What will kill Apple?

Stocks A to Z
#20

I think that little can kill Apple. They have a very wide moat, enough that I would deem them Steadfast (meaning that they are still around after 20 years, and their earnings predictable to be above some lower bound after 10 years).

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 deeply dependent. 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).
https://discussion.fool.com/intrinsic-value-29846517.aspx

I wrote a 6 part thesis in 2012 for which this is just one part and I strongly encouraged purchasing. 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 whilst nothing “kills” Apple, 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 per-customer a 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.

This bodes well for the future, not only related to the phone, but 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.

I think Google is a much better investment than Apple, though, and that mostly because of Apple’s relatively high multiple right now (32x). They will unlikely grow earnings as fast as Google over ten years, so should have a lower multiple than Google’s (28x), not higher.


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 defined (in 2022) as the 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 with extremely strong moats.

Berkshire’s IV10/price today stands at 2.4, which is higher than Apple’s 1.6. Selling Apple would not be profitable in done in isolation, but a combination of selling Apple and buying back Berkshire shares would be. Replacing with Apple with Google would be even better.

  • Manlobbi
12 Likes
#21

Apple’s hardware quality actually is quite poor. My kids have multiple MacBooks, iPhones over the years and some of them broke down for no obvious reason within a few months. I have been a user of WinTel products for 30 years and never encountered similar problems. However, the ‘cool’ factor is so strong and the software is so much more hassle-free that it is still irresistible.

#22

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

Just not true. The iOS development market is not a very huge market and not a very unique skill set. I have developers who code both Android and iOS, almost fungible.

#23

It is a huge uphill battle to convert users away from the iPhone.

There are many who think iPhone eco-system is valuable and its moat is insurmountable, etc. May be most of it is true.

Today is a harsh reminder of moat, perceived excellence, etc. Sadly, effective today Blackberry shutsdown its services. Remember Obama with blackberry? I remember how my IT department refused to allow iPhones and supported only Blackberry.

Things change. Technological moat is ephemeral. This doesn’t mean Apple is toast or vanishing tomorrow.

1 Like
#24

An upcoming generation will be so uneducated that they are not able or interested in buying computers as such. They will just thumb their cell phones.

WHAT? I can’t imagine how people would prefer accessing the Internet through smartphones instead of desktop or laptop computers. Smartphones are superior at portability, but their inferior ergonomics make them unsuitable for tasks that require an attention span longer than about 20 seconds. Even laptops are inferior to desktops when it comes to ergonomics. My attention span is quite a bit shorter when I use a laptop than when I use a desktop.

Because PCs depreciate rapidly, Linux users like myself can find great deals on used ones. For just %50 to %100, I’ve been able to buy a nice used desktop PC that runs circles around brand new low-end computers that cost far more. The latest version of my favorite distro, MX Linux, can run well on PCs from the Windows 7 era. How well can the latest version of MacOS run on a Mac from that era? How well can Windows 11 or even Windows 10 run on a PC from that era? Of course, this is a potential threat to both Apple and Microsoft.

#25

WHAT? I can’t imagine how people would prefer accessing the Internet through smartphones instead of desktop or laptop computers. Smartphones are superior at portability, but their inferior ergonomics make them unsuitable for tasks that require an attention span longer than about 20 seconds.

Don’t have to imagine it. It is here today.

I’m with you bro. I high speed touch type. Typing on a tiny screen is an abomination to me. Steve Balmer famously dissed the iPhone because it had no keyboard. I would have done the same thing.

But Balmer and I were wrong. Facebook, Instagram, and Snapchat don’t require an attention span longer than 20 seconds. The small screens have won. We’re dinosaurs.

5 Likes
#26

An upcoming generation will be so uneducated that they are not able or interested in buying computers as such. They will just thumb their cell phones.

WHAT? I can’t imagine how people would prefer accessing the Internet through smartphones instead of desktop or laptop computers. Smartphones are superior at portability, but their inferior ergonomics make them unsuitable for tasks that require an attention span longer than about 20 seconds. Even laptops are inferior to desktops when it comes to ergonomics. My attention span is quite a bit shorter when I use a laptop than when I use a desktop.

While I pretty-much agree with you, I find that some of my friends have abandoned their computers altogether, not only desk-tops, but lap-tops as well, and do everything on their smart-phones. Then they e-mail the stuff they need to print out to me for printing. Grrr.

I have an app on my cell phone that enables me full access to my broker (TD-Ameritrade) web site. But the screen is way way too small to actually use it. Fortunately, I do not have to be on-line all day at my brokerage, making trades all day. Gawwd!

#27

What killed RIM? It was the market leader. iPhone, product design. I remember Prem Watsa made a big bet on RIM and it didn’t pay off.

1 Like
#28

And I remember Apple being discussed at the time and why WEB hadn’t bought - seen as too risky with Samsung etc product cycle, then Apple was viewed as a network, services, brand…

I too had some RIM (very small, lost about 20%) and it put me off buying apple back in the day, now 3trn…

#29

their inferior ergonomics make them unsuitable for tasks that require an attention span longer than about 20 seconds.

My son uses his phone for 4 hours straight at home. Young people use their phones lot longer and for things that require attention span too, like he read a book on his phone, on our 4 hour car trip.

1 Like
#30

Last night our youngest asked to talk to his mom and me. We put down our phones and tablets, turned off the TV and all sat down together…fearing the worst.

He hesitated, then blurted it out…he wanted to use his Christmas money to buy a new Samsung phone.

We are an Apple family, we implored. Your brother, sister, mom, dad, we all have iPhones and iPads.

Nothing could convince him. He wants Android. He wants Samsung.

#31

Last night our youngest asked to talk to his mom and me. We put down our phones and tablets, turned off the TV and all sat down together…fearing the worst.

Hilarious. I am glad, though, that you put down your phones and tablets and turned off the TV.
Also glad his girlfriend, if he is old enough to have one, is not pregnant. :wink:

He hesitated, then blurted it out…he wanted to use his Christmas money to buy a new Samsung phone.

We are an Apple family, we implored. Your brother, sister, mom, dad, we all have iPhones and iPads.

Nothing could convince him. He wants Android. He wants Samsung.

That is very interesting. Has he actually used an Android-Samsung telephone? I happen to have a Samsung Galaxie S7 (now out-of-date, I suppose), and have used an iPhone in the past. I do not very much care which I have, but changing from one to the other is a pain (learning or re-learning curve). I do not use most of the features my cell phone has, and leave it off entirely some days. Most of my friends have iPhones, though, and some no longer even use their computers anymore.

#32

Last night our youngest asked to talk to his mom and me. …fearing the worst.
Yeah, I know that sinking feeling, I always experience that whenever my wife says she wants to talk to me.

#33

Last night our youngest asked to talk to his mom and me. …fearing the worst.

Yeah, I know that sinking feeling, I always experience that whenever my wife says she wants to talk to me.

I never had a wife, but I have learned by sad experience that whenever a girlfriend said “we need to talk,” (they usually did it on the telephone) it meant the relationship was over.

#34

I think most youngsters do it by text or just block / ghost nowadays.

#35

Hey…think of it this way. We were near uninimous stating Warren should avoid or sell at couple trillion or so ago. What do we know?

5 Likes
#36

We were near uninimous stating Warren should avoid or sell at couple trillion or so ago. What do we know?

I didn’t have an opinion. It’s interesting though that Charlie strongly advocated against reducing the position at all, when Warren did sell some not too long ago.

#37

We know that Warren is obsessed with the returns companies can generate on the actual capital tied up in the business - he constantly reminds us how rare these businesses are. Click this first link and look at the “Equity” line item, which is about the same as Apple’s net cash on the second link (my favorite apple PDF, updated quarterly). Apple has a stated goal to reduce net cash to zero, which it has been progressing towards. That will take shareholder’s equity to zero or negative. Watch the Return on Equity as the equity is removed from the company. Look at all the per-share measures up top as the capital return program progresses towards zero net cash. These two links are a great way to understand Warren and Charlie’s continued love of Apple even at these prices

https://roic.ai/company/AAPL

https://s2.q4cdn.com/470004039/files/doc_financials/2021/q4/…

2 Likes
#38

Look at all the per-share measures up top as the capital return program progresses towards zero net cash.
These two links are a great way to understand Warren and Charlie’s continued love of Apple even at these prices

This might conceivably also be a way to misunderstand the same thing.

The reduction in book capital makes the naively calculated ROE look better, but it doesn’t make the business any more attractive.
The return on deployed assets is unchanged, for example.

Consequently, the falling book and therefore misleadingly better ROE might lead some people to think
it’s a better and better business and fool them into thinking it’s becoming more attractive.

It’s a fine business, but buybacks at fair value don’t make it any better, and buybacks above fair value make a share worth less.
It’s up to you to decide where fair value lies.

But the thing to remember is that ROE is that most often it’s “necessary but not sufficient”.
Almost every good company will have a decent ROE. Not all firms with a high ROE are great businesses.
A rising ROE doesn’t necessarily mean the underlying business is becoming a better one.
Leverage and depleted capital base will juice ROE, and might be good or bad or neutral depending on the business.

I love the circularity of the case for large buybacks.
If a firm like Berkshire is extremely finicky about when to do buybacks, indulging in them only when it’s a really compelling deal,
then the long run trajectory of the value of a share will continue to rise strongly.
Meaning a share today is worth more.
If the share is worth more, you should be less finicky about the cutoff valuation for buybacks.
But if you’re less finicky, then the long run trajectory of value per share rises more slowly.
Meaning a share is worth less today, meaning you should be more finicky…around and around.
Personally I think Apple is not getting a very attractive return on the capital they’re currently deploying on buybacks.
Not that they have any other great way to deploy that capital, other than buying Berkshire Hathaway.

Jim

15 Likes
#39

The reduction in book capital makes the naively calculated ROE look better, but it doesn’t make the business any more attractive.
The return on deployed assets is unchanged, for example.

Consequently, the falling book and therefore misleadingly better ROE might lead some people to think
it’s a better and better business and fool them into thinking it’s becoming more attractive.

It’s a fine business, but buybacks at fair value don’t make it any better, and buybacks above fair value make a share worth less.
It’s up to you to decide where fair value lies.

But the thing to remember is that ROE is that most often it’s “necessary but not sufficient”.
Almost every good company will have a decent ROE. Not all firms with a high ROE are great businesses.
A rising ROE doesn’t necessarily mean the underlying business is becoming a better one.
Leverage and depleted capital base will juice ROE, and might be good or bad or neutral depending on the business.

Jim, thank you for expressing, much more eloquently than I could have, a partially formed idea I had floating around in my head. This discussion brings to mind IBM. Around the time Berkshire was an investor in the company, IBM had a very high ROE that routinely exceeded 70% or even 80%. In fact, according to this chart, IBM’s ROE briefly exceeded 110% in 2015: https://www.macrotrends.net/stocks/charts/IBM/ibm/roe. But the high ROE appears to have been chiefly a result of IBM having bought back so much stock that its book capital was exceedingly low. It did not mean IBM was a great business, as evidenced by its poor performance over the last decade (IBM is well below its highs from a decade ago). So, I think IBM is an excellent example of your point that “[n]ot all firms with a high ROE are great businesses.”

3 Likes