster coffee? Yup. Now you in a major city, it is practically impossible to be out of sight of a Starbucks. A zillion cups of overpriced coffee sold, and I still see it the same way.

When it comes to retail trends and consumerism, I’m not the one to look to for leading the pack on “what’s hot”.

Justin:

I like to read the investing threads here, not in my email inbox.

Not every product is ruled by price alone, some have snob value. In my day I’ve used Rolex Oyster watches. Now I don’t bother having a watch and a plastic one would do.

As I was posting I was thinking about the high price of Apple watches, not a good way to approach a mass market. Maybe Apple realizes that for now the watch has more snob appeal than utility. A bit like Tesla’s first model, the roadster. Testa is working its way down market. Maybe Apple expects to develop a watch on a chip that can overcome the deficiencies you mention.

I’m not buying Apple but with its various branches, the App Store, the Apple Stores, service and a variety of products, I believe Apple will be a cash cow for quite a long time. Whether the watch becomes a big hit or not is yet to be determined.

Denny Schlesinger

DBrown7,

Your little chart of iPhone sales got me digging a bit and I’m starting to re-evaluate Apple. Let me know if I’m making any sense here:

I’m wondering if fiscal 2016 was just a throw-away year for Apple. Basically, the last major iPhone upgrade (the 6) came out in fiscal Q1 2015. iPhone sales were up close to 40% from fiscal 2014. Pretty incredible. In fiscal 2016, they will almost certainly be down, but only 15% or so. That’s actually kind of amazing. When the iPhone 7 is released, who knows what will happen, but you gotta like the trend:

2013: 150M iPhones sold
2014: 169M iPhones sold
2015: 233M iPhones sold (iPhone 6 released)
2016: ~190M-210M expected (they’re at 126M after 2 quarters)
2017: iPhone 7 released

How many iPhone 7’s will they sell in 2017? Well that’s the couple hundred billion dollar question.

But since I don’t have a crystal ball, I would like to point out a couple things about the last two quarters. Phone sales in fiscal Q1 2016 were about flat with 2015 Q1: about 75M sold. Apple’s revenue was pretty flat as well. But wait a minute, that was without a major new phone released in Q1! Sure, the 6S came out, but sales were the same as when the blowout 6 was released a year earlier!? Wow.

Q2 showed that the 6S didn’t have as much staying power, as phone sales were down from 61M to 51M units. That’s over 16% fewer phones. But Apple’s revenue was only down about 13%. Just slightly interesting.

Personally I think the best thing that could happen in the next 2 quarters is that they could sell even fewer phones than projected, causing Apple to be even further down YoY than Wall Street expects. That also might mean everyone’s waiting on the 7 to come out to upgrade. Apple’s stock could see prices in the 80’s…maybe lower…right before fiscal 2017, potentially their strongest year yet.

Thoughts?

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One thing I was wondering about is the to-be-expected upgrade cycle in China.

I understand that there was a lot of pent-up demand in China before last year. I guess that means that AAPL sold a lot more phones in China in a short period in time than what can be expected in a normalized environment, which is making yearly comparisons difficult now in 2016.

This spike will have taken a lot of potential buyers out of the market for a certain period. I don’t know what the normal upgrade cycle is but am most familiar with carrier contracts that allow you to get a new, subsidized phone every two years. If that was similar in China then I guess 2017 should see a massive upgrade cycle from the initial buyers in 2015.

Does that make sense? Does anybody have any insights on whether the major carriers in China subsidize iPhones and what the duration of those contracts are?

Personally I think the best thing that could happen in the next 2 quarters is that they could sell even fewer phones than projected, causing Apple to be even further down YoY than Wall Street expects. That also might mean everyone’s waiting on the 7 to come out to upgrade. Apple’s stock could see prices in the 80’s…maybe lower…right before fiscal 2017, potentially their strongest year yet.

I like Apple, but your holding horizon has to a be longer as the buybacks and development in the pipeline need time to take full effect (at least 3-5 years).

All rumors point to the iPhone 7 being not that much of an upgrade but the iPhone 8 being the big splash release. Here’s what I posted on the SA: Apple boards:


This has been discussed at various points before, but I think it is good to bring this up again as if people are hoping that the iPhone 7 will move the sales needle significantly then if these rumors are true it may not.

I’ve been digging through the rumors of the iPhone 7 and all of them point to the iPhone 7 (2016 release) being more like the iPhone 6s and the iPhone 8 (2017 release) being the “game changer”.

The iPhone 7 will look like the iPhone 6/6s but have dual camera (on the plus size phone) be thinner, change of connectors/ports (maybe no headphone jack) and possibly wireless charging (not just put the phone on the charging pad but charging anywhere you are near the charging station), minor change of design in the back with the antennas. So think of it as more of a “iPhone 6s 2”.

The iPhone 8 is where things are suppose to get more interesting with no home button, touch ID built into the screen, OLED or Micro LED, wrap around screen (like the S7 Edge), etc.

Analyst Predicts 2017 iPhone 8 ‘Mega Cycle’ With OLED, Wireless Charging, and No Home Button

http://www.macrumors.com/2016/04/22/2017-iphone-8-mega-cycle…

If this is the case (big if since they are just rumors), then I suspect more sales pain ahead for the iPhone as the iPhone 7 probably won’t move the needle as much. This will probably create pent up demand for the iPhone 8.

This also implies that the naming scheme and “tick/tock” cadence with the S models may change starting this year.

I hope this isn’t true, but we shall see.

Sincerely,
Charlie

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PaulWBryant,

Nobody knows how many iPhone 7’s Apple will sell or how many SE’s for that matter. Everything is just a guess at this point. Who knows how fast service revenues will grow or Apple Watch sales?

What I do know is that AAPL doesn’t have to grow at all to be a decent investment at today’s price with a cash flow yield above 10%, assuming management is judicious with its use of the cash. Any significant growth will be a big bonus.

Don

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