There were some posts about Apple on the Berkshire board, so I’ll add the comparison between Apple, Berkshire, Google, Alibaba and Broofield Asset Management here.
Firstly about Apple. I posted a thesis about Apple in 2012 which underlined engagement of developments as important (similar to what caused DOS to remain dominant for ludicrously long despite the technology literally a decades behind competitors) and these developers having a large learning curve and career-destroying switching costs. Unknown to many, this is still the main reason Apple is doing so well today. They have a pretty good phone product on top, but the size of the developer community is ludicrously large - and very dependent upon the software sales linked to their experience with iOS programming. The product could falter far longer than people imagine (look at DOS vs the other extremely more advanced OS environments around at the time), and they will still retain the developer partnerships and be completely dominant in software for a long, time. Don’t compare this to Nokia as their development community was a joke. Google would be a threat, except that if they heavily marketed their own phone, hardware competitors would jump ship (it would be like Microsoft bringing out their own PC, which would kill DOS, and they were smart enough to not do that).
I wrote a 6 part thesis in 2012 for which this is just one part and I strongly encouraged purchasing Apple in 2012. I predicted that earnings in 20 years (that is 2022, so now) would move towards services, and even from here I think it will be important for Apple when looking out to 2032.
Even though I deem Apple to be Steadfast, some investors might be overconfident about how much higher Apple’s earnings will be ten years away. They’ll be higher, but there is only so much $$$ you can extract per customer once you have near market saturation.
A good argument for Apple’s having no problems with the per-customer spend ceiling is that most people consider what they get out of using their phone to be far higher than the dollars they are spending each year on the phone. That isn’t always important, but is important when combined with the next paragraph.
This relates to the phone, but is also related to what we spend for our mobile access to the internet generally, for which the product will vary over time but we will still want to have the best version available, and won’t want second best. There will be a market for “nearly as good, but cheap”, but there will also be a market for “only the best”, and you can think of the markets as distinct, the latter never going away or being replaced with the former.
The last time I investigated Apple closely (a few years ago), I put its earnings growth into these components:
- 11% total annual growth, comprised of…
- 1.5% dividend and buybacks
- 3% from real increase in services
- 2.5% from very lumpy but the real normalised increase from new product categories
- 2% increase in new users
- 2% inflation
I think Google is a much better investment than Apple, though, mostly because of Apple’s relatively high multiple right now (32x). Apple will unlikely grow earnings as fast as Google over ten years, so should have a lower multiple than Google’s (28x), not higher. Fortunately all of those nuances get summarised by just one ratio, the IV10/price.
*Apple* Normalized earnings per share 5.6 Average earnings per share 9.74 Earnings multiple at year 10 20 IV10 277.56 Price today 179 IV10/Price 1.6 *Google* Earnings per Share normalized 95 Average earnings growth rate 13.00% Earnings per Share at year 10 322.48 Earnings multiple at year 10 25 IV10 8062.1 Price today 2900 IV10/Price 2.8
IV10 is defined (in 2022) as near-worst-case estimate of intrinsic value of a company in 2032, no inflation adjustment or earnings discounting. For most firms this is close to $0 as our worst case is a wipeout, so this only works for firms that are Steadfast. Everything posted here is Steadfast (crudely defined as the firm definitely around in 20 years, and earnings above some minimum predictable baseline after 10 years).
*Berkshire Hathaway* Book Value per Share, Sept 2021 211 10 year increase in BVPS 8.00% Book Value per Share 2032 455.53 Intrinsic Value = BV per Share * 1.5 683.3 Price today 308 IV10/Price 2.2 *Brookfield Asset Management* Shares outstanding 1587 Book value per share today 19.98 Fee business (25 Fee related earnings) 28.36 IV0. 1.0 x book, plus fee business 48.33 Accumulated value generation incl. divs 13.00% IV10 164.06 Price today 60.52 IV10/price 2.7
And don’t forget Mr. “Popular”:
*Alibaba* Earnings per Share 2022 8 Earnings per Share 2026 12.17 Earnings per Share 2032 26.9 Earnings multiple at year 10 24 IV10 645.54 Price today 112 IV10/Price 5.8
If you think the 24 earnings multiple is too high for Alibaba above, come up with your own multiple, but at least have something that is consistent through both good and bad new story cycles.
The last time we had a candidate with an IV10/price ratio above 5.0 was with BPY last year. Think back to one’s emotions in April 2020 when all properties were temporarily shut down. I was ploughing through the contracts on what happened to be the night of the market’s very lowest quote, making sure the short-term lack of cash flow was fine against their debt, and I couldn’t find any problems. Posts on this board were viciously scathing of its prospects. It was privately bought out at well over twice the quote and public quotes of similar firms are now more than three times higher. For many it felt awful to be an owner in April 2021 though, and many sold out at the lows, and few allocated more capital to BPY whilst the IV10/pice was near 5.0. The Manlobbi Method doesn’t care about news stories and Bloomberg neoliberalist passions - it cares about whether the firm is Steadfast, and what the IV10/price is.