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VALUATION METRICS: 10 factors to consider when assessing if a company is 10X Revenue Club material

Bill Gurley of Benchmark is one of the smartest VCs I know. His investments include Uber, DogVacay, GrubHub, Zillow and OpenTable.This is a great filter for assessing investing in private companies as well.

We created a list of 10 factors that public investors consider when trying to qualify if a company is deserved of such a prestigious and lofty valuation. These factors are:

1. Sustainable Competitive Advantage – how big is the competitive Moat?
2. Presence of Network Effects – does the model tip to a single vendor?
3. Visibility/Predictability – is the revenue consistent
4. Customer Lock-in / High Switching Costs – is it expensive to leave?
5. Gross margin levels – How much leverage exists is the business?
6. Marginal Profitability Calculation – is the leverage still expanding?
7. Customer Concentration – are there key dependencies?
8. Major Partner Dependencies – are there key dependencies here as well?
9. Organic Demand vs. Marketing Spend – is customer acquisition expensive?
10. Growth – how big will the future be?

via abovethecrowd.com

January 03, 2014 in Coaching, Investing, Pattern Recognition, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

NIKEiD and the Uber-ization of Global Logistics

Uberization-Global-Logistics

"Any sufficiently advanced technology is indistinguishable from magic." - Arthur C. Clarke

"You mean, I simply push this button, and it just shows up?"

**It**, in this case, is the magical Uber Black Car; magical being relative to the pedestrian, unreliable yellow taxi.

What Uber did in re-thinking the gray space between taxis and private car services is instructive.

Logistically speaking, they rejiggered the following:

  1. The Ordering Process (it's push-button simple via an app; no interminable waiting on hold for a dispatcher)
  2. The Transparency of Availability (you can literally see how many cars are nearby, and how quickly your car will arrive)
  3. The Nature of the Transaction (no money ever comes out of your pocket; you never have to think about the tip again)
  4. The Reliability of Your Order (you are notified on your mobile when Uber arrives, the driver confirms that you are indeed the orderer; no more pickups that don't show up, or taxis 'stolen' by pedestrians on the street)
  5. Your Relationship to the Driver (most drivers feel like entrepreneurs; Uber is a new revenue source for them; all drivers are identifiable, and subject to being rated and reviewed)

Part of the magic of Uber is that the company is able to create this transformative experience without owning any of the cars or hiring a fleet of drivers.

Given the above, is it any wonder then that "uber-ization" has become my go-to term for industry re-invention through new combinations of design, user experience, workflow and logistics -- as enabled by broadband, mobile and the cloud. 

NIKEiD: Re-Thinking What a Shoe Can Be

The power of great technological waves and re-invention in general is not merely that they change how things are made, or what they cost. 

Rather, it's that they change our concept of what is possible, and what a given medium can be.

In the realm of motion pictures, adding sound (and talking) to films, completely transormed the industry.

In the case of ecommerce, the boundarly-less and friction-free nature of Amazon, has completely disrupted retail.

In the realm of mobile, building a unifed platform around iPhones, iPads, iTunes and iOS, has catalyzed the post-PC era. 

I thought about this truth yesterday, as the pair of fully customized NIKEiD shoes showed up at my door.

Not only were they beautiful (okay, beauty is in the eye of the beholder), but what left me feeling awed was the fact that what had begun as a series of push-button simple clicks in San Francisco, had traveled across the globe, navigating an unimaginably intricate manufucturing and logistics process to find its way back to my front door.

The UPS route home alone (see above) shows stops in China, Hong Kong, Taiwan, Philippines, back to China, Alaska, Kentucky, Oakland, and finally, San Francisco. 

Simply magic, and I wonder how many other products, services and industries are ripe for such reinvention. 

If you are sitting in an industry where commoditization and/or disruption is your future (through de-localization, re-invention and digitization, you need to heed the words of Google CEO Larry Page.

His guidance? "I encourage more companies to do things that are outside their comfort zone. It gives you more scalability."

Food for thought.

Related:

  1. Uber-ization: The art and science of reinventing an industry (GigaOM)
  2. Retail needs a reboot to survive (GigaOM)
  3. You say you want a revolution? It's called post-PC computing (O'Reilly)

May 31, 2013 in Amazon, Apple, Coaching, Design, Economy, Ideation, Investing, iOS, Mobile, Pattern Recognition, Post-PC, Retailing, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

Reading the Tea Leaves of Apple's Q2, 2013 Earnings Call -- Four Takeaways

Reading-Tea-Leaves-Apple

"It's not real, you know, the fame thing."- Anna Scott (Notting Hill)

The hardest thing for the beleaguered Apple investor to wrap their head around is the fact that Apple exists on a schizophrenic plane like no other.

On the one hand, there is 'THE STOCK' -- i.e., the broken stock price.

It rests in the same Bargain Bin as Dell Computer, a company selling undifferentiated offerings in a commoditized segment that quite literally shrinks by the day.

On the other, there is 'THE REAL COMPANY,' an innovating, selling, marketing, leverage and cash-generating machine that has now dropped almost $100 billion dollars in revenues and $22 billion dollars of profits in just the first two quarters of Apple's fiscal year.

That this engine has fattened the company's coffers to the tune of $145 billion dollars (another $12.5 billion added this quarter) does not satisfy.

That this harvest comes from six different multi-billion dollar product lines (iPhone, iPad, Mac, iPad, iTunes & Services, Accessories) manages little more than an acknowledging shrug.

That the company has repeatedly proven its ability to create massive new markets in a quasi-predictable, highly-levered fashion (now known simply as the iOS platform), yields but a yawn.

"Where's my divvy," bitch the disappointed investors, seemingly ignorant to the fact that not only have spirtual peers, Google and Amazon, never offered up a dividend, but they've never even let the topic so much as brush the top of the table. 

"Apple has an identity crisis," utter the dumbest of the dumb media, blind to the power of Apple's unique position in the market as an integrated hardware, software, services, media, tools and marketplace solution provider.

Ever clear on their North Star - i.e., delivering great consumer experiences that change people's lives - Apple has neither changed their identity, nor lost their focus, as evidenced by the best customer satisfaction and customer loyalty ratings, and consistently, the industry's highest profit margins.

Know this. If it was even remotely easy to approximate the 'Apple Way,' we'd be talking about the multiple multi-billion dollar product lines that Apple's competitors have created; we'd be talking about the breakout success of the Apple Retail Store copycats; and we'd be talking about the multitudes of developer success stories that have dropped out of the Google, RIM or Microsoft mobile ecosystems.

We aren't, and it's not (easy).

It's with this fundamental schism between THE REAL COMPANY and The STOCK that I attempted to make sense of the takeaways from Apple's earnings call.

There are four conclusions that stood out to me:

  1. Tim Cook wants Apple to be Liked by Investors in a way that Steve Jobs never did: In the call, Cook had an almost apologetic tone with respect to how Apple has failed to beat the guidance, growth and margins expected by analysts and media. In increasing the dividend and upping buybacks, the tone was more akin to "we're trying harder" than "get on the bus or get left in the dust." By contrast, even when Apple's stock was cratering into the $80's following the crush of the 2008 financial crisis, Jobs embodied a healthy irritation for the capriciousness of investors, and the ignorance of many analysts and the media. The truth here is that no good deed goes unpunished, and far from appreciating Apple's olive branch to investors, the narrative is likely to be spun as Cook's Apple is trying to buy time, and is in defensive mode. Me personally, I wanted a bit more "F-U," and a bit less, "we're sorry."
  2. Margins will Remain Contracted for the Foreseeable Future: If there are two product-related narratives that stood out for me, they are: 1) iPad mini unleashed an absolute torrent of first-time tablet device buyers (personally, it's their best tablet device), and if the sacrifice is lower margins (relative to the larger iPad), it's worth the trade-off. If the tablet is the replacement device for many a 'job' that users previously hired PCs for -- as I believe it is -- then any way that Apple can capture this market share is a zero-sum type of win that they must secure. Here, Cook and Apple CFO Peter Oppenheimer were quite clear that Apple executed a similar strategy in winning the media player market with iPod, so what's past is prologue; and 2) iPhone 4/4S is the smartphone device that Apple is counting on to capture market share outside of the US with first-time smartphone buyers. Unsurprisingly, these devices may be where the highest volume comes from on iPhone (especially, until the next iPhone comes out), eroding margins in the process. The alternative is to give that ground to Android based devices, a calculus between market share, revenue, user experience and the bottom line that the company has repeatedly shown the acumen to manage through. Honestly, I am not even remotely concerned that they will find the right balance here.
  3. The New Product Pipeline will Likely Remain Dry until Fall at the earliest: Given the extreme secrecy by which the company launches new products, and manages expectations around same, Cook spoke with a metaphorical bull-horn in flatly stating that new product **categories** and new services are not expected until this Fall and throughout 2014. Needless to say, the absence of new products combined with the absence of seasonal catalysts, explains why Apple's outlook for Q3 was a flat quarter, and why the quarter behind that may not be much better.
  4. iOS Usage Rates are Staggering in their Differential relative to Competing Platforms: If the downside of the current Apple story is absence of true catalysts to carry it aloft to new heights, the upside is that iOS stands alone in generating 75 cents of every dollar of ecosystem commerce in the mobile universe. Simply put, Apple is paying developers $1 billion dollars in revenue share every quarter, iTunes is on a $16 billion dollar run rate, and the actual usage of these devices in terms of web traffic is of a different degree than the competition. Keep that in mind next time Google touts generic Android unit count numbers. Again, that's not to say that there aren't clear scenarios where Apple gets attacked on the margins, but their core differentators, and the depth of engagement and loyalty with users is unlikely to be threatened any time soon. That's the bottom line.

So, netting it out, should you Buy, Sell, or Do Nothing? And what will Apple stock do in the intervening months ahead?

This, unfortunately is a riddle without a clear answer, a stark reminder of the famous quote that the market can stay irrational far longer than most investors can remain solvent.

Related Posts:

  1. Cry Babies: The Strange, Confusing Path of the Apple 
  2. Apple's North Star: Four Takeaways from Apple's Q4 Earnings Call
  3. OMG, WTF is going on with Apple Stock
  4. What is Apple Worth: The 'Gold Standard' Thesis
  5. Get ready for the Apple + iPhone backlash

April 23, 2013 in Amazon, Android, Apple, Coaching, Investing, iOS, Metrics, Mobile, Pattern Recognition, Post-PC, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

Cry Babies: The Strange, Confusing Path of the Apple Investor

Cry-Baby-Apple

"GODDAMNIT, APPLE IS DOOMED!! Wait… that’s profit? Carry on." - Jim Dalrymple

Let me preface my comments by saying that I am LONG Apple, so I am not real happy at the moment.

Consider, a company that:

  • Routinely beats its own projections, generating more revenue ($54B) in a quarter than Google generates in a year. (Side note: fuck the analysts' projections - if they knew shit, they would have anticipated the collapse of DotCom, the 2008 financial crisis, etc.)
  • Is consistently, mind-numbingly profitable, yielding outsized profits that have fattened their cash hoard to $137 billion dollars. You'd have to look to the gas & oil industry to find another company that is comparably profitable.
  • Has not one multi-billion dollar line of business, but six of them (iPhone, iPad, Mac, iPod, iTunes, Accessories), and all of these lines of businesses feed off of a common ecosystem, creating leverage, lock-in, loyalty and all sorts of halo effects. In fact, the company sold over 75 million iOS devices in this most recent quarter.
  • Is unequaled in terms of having an R&D engine for creating new products that generate massive new revenue sources -- not just defensive moats.
  • Has cracked the code to selling in China ($7B in most recent quarter; 60% year-over-year growth), something few other American companies have done.
  • Despite a reputation for secrecy (with new product launches - duh), sets the bar for transparency with investors, breaking out minutiae on product lines, growth rates, ASPs, sales channels, same store numbers, etc. Contrast this with comparable growth companies, like Amazon, Google and Netflix, where the details are much more surface level.

Apple Revenue by Product and Operating Segments

Apple-Breakout

Thus, it is with little surprise that Apple is:

  • Getting tarred and feathered after hours, down $52, or 10%. As someone put so eloquently on twitter, "I never thought I would see "$54 Billion" and "light on revenues" in the same headline. 
  • Trading at a P/E of 10.4, and excluding cash, a P/E of 7.1. By contrast, Amazon is up over 20% following a report of a LOSS in their most recent quarter, and investors loved Google's most recent revenue miss (the stock shot up 5%). Oh by the way, neither Google nor Amazon pay dividends, something to keep in mind when you hear an investor lamenting that Apple should increase their dividend.

Stock Performance: Apple vs. Amazon vs. Google

Apple-Goog-AMZN 

Let me net it out for you

To say that investors are idiots, really is an unfair dig at idiots.

The more nuanced truth is that we tire of winners and root for their demise. We trust so-called experts, even when all of the data suggests that not only are they clueless but hopelessly conflicted as well. 

And most disappointingly, we don't reward transparency and being treated like adults when it comes to investing.

We respond best when we are teased, ignored or treated like children. 

For Apple, the hard truth on this one is to:

A) Be comfortable with the bottom line that rumors and outright lies nothwithstanding (I am talking about you, iPhone 5 rumor-mongers), there is only Apple when it comes to products, customers and profits. Everyone else is in the "not exactly" bucket;

B) Give up the game of sandbagging and then beating earnings, and focus investors on a real earnings range (as they did in this call) so clueless analysts and the media that lap up their dog vomit, can't harm them;

C) Embrace the Jeff Bezos ethos about being willing to be misunderstood for long periods of time, and wear that as a badge of honor with investors.

If you are Tim Cook, and company, you sleep well knowing that your North Star is as bright as ever.

But, at the same time, knowing how many investors are hysterically blind to the potent lights emitted by that star, must sting a little, no?

UPDATE:

  1. Jim Dalrymple, who I quoted in the entry to this piece, writes today, "How the hell does this happen? Amazon misses its earnings, income fell, sales missed Wall Street consensus and… the stock price goes up 6 percent.Apple sells a gazillion of everything, reports record revenue and profit, and its stock falls."

Related:

  1. OMG, WTF is going on with Apple Stock
  2. What is Apple Worth: The 'Gold Standard' Thesis
  3. Get ready for the Apple + iPhone backlash
  4. Apple's North Star: Four Takeaways from Apple's Q4 Earnings Call

 

January 23, 2013 in Apple, Investing, Pattern Recognition, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

Tim Cook on the relationship between collaboration and integration to Apple's success

Tim-cook-apple-ceo

This Businessweek interview with Apple CEO Tim Cook is an excellent read, but I really nodded when Cook talked about Apple's unparalleled level of integration and the role that collaboration plays in their culture and organizational structure, inasmuch as it points a bow around the core thesis behind my recent GigaOM article on the age of indivisibility and integrated systems design. Here's Cook:

"You look at what we are great at. There are many things. But the one thing we do, which I think no one else does, is integrate hardware, software and services in such a way that most consumers begin to not differentiate anymore. They just care that the experience is fantastic. So how do we keep doing that and keep taking it to an even higher level? You have to be an A-plus at collaboration."

Sounds sooo simple, yet just a tiny handful of companies on the planet have found a way to do this across products segments, product lifecycles, and do so at scale -- over a multi-year period. That's the magic of Apple.

Read the full Cook interview HERE.

Read my GigaOM piece HERE.

December 06, 2012 in Apple, Coaching, Design, Investing, Marketing, Pattern Recognition, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

OMG, WTF is going on with Apple Stock?

Apple-Crash-Burn

Apple stock is down 25% since late September, and the pundits, naysayers and Apple haters are all saying that if there is this much antipathy for Apple stock, maybe the smart money knows something.

The narrative reasoning behind this is straightforward, and it goes like this. One year after Steve Jobs' death, Apple's magic is gone. Siri sucks. Maps suck. iOS 6 is buggy. There is no more iPod, iPhone or iPad like 'breakthrough device' in the offing. Tim Cook isn't Steve Jobs-like in keeping his management team moving in lock-step. The Apple Retail hire was an obvious cultural miss-fit from day one.

Finally, the competitive offerings are getting 'good enough,' meaning: A) Margins are destined to be under pressure; and B) The flow of devices into customers hands, and cash into Apple's coffers, are poised for disruption.

First off, let me say that in early September I predicted this EXACT backlash to play out following the iPhone 5 announcement (see: 'Get ready for the Apple + iPhone backlash').

You can read the piece to gauge the many reasons why market indigestion was a given, but that doesn't address the larger question of whether Apple has really lost its mojo, or not.

I have three thoughts on this one:

  1. Stock Value: Apple is trading at a trailing price-to-earnings (PE) ratio of <12, and a forward PE of 9. By contrast, Google, which missed its latest earnings, is trading at a trailing PE of 20, and a forward PE of 14. Unless you believe that Apple is worth 60% of Google, it doesn't take a rocket scientist to conclude that something is amiss. In fact, the always-excellent Andy Zaky at Bullish Cross has done detailed analysis showing why at no point in recent history has Google been a better investment than Apple (see: 'Buy Google or Apple? The Answer is Simple'). Similarly, I wrote a piece some time back arguing that Apple is a "Gold Standard" investment, reserved for category leaders that consistently out-execute the competition; the point being that Apple's peers are not HP and Microsoft, but rather, Amazon, Google, Disney, Nike, McDonald's, Southwest Airlines, Berkshire Hathaway, Proctor & Gamble and Coca Cola. So what are those guys trading at? Factoring out Amazon, which trades at a wacky PE of 2,679, the averaged PE of those companies is 17.32. Again, Apple is trading at a PE that is 68% of the value of the Gold Standard companies (see: 'What is Apple Worth? The 'Gold Standard' Thesis'). The key point here is that whether you believe, as Andy Zaky argues, that Apple is a $1,000 stock in the next year or not, you should have conviction that Apple's stock values are out of whack.
  2. This Time is Different: Uh, no. Actually as Horace Dediu at Asymco shows, Apple has had multiple of these types of valuation contractions over the years, as the market is fairly simplistic, dumb and reactive when it comes to the Apple narrative. Also, know that Q4 is routinely their weakest quarter since it's the wedge between back to school and holiday, and typically the new iPhone launches late in the quarter, meaning that revenue does not pop until Q1, the holiday quarter. Analysts always miss this, and in fact, last year the stock dropped 13% based on the same narrative. Just as last year, the miss was analyst numbers, not Apple's, something that I noted then. In fact, following last year's Q4 disappointment + end of year tax selling through to their Q1 earnings call (end of February), the stock went up 44%. If it did something comparable, the stock would trade at $750.
  3. Apple and its Ecosystem: The other big picture is whether there are systemic issues fundamentally breaking Apple. Corporate culture is certainly a risk, and I am NOT betting that the company has another breakout iPad or iPhone type of device in 2013 (color me dubious on a game-changing Apple TV, which I blogged about HERE). Then again, they don't have to, as they are not priced richly, and there are a lot of legs left in iPhone and iPad in my opinion. Margins? Well, the margin story never ends, and yes, iPad mini tightens margins a bit, but then again, Apple's stock price assumes a margin collapse. What happens when margins tighten, but it's minimal? Is Apple losing business? Are they losing profits? Are they failing to generate cash? The answer is obvious - NO - so it really comes down to your intestinal fortitude and cash urgency as an investor. 

Obviously, I know no secrets, but if I were you, I would embrace the Warren Buffett-ism: Be greedy when others are fearful, and fearful when others are greedy.

The market is acting fearful. Be greedy.

UPDATE: I thought that Tim Cook's comments on the relationship between integration and collaboration (in BusinessWeek interview), and how the translates to uniquely Apple execution was instructive. There are a small handful of companies on the plan that have the DNA to do this.

Related Posts:

  1. What is Apple Worth: The 'Gold Standard' Thesis
  2. Get ready for the Apple + iPhone backlash
  3. Why the Rumors About Apple Building a Television are Wrong (O'Reilly)

 

November 16, 2012 in Apple, Coaching, Google, Investing, Pattern Recognition, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

Apple’s North Star vs. Earth’s Gravity: Four Takeaways from Apple’s Earnings Call

Apple-north-star

The broad narrative on Apple earnings for the quarter is that the company: A) Missed on most of Wall Street’s projections for them (except iPad and iPod sales); B) Barely beat their own comically conservative guidance; C) Provided guidance numbers for the quarter ahead that are especially conservative; and D) Acknowledged that the slowing global economy is a challenge on multiple fronts.

Unsurprisingly, the stock is down 5% after-hours. But the real question is, 'Buy,' 'Sell' or 'Hold,' right?

To answer this one, let me put forth two salient questions on the topic.

One, is Apple still selling something that the market wants, that customers are willing to pay for when times are tough, and is sufficiently differentiated to maintain high margins?

Two, as a stock, is Apple richly priced, fairly priced or under priced?

Related to this, any analysis of the quarter needs to take note of the fact that the company is in a clear ‘down period’ before the release of the next iPhone.

Simple logic dictates that those who know Apple's product release patterns would default to waiting for the next iPhone, knowing that it’s a quarter away.

Similarly, the same analysis needs to factor that Apple’s newest MacBooks contributed just a few weeks of revenue to the quarter given their date of release.

So, let me attempt to answer Question 1 (Demand + Differentation) and Question 2 (Stock Value) with my four main takeaways from the earnings call:

  1. Performance is Relative: Apple revenue was still up over 22% year over year to $35B, so the law of big numbers is not catching up to them yet. Moreover, the company shows no signs of margin erosion. Quite the opposite. Margins this quarter were 42.8% vs. 41.7% a year ago, and 39.1% in the year ago quarter before that. Further, iPad is disrupting more segments within the PC market than ever before, as evidenced by Apple’s own accelerating separation in sales of iPads vs. Macs. A year ago at this time, Apple was selling 2.5 times as many iPads as Macs. Yet, in this quarter, that number mushroomed to 4.25 times as many iPads. And we already know that the Mac is outpacing the general PC market, growing 2% year-over-year, vs. the PC, which is shrinking 1% year-over-year. A big part of this is the educational sector, especially K-12, where Apple has intelligently segmented pricing with the $399 iPad 2. Apple CEO TIm Cook was quite pointed in asserting that when people talk about the 'tablet market' they generally mean iPad, notwithstanding the buzz and promise of Nexus 7, Kindle Fire and the Nook. Similarly, iPhone was up 28% year-over-year, and shows no signs of losing its magic with either consumers, the enterprise, or even carriers, especially with the promise of a new iPhone and iOS 6 in the fall. In other words, we can debate if Apple should have WON more, but we can’t and shouldn’t posit that they are LOSING anything anywhere. The iOS platform, now 410M devices strong (45M devices added in the quarter), coupled with iTunes and surrounded by iCloud (150M users), stands alone. (Some great charts on Apple numbers are HERE.)
  2. The Economy Sucks: One of my favorite moments of the call was when Bernstein analyst Toni Sacconaghi challenged Apple CFO Peter Oppenheimer’s comments about being “pleased” with the quarter, by noting Apple’s various weak spots, and asking Oppenheimer what he wasn’t pleased about. This led to a bit of a 'tell' by Oppenheimer, who stated that, “Given what’s happening around us...” Oppenheimer went on to talk about a weak Europe, struggling economies that are based on natural resources, foreign currency weakness against the dollar, and delays in getting both the new iPad and the new portables into China. In other words, while Apple is quite strong in the US (no slowdown yet), and asserts great strength in China (they have not seen the rumored China slowdown in their business), there was ample acknowledgement that the economic picture is cloudy and getting dark, so much so that Apple’s going forward numbers assume a weak Europe, Australia, Canada, Brazil, France, Greece, Italy and even Germany. That, by friends, is macro risk, something that Sacconaghi, who is bullish on Apple, nonetheless suggests HERE.
  3. Apple Retail is Flat, but No Alarm Bells: I watch this one like a hawk, inasmuch as retail presence is such a game-changer when it works (product discovery, social confirmation, sales, upsell, and support channel) and an albatross when it doesn’t. As such, I am perennially looking for canaries in the coal mine. Well, here the news is muddy.  Same store sales were up a measly 2.8% year-over-year (from $10.8M per store to $11.1M per store). But at the same time, overall sales numbers were up 17.1% year-over-year to $4.1B, and logic suggests that the company still has room for further geographic expansion. For some contrast, in the obviously seasonal holiday quarter, same store numbers were $17.1M (up 43% over the prior year's quarter), but in the more representative October quarter, they were $10.7M, a number that was actually 9.3% worse than the prior year. Do with this data what you will, but it suggests that Apple Retail continues to work.
  4. Apple Stock Remains Cheap, Getting Cheaper: I have blogged on my 'gold standard' thesis with respect to Apple, so read that post, if interested. The upshot is that there are a small handful of companies that are such bellwethers that their value is almost segment independent. Their only peers are the other bellwethers. Who are the bellwethers? Think: Google, Disney, Nike, Coca Cola, Berkshire Hathaway, Amazon, Southwest Airlines, Procter & Gamble, McDonald’s. Well, after-hours Apple is now trading at 12.6 times trailing twelve-month earnings (per Horace Dediu of Asymco). By contrast, its gold standard peers are trading at 18.54 times trailing earnings, and that’s factoring OUT Amazon’s crazy multiple. Put another way, does anyone think that Apple is even remotely worth only 68 cents on the dollar of its peers? I sure don’t.

Final Notes:

  1. Reality Distortion, My Ass: I have stated this previously, but it bears repeating given Apple’s reputation for secrecy and reality distortion. If you want to find out which company is more open about their strategy, tactics and results, all that you have to do is sit in on an Apple earnings call. Then compare it to a Google, Amazon and/or Netflix earnings call. For example, while Google may fancy itself as the more 'open' company, with its investors at least it generally provides 50,000 foot fly-over views of the business (and Amazon and Netflix are even worse). By contrast, Apple gets surgical, breaking out metrics, segments, margins, channels, etc. Where I come from, WYSIWYG is a good thing, especially where my pocket book is concerned.
  2. Apple TV is a Nice $400M Hobby: Apple has now sold 4M Apple TV units this year, including 1.3M units in the quarter. That’s up 170% year-over-year, and Tim Cook was candid that Apple doesn’t pursue hobbies where they don’t think there is a 'there' there. Still, nothing in the call suggests that a full-blown TV is on the horizon, and I remain extremely dubious that that’s a business that they should get into, as I have previously written about. 

In closing, I'd like to note that I loved Tim Cook’s comment that, “Our (Apple’s) 'North Star' is to maniacally focus on making the world’s best products, and economy aside, we won’t deviate from that...that’s why we breathe, that’s why we live.”

I don't know about you, but I root for companies that aspire for greatness, as I know how few truly do set such lofty goals.

And as an Apple acolyte and frequent investor in the company, I know this isn't Tim Cook puffery. It is Apple gospel, something Cook put a bow around by noting that the company has seen time and again that when companies opt to belt-tighten vs. innovate in tough economic times, the end-result is that Apple puts more distance between itself and the competition.

When you get down to it, that's the Apple story over the next few quarters. To win convincingly by following their North Star, or succumb to Earth's Gravity, and be like everyone else.

Related Posts:

  1. What's Apple Worth? The 'Gold Standard' Thesis
  2. Understanding Apple's Q2 Earnings: It’s about Value & Integration, and it’s Global
  3. It’s Time to ‘Think Different’ because Conventional Wisdom is Dead: Thoughts on Apple’s Q1 Earnings Call
  4. Four things I heard at the Apple Q4 Earnings Call (2011) that caught my attention

July 24, 2012 in Apple, Investing, iOS, Mobile, Pattern Recognition, Post-PC, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

Amazon Prime as a 'gateway drug' - Subscribe & Save

Subscribe-save

Last week in my weekly 'Pattern Recognition' column, I looked at the disruptive potential that same-day delivery will bring once Amazon launches it, as is widely-rumored.

Add to the mix their Subscribe & Save service, which I stumbled upon when ordering a case of protein drinks earlier today.

Once again, this underscores the 'gateaway drug' nature of Amazon Prime.

First, it removes a perceived friction of ordering online - namely delivery cost and delay - by bundling free two-day delivery with orders of any size (on applicable products).

Now, with Subscribe & Save, I can pick off a category of products (bulk size orders) that heretofore were in the domain of Costco.

Side thought: What if Amazon built user-facing analytics me around these products (or enabled third-parties to do so)? Then, their lock in potential for getting consumers to single-source becomes really huge.

Related:

  1. Pattern Recognition: Amazon the Assassin; Late Bloomers; Dream Team Disssage
  2. Amazon's 'Prime' challenger to the iPad (O'Reilly Radar)
  3. Existential Threats: Google v. Apple v. Amazon - who fares best?

July 17, 2012 in Amazon, Investing, Pattern Recognition, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

Is Yahoo save-able, and is it worth saving?

Yahoo-save

Let's begin with the end. No one knows if Marissa Mayer will execute, but Yahoo's hiring of her as CEO definitely passes the sniff test of giving them some 'benefit of the doubt' runway.

Why do I say this? First and foremost, this move was proceeded by a bunch of course-correction actions that Fred Wilson noted today in his post, 'Yahoo Is No Longer Dead To Me.'

In other words, it fits within the larger context of "we (finally) get it."

No less important is the underlying question of, "Is Yahoo save-able, and is it worth saving?" Here, I think the answer is more positive than not.

For one, the company has over 700M unique users worldwide per month, over 150M of which are in the US.

Those are BIG numbers, all the more impressive when one considers how completely the ship has been floating adrift for multiple years. Where there's users, there's hope.

Two, pretty much everyone has 3-5 Yahoo services that they use over the course of a month. I am hardly a Yahoo fanboy, and still find myself using Yahoo Finance (daily), Sports (weekly), Flickr (monthly) and Groups (monthly). In other words, the company is far from irrelevant with its users.

Three, expectations have been beaten down so far for this company that even the slightest hint of focus and directional improvement will give the company the kind of halo effect that makes recruiting easier, gets users to take a second look and gets advertisers motivated to double down.

After all, folks are comparing this story to Apple's turnaround, which is laughable. Apple was a negative margin company in a commoditized space with a duopoly gorilla stepping on it (Wintel), and was massively bleeding cash.

This aint Apple, this aint RIMM, this aint HP.

If anything, the tech space has 5-6 mega players that while they are all reasonably within a step or two of Yahoo's universe, none of them can quite do what Yahoo does.

Think about it. There's Amazon, Apple, Facebook, Google, Microsoft and eBay, and that's about it.

Obviously, lots of interesting startups and disrupters, but no one with the hybrid of services, media, advertising and a smattering of technical chops that Yahoo has.

Again, this just argues that Yahoo is far from irrelevant, from far dead and far from the mother of all turnarounds. Not that it will succeed without herculean effort.

So what should Yahoo do to succeed? First and foremost, "Tear down those walls, Mr. Gorbachev."

Let's face it. Everyone who has paid attention knows that Yahoo has long had good (enough) parts.

Their challenge has been that those parts are poorly integrated, owing to a: A) Silo'd business unit oriented culture; and B) Puritanical approach to commingling user data into one composite data-driven profile.

By that, I mean that whereas Facebook started from the concept that the profile is the context of the user's experience and identity, and then found ways to increasingly stitch more contexts and more actionable events into it, Yahoo is positively in the dark ages in this one.

Consider, that just today I clicked on the Yahoo Profile, and see the above message practically warning me that I am making a choice with unknown dubious value. Needless to say, I did NOT click. Good work, guys.

If there's any moral of the story from Facebook and Apple's success over the past 7-8 years is that everything stems for deep integration - value, experiential richness, user engagement, monetization, etc. In my opinion, this is job one.

Armed with this logic, Mayer needs to define what's the core of Yahoo, how the company will integrate it, what they won't do and what winning looks like. Easy to say, hard to do, but NOT unfathomably hard.

Two final thoughts. Everyone assumes that M&A strategy MUST be a near-term linchpin of Yahoo's turnaround, but I hope that Mayer does not go this path immediately (Note: the media, investment banking and venture communities are motivated by self-interest and intellectual laziness on this one).

Why? We already know that most M&A fails, and that the digestive energy expended from integrating disparate cultures is fraught with peril.

Keep it simple, Mayer. Define the core, fix the core, THEN re-assess.

Then again, most CEOs like to build empires, and M&A is the 'big swinging dick' move of new CEOs.

But of course, Mayer has no dick, so maybe there's hope. :-)

Lastly, know this. It will take only the tiniest amount of execution proof for the stock to begin to turnaround, such that the company will have: A) Cheaper currency for M&A if they desire it; or B) One of the big 5-6 calling to acquire it at terms advantageous to Yahoo.

Even better, with cash flow comes the ability for Yahoo to write their own story on their own timeline.

July 17, 2012 in Investing, Pattern Recognition, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

Pattern Recognition: Passbook is Apple's eWallet; Fragility; TV Business Collapse

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:
  1. Passbook is Apple's eWallet: In my analysis of Apple's forthcoming iOS 6 (part of my WWDC Keynote article), I saved my biggest WOW! for Passbook, noting that while Apple presented it as a consolidated place to organize things like gift cards, flight itineraries, movie tickets and the like, I believe that it's the true beginning of Apple’s foray into being the defacto eWallet. Happily, I stumbled upon this exceptional Quora thread about Passbook. Definitely worth a read, as I believe Passbook is a game changer. Excerpt: "Apple has entered into the mobile wallet marketplace by sticking just a toe in the ocean of mobile payments. In the process, Apple will change just about all aspects of discounts, ticketing and payments."
  2. Fragility - How to Detect Who Will Go Bust: Nassim Nicholas Taleb is unquestionably one of my favorite writers/thinkers. Fooled by Randomness provided intellectual framing for comprehending how biases cloud our judgement, and how we frequently misfactor the role of chance. It also introduced the concept of Black Swan events into our lexicon (although Fooled by Randomness is a better read than Black Swan). His newest book is called Antifragile, and in it he espouses a methodology for figuring out if our miscalculations or misforecasts are more harmful one way or the other (than they are beneficial), and how accelerating the damage is. This article provides a nice overview. Anything pertaining to risk mitigation is a worthy ounce of prevention in these turbulent times.
  3. Is the TV Business Starting to Collapse? I've read many arguments that TV programming is destined to go ala carte and unbundled, breaking the stranglehold that the cable, satellite and broadcast providers hold on consumers. This piece by Henry Blodget does an excellent job of detailing the many reasons this could happen, but I just don't see it happening any time SOON. Someday, sure, but not in the next 5-10 years, I believe. Why do I say this? One, is that the affilate fees that the cable companies pay to the content providers (e.g., ESPN, Bravo, TNT) are the consummate golden handcuffs. The day that ESPN wants to go ala carte is the day that Comcast can stop paying ESPN $4.69 per household per month. Plus, there is the factor of the selfish gene at work; namely, even if the content creators and network operators saw the wisdom of embracing new models, the individuals in power seats have a vested interest in protecting their fiefdoms, something that I blogged about HERE. "Not on my watch," is the unspoken operating logic here. How about Apple? Won't their rumored TV disrupt the business? First off, I believe that they are a more likely set-top box play than a TV maker, but more to the point, when Apple built the iPod, they worked through the record labels, didn't replace them. When they launched iPhone, they worked through the carriers, didn't replace them. I think the same equation will play here. Two related takes on this story. One is that our thirst for live sports (and perhaps, live content in general) is insatiable. It's why ESPN is ESPN, and why ESPN is the true profit center for Disney. Two is that original programming becomes the differentiator for long-term success. It's the reason that HBO can command the fees it does, and maintain high subscriber retention. It's why people care about AMC (Mad Men, Breaking Bad), and it's why TBS/TNT is no longer the place that syndicated shows go to die (although they do plenty of that, too).One other moral of the story is that creating this TV programming that viewers are loyal to is A LOT harder to produce, distribute and market than news content, which is why blogs could kills newspapers, but YouTube hasn't killed the networks. When someone figures out a different format or production methodology that changes the equation, look out.

June 15, 2012 in Apple, Investing, Media, Pattern Recognition, Post-PC, Streams and Nuggets, Television | Permalink | 0 Comments | TrackBack (0)

Pattern Recognition: The JCP Story; App-Enabled Hardware; Thesis-Driven Investing

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

  1. To make sense of J.C. Penney, look to Apple: What's the moral of the story at JCP, where same store sales are down 18.9%, the stock is off 26.5% year-to-date, and CEO Ron Johnson, who built Apple's massively successful retail stores, is suddenly no longer looking like a savior? I think that the moral is less mysterious than it may seem. It's that change is hard, mega-transformations take time and only those with the intestinal fortitude (and board support) to focus and see it through to the end, succeed. After all, JCP is trying to fix a broken brand that's been poorly packaged in a tired segment where a shocking 99.8% of all sales occur at below regular price. Moving to "Fair and Square" pricing may be the right approach, and it's certainly sensible enough to succeed (think: "Low Prices Everyday"), but success won't happen overnight. After all, it took Apple six years to reach the tipping point from which they'd never look back. Macs were dead. Apple's brand was tarnished. The iPod was hardly an overnight success and Apple stores to a while to find their footing. In fact, few remember that while Apple was a ~$5.50 stock when Steve Jobs became interim CEO in September, 1997, it nonetheless hit $6.56 in April, 2003. Now, don't get me wrong. I am not saying that Ron Johnson is Steve Jobs. Just that he's no shlub that has no idea what he's gotten himself into, nor a simpleton who doesn't understand the requisite details needed to come together for his company to succeed. Know this, though. Mega transformations take time, and he'll need it to reinvent JCP. I thought about this reading Herb Greenberg's quasi-defensive position on twitter. Two related takes: HERE and HERE.
  2. GTariOS Inside - App-Enabled Hardware Accessories: As a long time network hardware guy (I've built it, sold it, and created platforms to extend it), and one of the earliest 'bandwagon jumpers' on iOS as a platform play, I have been more than a little disappointed in the lack of hardware accessory businesses to grow out of the enormous success of iOS. After all, from 1994 to the crash of the dotcom bubble, there was a tremendous amount of network device innovation, the so-called Internet of things. Money flowed in, and cool products came out. But as the past 30 years teaches us, the marriage of software and hardware is a coupling that is incredibly hard to pull off. Software guys hate hardware guys, and vice-versa, and that's when they even talk the same language. That's one fundamental reason that there's Apple, and everyone else. Making software, simple web services and apps is a whole lot easier, and takes a lot less capital, so that's where the dollars and decisions flow. But, the ability to create entirely new categories of devices that are "app aware" and can take advantage of an iPhone or iPad as a proxy is a BIG idea - think watches, scales, fitness devices, home monitoring systems, thermostats, etc. That's why I was particularly excited to see Incident's gTar, a new fangled electric guitar that uses an iPhone as its brain, get honorable mention at the latest TechCrunch Disrupt. Subsequent to this, I was thrilled to see that Apple has created a category in their online store for such devices called App-Enabled Accessories. Between this, Apple's decision to resell the Nest Learning Thermostat, and the tremendous story of the Pebble smart watch project at Kickstarter, which raised over $10M and generated tens of thousands of orders, I am optimistic that a boom in hardware accessories that are "native to the post-pc era" are just around the corner.
  3. Thesis-Driven Investing ("Large Networks of engaged users.."): I will never forget the conversation that I had with a VC a few years back. In response to my assertions about the value of thesis-driven investing, the VC retorted, "Well, we pride ourselves in NOT being thesis-driven." That the fund is defunct, and the particular VC was never heard from again, is unsurprising, something that I thought about in reading Union Square Ventures' investment thesis in a post this week. USV is the fund led by Fred Wilson, who in addition to being in most of the smartest deals, is transparent about his approach (via his blog), engages his faithful community (myself included) in a conversation on same, and has enough battle scars from the dot-com bust to not take himself too seriously. No hubris here. Hence, I was more than a little piqued to read and digest their investment thesis, which is focused on: "Large networks of engaged users, differentiated through user experience, and defensible through network effects." Read the whole piece, as it's well articulated, but even better, think about codifying your own thesis. 

 

June 01, 2012 in Apple, Investing, iOS, Post-PC, Retailing, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

Pattern Recognition: That Was Then; Losing My (Institutional) Religion; Mobile Native

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

  1. That Was Then, This is Now: Reading about Morgan Stanley's role in screwing retail investors in the Facebook IPO, and JP Morgan's hedge fund safely nestled in a too big too fail mega-bank (with an implicit US government guarantee), I am reminded that Wall Street wasn't always an amoral, scumbucket octopus. Back in the mid-70's, New York City was teetering on the edge of bankruptcy. Dark days, to be sure. Then, Walt Wriston, the visionary CEO of Citibank (now Citigroup), stepped in, and quite literally, helped save the city. Talk about a juxtaposition. Today's Citigroup not only had to be rescued by TARP, but its CEO was recently rebuffed by angry investors over his excessive pay package. All of which leads me to conclude that if the circumstances of a major municipality going bust were to repeat itself in America today, couldn't Wall Street be "trusted" to find a way to profit from the bust vs. acting socially responsible? How times have changed.
  2. Losing-trustLosing My (Institutional) Religion: A few weeks back, I saw an intuitive, yet troubling, chart on how Americans are losing faith in our greatest instituitions (e.g., Congress, Banks, Schools, the Presidency, the Supreme Court). Then, I read Apple's legal response today to the Department of Justice's E-Book Case. The specific way that Apple frames it (it's worth a read), put a bow around how fucked up so many of our intitutional processes are. This point was lain especially clear in a conversation I had with a friend of mine in the real estate industry. Regardless of whether you consider yourself pro-businesss, anti-business, liberal or conservative, his point was illuminating. He told the story of how everyone in his industry is worried about the capricious way that the government has gone about changing the rules for banks about lending, from reserve requirements to constraints on where they can make loans. His point was less that the government shouldn't be coming up with policies for these things, and more that the government bodies typically step in with broadstroke policies that are completey disconnected from the outcomes they want to encourage or discourage. As a result, we end up with policies that by virtue of their superficiality, just institute random risk, which is obviously not a good thing if you want business investing in growth. To me, this speaks to a false dichotomy that we find ourselves in with respect to the role of government. Today, it feels like a choice between: A) laissez faire policy/enforcement (which led to an SEC completely asleep at the wheel, culminating in the 2008 economic crisis); and B) broadstroke governance, which results in policy that's akin to the "successful" surgery where the patient dies. It's why the health care reform sucked so bad for the very people it was supposed to help most, at a time when they needed it most. The net effect of this false dichotomy is that it only serves to perpetuate the gridlock in Washington. 
  3. Go Native (Mobile): It's the nature of technological waves, that the first stage of a new wave always looks derivative of the old wave. But, the new wave doesn't lead to lasting, transformational change until 'native' applications are born that could only exist within the new medium. The silent film gave rise to the talkie, and while it took a while for the new medium took find its footing, our concept of what a motion picture could be was never the same again. The first TV shows were basically redux versions of their radio show parentage, but ultimately the medium became something entirely unique. So, too, the PC and then, the Web, completely transformed what came before it. Now, we are sitting at the precipice of 1 billion post-pc devices, on our way to 10 billion devices globally. Respected VC and Blogger Fred Wilson suggests that this confluence is due to give rise to legions of Mobile Native Services. In other words, apps and services that are not simply 'children of the Web,' but rather, new DNA entirely, powered my untethered mobility, GPS-locative attributes, perpetual connectivity, unparalleled scale, social fabrics, big data graphs and application platforms that are part hardware, software, service and tool. Metaphorically speaking, we are at the moment in the 1950's when everyone thought that TV was simply 'radio with pictures.' But very soon, that will change, and what rises on the other side is destined to be the Golden Age.

 

May 25, 2012 in Apple, Economy, Investing, Mobile, Pattern Recognition, Policy, Politics, Post-PC, Streams and Nuggets, Values | Permalink | 0 Comments | TrackBack (0)

Understanding Apple's Earnings: It’s about Value & Integration, and it’s Global

We live in a world of extreme noise. So many stories, and so many competing narratives vie for our attention that what rises above the noise is perhaps the closest proxy to actual truth.

With that backdrop, and without restating ad nauseam the numbers behind another blowout Apple quarter, let me state the truth about Apple’s March Quarter Earnings as I see it:

  1. It’s About Value: Every quarter, the prognosticators wait for the mythical other shoe to drop, be it the ‘inevitable,’ ‘unstoppable’ onslaught of Android, the depletion of fanbois, the resolve of carriers or the exhaustion of those who’ve yet to purchase an iPhone or iPad. But, on this topic, I would turn to the one quote that has swirled in my head continuously since I first heard it, and it’s from Ron Johnson, JC Penney’s new CEO, and Apple’s former head of Apple Retail, who says quite cogently that, “Customers will not pay literally a penny more than the true value of the product.” You can parse this any number of ways, but what it means to me is that when a consumer looks at an iPhone vs. an Android Phone, they see something real, that is supported, that is readily understandable and for which their investment will be rewarded. By contrast, with Android increasingly they grok that they are buying ‘Not Exactly.’ The efficacy of this truth is never more evident in the Tablet segment where, despite Android’s success in smartphones, and in spite of Apple’s clear proof that there is indeed a massive tablet market, Android Tablets are utterly stillborn. It’s about value, which simply can’t be smoke-screened. This truth is especially clear in the case of Carriers, who would no doubt love to reduce subsidies on iPhones (and other smartphones for that matter). But as Apple CEO Tim Cook sagely noted: A) The Subsidy is 'not that large' relative to the 24 months of revenue that the carrier is securing via subsidy; B) The Delta of the iPhone subsidy relative to other smartphones’ subsidy is not material; C) The Churn of iPhone buyers to other carriers is the lowest of any phone that the carriers sell; D) iPhone is the number one trigger for carriers upselling feature phone customers into smartphones – i.e., their largest untapped market; and E) Carriers want to sell what customers want to buy, and that’s iPhone. In other words for all of the puffery and noise about competition, commoditization, pricing pressure, etc., it’s fairly simple. Apple wins because its value is tangibly real, and for no other reason.
  2. It’s About Integration: I blogged on this point yesterday, so read that post, but suffice it to say Apple’s success is best understood by looking at how an iPhone or iPad integrates beautifully designed hardware with iOS, iTunes, App Store, iCloud, Apple Retail and App Developers into one unified set of outcomes and experiences. Then, contrast that with how Android doesn’t (or even the sluggish rate of innovation on the slightly more integrated Amazon Kindle Fire). Integration vs. DIS-Integration. It’s the distinction between the restaurant where the food, service and dining experience is orchestrated into a synchronous whole vs. the Mongolian barbecue, where the whole never quite adds up to the sum of the individual parts. I'll leave the digestive visuals to you.
  3. It’s Global: I think that the most YOWZA takeaway from the call was when Tim Cook talked about how Greater China has grown 3X year-over-year to $7.9 Billion on the most recent quarter (i.e., 20% of Apple’s total sales). Here Cook noted that there’s a massive, emerging middle class in China that (un) surprisingly aspires to the same products and experiences that consumers do in the US. For all of the easy quips about China being the land of knockoff imitation products, they want the same real products, and are willing to pay the real value for it. Apple has only brushed the tiny surface of this market, not just in China, and not just across the globe, but across industry segments (enterprise, education) and product categories as well (i.e., iOS is a scale-able platform for other types of devices, accessories and price points). In other words, the Apple 'halo' is global, and just getting started.

Mind you, that for all of the Apple accolades, the same company that grew earnings by 94%, that generated 77% of its revenue from iOS devices, which generated gross margins of 47.1% and which dropped another $14 billion into its coffers still trades at a mighty 20% discount to its gold-standard peers. Govern yourself accordingly.

Related Posts:

  1. DIS-Integrated Systems: A parable for acolytes of Apple, Google and Amazon
  2. It’s Time to ‘Think Different’ because Conventional Wisdom is Dead: Apple’s Q1 Earnings Call
  3. What is Apple Worth? The Gold Standard Thesis
  4. Is Google doubling-down on a losing hand with Android in Tablets?

 

April 25, 2012 in Android, Apple, Google, Investing, iOS, Pattern Recognition, Post-PC, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

What is Apple Worth? The 'Gold Standard' Thesis

Apple-Stock

With Apple having shot up almost 75% since late November (from $363.57 to $633.68), the obvious question is whether the ship has sailed from an 'Apple as a Stock Investment' perspective.

My take on this one is that the so-called market professionals (analysts, media, insitutional investors) tend to bucket stocks by category, so that a company like Apple (18.03 trailing PE) is wrongly bucketed in the Dell ($DELL) and Microsoft ($MSFT) personal computers category, when in truth, the company is more of a "gold standard" type of investment for those looking to large cap and growth.

In other words, it combines bragging rights ("yeah, I own Apple stock"), buy and hold (it's a seminal stock to give to your kids) and of course, delivers earnings growth consistency (style AND substance).

This puts it in the category of the brands that everyone loves most, the companies that are most respected and the stocks that no one will ever lose their job for purchasing.

So what are those stocks worth in terms of trailing price-to-earnings (P/E)?

  • Google (21.25 trailing PE)
  • Amazon (141.89 trailing PE)
  • Berkshire Hathaway (19.52 trailing PE)
  • Coca Cola (19.91 trailing PE)
  • Southwest Airlines (36.13 trailing PE)
  • Procter & Gamble (19.79 trailing PE)
  • McDonald's (18.71 trailing PE)
  • Disney (16.36 trailing PE)
  • Nike (23.03 trailing PE)

Now, when I average these out, it comes to a wacky 35.18 trailing PE, impacted by how crazy Amazon's stock is. When I back out Amazon, I get a 21.84 PE.

If I apply this PE to Apple's current price, I get a $767.59 target price.

Meanwhile, the following variables lead me to conclude that Apple getting to that price point is NOT unlikely.

One, is the simple fact that the company is still growing iPhone very well (all of the field data suggests that it's simply dominant in the US and abroad), and iPad will continue to double in the year ahead.

Two is that in both of these categories there are no competitors that are taking market share owing to perceived lack of differentiation, which means I don't see any obvious margin pressure.

Three is that the 'halo effect' for Apple is only accelerating. Their iCloud piece is increasing the rate by which families will standardize on all things Apple, which just means that the per household spend on Apple will continue to grow.

Four is that the Mac is continuing to grow for the simple reason that every PC company is leaving the business, and the core functions of a PC are so commoditized that it actually favors a great PC maker with a focused, fairly priced solution, and that's Apple.

Five is that election years are historically good stock market environments, so that favors a positive macro market in the month's ahead.

In any event, your mileage may vary, but the simple math suggests another ~21% of upside, based upon nothing more than what we already know about Apple's business and the market at large.

But, as you know, Apple is not one to rest on its laurels in terms of new product innovation and earnings acceleration.

UPDATE 1: With Apple down to $530.12, owing fully to a skittish market, this topic is worth re-visiting. Andy Zaky of Bullish Cross (he's the #1 $AAPL analyst in my book) did just that, instituting only his 5th BUY rating ever on Apple, adding that the company is trading at a near 8-yr low P/E ratio. He projects that the stock will hit $750 by end of January. 

UPDATE 2: I wrote this piece originally on April 5, so you may be inclined to say that the market has corrected, and therefore Apple's value should correct accordingly. Would it surprise you to know then, that even after the corrections (the averaged P/E for the comparison companies, net of Amazon, is NOW 19.19), Apple's implied value based upon the same logic is $788.

UPDATE 3: Jean-Louis Gassée has written an excellent piece that attempts to decode share pricing logic, and the wide disparity between Apple and Amazon. I would add another point of consideration to this equation. Namely, that no good deed goes unpunished. In other words, for all of the bashing about Apple’s walled garden mentality, it is refreshingly transparent with investors on things like unit counts, product and geo segment breakdowns, margins, virtual channel metrics (iTunes/App Store) and real channel metrics (Apple Store), to name a few. Put simply, this is a company that wants to be understood AND pays the price for it.By contrast, Amazon’s metrics are all about not wanting to be understood, and they are awarded deeply for it.I suspect this is in part because we have all been trained that the naysayers in phase one of Amazon’s life as a public company were left embarrassed, and fear of humiliation when you know that the guy on the other side of the table is smarter than you is a potent force.

UPDATE 4: As of February 23, 2015, Apple is now trading at $929 per share pre-split. Not only have they not cratered, they added a dividend, captured 95% of the profits in the entire mobile phone handset industry, cracked the code on China, and successfully made the transition from Steve Jobs to Tim Cook. The next big test is Apple Watch. 

Related Posts: 

  1. It’s Time to ‘Think Different’ because Conventional Wisdom is Dead: Apple’s Q1 Earnings Call
  2. Apple just became IBM of the Post-PC Era: Thoughts on Apple’s 'Q3 Earnings Call
  3. Apple's Segmentation Strategy (and the Folly of Conventional Wisdom) 
  4. Five reasons iOS vs Android isn't Mac vs Windows
  5. Holy Shit! Apple's Halo Effect

April 06, 2012 in Apple, Investing, Metrics, Pattern Recognition, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

"Synchronicity": The case for a 'customer dividend' for lovers of all things Apple

Think-different

Apple has announced a conference call on Monday morning to reveal the outcome of their internal discussions regarding a rather beefy $100 Billion cash balance that's 'gathering dust' by their tool shed.

So, it's 'speed round' to guess what they are going to announce because Apple chose to announce this at 6 AM Pacific (9 AM Eastern) on Monday. (A tad hastily, for Apple, don't ya think?)

Conventional wisdom says that Apple is going to announce a dividend because they have more money than they reasonably need, and as such, will return some of that cash to investors.

But as I said HERE and HERE, Apple doesn't follow the logic of conventional wisdom, and won't start to do so now.

Why not? Apple has been the top-performing stock for a decade plus, and show no signs of slowing down. They trade at a relatively low P/E, and heretofore, have avoided all of the typical optics that public companies tweak to lure new investors. If they wanted a higher stock price, there are other things that they could do.

Besides, cash allows them to do whatever they want, whenever they want, and history has taught them that rainy days do come. 

As such, the only scenarios that make strategic sense to me are:

  1. Do nothing: No change in cash strategy;
  2. Capital expenditure that increases the long-term health of the business; 
  3. Major acquisition that changes the composition of the business;
  4. Customer dividend that moves more Apple gear plus creates a secondary catalyst for customer loyalty. 

You can pretty safely rule out scenarios #2 and #3, as Apple wouldn't announce something so strategic with virtually no advance media runway so early in the morning.

Scenario #1 makes a lot of sense, but then why did they go out of their way to broach the subject in the last earnings call?

It's not like Apple has felt the need to assuage investors regarding what they're going to do with their cash in the past.

Hence, my best guess is that Apple is going to offer a dividend, but NOT one that is the traditional cash variety.

Rather, they'll pursue one that is a win for lovers of "all things Apple."

Specifically, I am betting on a dividend that is only redeemable at Apple Stores (online or retail) in the form of gear, apps, music, movies and/or books.

UPDATE: In the first sign (of many?) that this is now Tim Cook's Apple, and not a continuation of the global philosophy that Steve Jobs set forth, Apple has announced a dividend AND a stock-buyback. The market obviously loves this (the stock is up $14), but I consider this move a bit of a bearish indicator. Why? When a company that has repeatedly avoided going out of their way to feed the trough of investors, who are notoriously short-sighted, turns tail so fully, it is worrying. Simply put, it represents another mouth that the company is now committed to feeding, and one whose interests aren't fully aligned with Apple's. As such, it changes the context "a bit" about how the company sees its constituency, and the compass that it follows. Heck, why didn't they go for the trifecta, and announce a stock-split as well? Not a fan of this decision for those reasons.

Related:

  1. It’s Time to ‘Think Different’ because Conventional Wisdom is Dead: Thoughts on Apple’s Q1 Earnings Call
  2. Apple's Segmentation Strategy (and the Folly of Conventional Wisdom) 

March 19, 2012 in Apple, Investing, Pattern Recognition, Streams and Nuggets | Permalink | 0 Comments | TrackBack (0)

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