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This is indeed an analysis that we don't see often enough. Apple is viewed as a "tech company" and tech companies are all about innovation and growth. And the

by ajross 3y ago

This is indeed an analysis that we don't see often enough. Apple is viewed as a "tech company" and tech companies are all about innovation and growth. And their stocks are priced accordingly. But, Apple is actually extremely conservative with product rollouts and new markets (c.f. having essentially missed the boat on AI). They make phones and sell phone apps. They do a few other things, but at the end of the day their balance sheet says "Apple sells phones". And the phone market is saturated now. Everyone's got one. They keep getting better and people keep them longer. And Apple already has a 50% share of units sold, and a much higher proportion of total revenue. This market is tapped out. It's not going to grow. Really the mess happening in Europe (mostly in Europe anyway) is best seen as a desperate struggle to push the growth reckoning far enough out for them to roll out a new successful product. They're rent seeking just to keep the balance sheet clean, but it won't work forever. Really this happens to all big tech companies. Eventually the original product set starts to commoditize and there's nothing left to fill the void.

carlosjobim 3y ago
As long as new people are growing up, they're going to need their own phones, so there will always be a market. The same of course with many other consumer goods.
- ajross 3y ago
  But not a growing market. You don't get a 27.27 P/E ratio by selling phones to the same fraction of the general population. Indeed, that's "the same as many other consumer goods", so go check valuations of Nestle or Proctor & Gamble or whatever. The point is that an Apple stock priced at a level commensurate with a static market would be a catastrophic loss of shareholder value.
  - carlosjobim 3y ago
    Well of course nothing can grow forever. But Apple can still keep making profits every year and pay dividends. Why should I or anybody else care any more than that for the shareholders? Boo-hoo?
  - gen220 3y ago
    I'd recommend looking at P/S, Gross Margin and Operating Margins. They're more robust measurement tools than P/E and Net Margin, because – unlike Net Income (Earnings) – Revenue, Cost of Revenue and Operating Expenses are not accounting magic. Today, Apple trades at 6.94 Price/TTM Sales per Share. P&G trades at 4.7. Apple's TTM Gross Margin and TTM Operating Margins are 45% and 30.7%. P&G's are 50% and 22%. Apple's TTM Operating Margin is 1.395x of P&G's, and their P/S is 1.476x of P&G. This is the explanatory variable for the higher P/S – higher operating efficiency. Which makes sense because their blend of revenue includes services and insurance, not just high-margin physical products. IDK the point you're trying to make, because these companies have essentially the same multiples today. Apple's market cap is higher because their TTM revenue is $386B and P&G's is $84B. But their key ratios are not so far apart. I wrote all this up to show you the perils of P/E comparisons... before realizing that Apple and P&G actually have essentially identical P/E valuations (~26-27). In this instance, there's not a lot of peril, because they're both in a similar phase of corporate life: operating as late-stage growth companies surfing the wave separating innovation from profit-maximization for as long as they can – where generating income is important (so net income is not hovering around zero) but not the end-all/be-all (there're still expectations of YoY revenue growth). Besides, Apple's customer and revenue composition is also not at all static, and you'd understand this if you read their earnings reports. They are not a dam that's waiting to burst, in spite of some people willing them to be. On the contrary, they've never been stickier or more mass-market than they are today.
- zogrodea 3y ago
  That's an interesting thought and makes me think, because of declining birth rates and an ageing population, Apple will have fewer and fewer people to sell phones to as time goes on.
amluto 3y ago
> c.f. having essentially missed the boat on AI What boat? Not being first to market with a fancy commercial-grade model and charging $20/mo for consumer-style access (a la OpenAI)? Not having a cloud offering (MS, etc)? Not having a fancy in-your-pocket AI (like… no one? Siri is behind the times, and a better Siri would be great, but IMO the issue isn’t so much the quality of the language model but that Siri is oddly limited in what it can interact with). I agree that Apple hasn’t been amazingly innovative in the last few years, but being off the AI hype boat seems off the mark.
- ajross 3y ago
  AI is producing shareholder value like crazy. No, that's not the same thing as a new market, exactly, but it speaks to the same need in the C suites. Apple didn't get on that boat, and so is being forced into squeezing their partners and fighting in the trenches on essentially unwinnable regulatory points just to preserve the illusion of growth. AI is a much more effective illusion of growth!
  - matwood 3y ago
    The did mention AI 12 times in the PR announcing the updated MBA earlier this week.

by ajross 3y ago

carlosjobim 3y ago

As long as new people are growing up, they're going to need their own phones, so there will always be a market. The same of course with many other consumer goods.

ajross 3y ago
But not a growing market. You don't get a 27.27 P/E ratio by selling phones to the same fraction of the general population. Indeed, that's "the same as many other consumer goods", so go check valuations of Nestle or Proctor & Gamble or whatever. The point is that an Apple stock priced at a level commensurate with a static market would be a catastrophic loss of shareholder value.
- carlosjobim 3y ago
  Well of course nothing can grow forever. But Apple can still keep making profits every year and pay dividends. Why should I or anybody else care any more than that for the shareholders? Boo-hoo?
- gen220 3y ago
  I'd recommend looking at P/S, Gross Margin and Operating Margins. They're more robust measurement tools than P/E and Net Margin, because – unlike Net Income (Earnings) – Revenue, Cost of Revenue and Operating Expenses are not accounting magic. Today, Apple trades at 6.94 Price/TTM Sales per Share. P&G trades at 4.7. Apple's TTM Gross Margin and TTM Operating Margins are 45% and 30.7%. P&G's are 50% and 22%. Apple's TTM Operating Margin is 1.395x of P&G's, and their P/S is 1.476x of P&G. This is the explanatory variable for the higher P/S – higher operating efficiency. Which makes sense because their blend of revenue includes services and insurance, not just high-margin physical products. IDK the point you're trying to make, because these companies have essentially the same multiples today. Apple's market cap is higher because their TTM revenue is $386B and P&G's is $84B. But their key ratios are not so far apart. I wrote all this up to show you the perils of P/E comparisons... before realizing that Apple and P&G actually have essentially identical P/E valuations (~26-27). In this instance, there's not a lot of peril, because they're both in a similar phase of corporate life: operating as late-stage growth companies surfing the wave separating innovation from profit-maximization for as long as they can – where generating income is important (so net income is not hovering around zero) but not the end-all/be-all (there're still expectations of YoY revenue growth). Besides, Apple's customer and revenue composition is also not at all static, and you'd understand this if you read their earnings reports. They are not a dam that's waiting to burst, in spite of some people willing them to be. On the contrary, they've never been stickier or more mass-market than they are today.
zogrodea 3y ago
That's an interesting thought and makes me think, because of declining birth rates and an ageing population, Apple will have fewer and fewer people to sell phones to as time goes on.

amluto 3y ago

> c.f. having essentially missed the boat on AI What boat? Not being first to market with a fancy commercial-grade model and charging $20/mo for consumer-style access (a la OpenAI)? Not having a cloud offering (MS, etc)? Not having a fancy in-your-pocket AI (like… no one? Siri is behind the times, and a better Siri would be great, but IMO the issue isn’t so much the quality of the language model but that Siri is oddly limited in what it can interact with). I agree that Apple hasn’t been amazingly innovative in the last few years, but being off the AI hype boat seems off the mark.

ajross 3y ago
AI is producing shareholder value like crazy. No, that's not the same thing as a new market, exactly, but it speaks to the same need in the C suites. Apple didn't get on that boat, and so is being forced into squeezing their partners and fighting in the trenches on essentially unwinnable regulatory points just to preserve the illusion of growth. AI is a much more effective illusion of growth!
- matwood 3y ago
  The did mention AI 12 times in the PR announcing the updated MBA earlier this week.