Why Apple Investors Could Go Bust

At The Motley Fool investing conference last week, a panel of Fool advisors voted unanimously that Apple (Nasdaq: AAPL  ) would beat the market over the next five years. After all, there is a compelling case to be made for that to happen, even though genius Steve Jobs has stepped down as Apple CEO. Not only is the company sitting on two blockbuster and still fast-growing products -- the iPhone and iPad -- but it also has $75 billion it can use to develop another blockbuster product, make a game-changing acquisition, or both!

Given those attributes, paying 10 times EBITDA for one of the world's largest and fastest-growing technology companies seems like a bargain. Heck, assume that Apple can continue retaining 100% of earnings and earning a 40% on equity, as it has over the past 12 months, and the math -- demanding a 10% return -- says it's worth approximately $900 per share.

The problem with that
Apple, however, has never sustainably earned a 40% return on equity or even a 20% return on equity. Go back 20 years, and what you'll find in Apple is actually a (gasp!) cyclical business. A boom from 1990 to 1992 was followed by a bust from 1993 to 1997, followed by a boom from 1998 to 2000, a bust from 2001 to 2004, and a boom from 2005 to the present.

With it now being almost 2012, either this time it's different (and I use that phrase intentionally) or this boom is starting to get a bit long in the tooth.

Enter the competition
The word "commoditization" might as well be a four-letter word for the tech industry. What it means is that a once-novel product is swamped by competition, resulting in rapidly falling prices. Consider the Walkman, the Discman, the MP3 player, the mobile phone, the desktop computer, the laptop computer, the server -- you name it. They've all been commoditized. In the case of the laptop, for example, the average selling price dropped from $1,640 in 2001 to $615 last year -- a roughly 10% annual decline. And that commoditization of the PC, incidentally, is one reason Apple has been cyclical in the past.

This isn't to say there aren't still laptops selling for more than $615. There are. In fact, Apple released a MacBook Pro last year that was so fast and had such a big monitor that it retailed for more than $3,000. But that's a boutique product with a small addressable market, since so few users need that much computing power. Indeed, an analyst last year called the new MacBook Pro "The $3,000 Laptop No One Needs."

With relatively cheap Google (Nasdaq: GOOG  ) Android phones already catching up to the iPhone and Amazon.com (Nasdaq: AMZN  ) getting ready to release a tablet, commoditization will inevitably catch up with the iPhone and iPad -- leading to declining average selling prices (ASPs) going forward.

Can't spell revenue without ASP
Way back in 2010, Apple sold almost 50 million iPhones and 15 million iPads, each with ASPs of more than $600. This year, iPhone sales are expected to nearly double and iPad sales may triple. Thanks to that growth trajectory and better-than-expected sales in China, Apple stock is up 25% this year.

Obviously, investors who buy the stock expect this top-line growth to continue. Remember, though, that revenue is a product of unit sales and ASP. Though I don't doubt that Apple will continue to sell more and more iPhones and iPads, I don't think it can keep selling them for more than $600 each.

Enter the Kindle Fire
As my colleague Eric Bleeker reported earlier this week, Amazon is set to enter the tablet space, selling the Kindle Fire for just $199. This price point means that Amazon is sacrificing some technology with the product, but how many iPad users are using all of its computing power anyway? Furthermore, when one starts thinking about Apple selling 100 million or more tablets around the world, how many of those customers will need the $600 version? In China, for example, GDP per capita is less than $4,000. And while wealthy Chinese in Tier 1 cities are snapping up Apple products, that market is far, far smaller than the Chinese market overall. This is why Baidu (Nasdaq: BIDU  ) wants to launch a stripped-down mobile operating system that's more feature phone than smartphone -- it's all that most Chinese consumers need.

To show why this matters, I've lifted some unit-sales estimates from one of my bullish-on-Apple colleagues. Assuming a 3% annual ASP decline over a 10-year model with normalized profitability and holding Mac, iPod, iTunes, and other peripheral operations constant yields a fair value per share of approximately $550 -- well above the current stock price.

Assume, however, the 10% ASP declines that laptops experienced, and the stock is worth just $340 -- well below the current stock price.

The global view
To buy Apple today, an investor has to believe one of two things:

1. The iPhone and iPad will not become commoditized.
2. If the iPhone and iPad become commoditized, Apple will innovate, develop, and launch a new product to overcome the resulting revenue declines.

Neither scenario is, of course, impossible, but I do not believe that Apple is as cheap as it looks. Not only will it have to move downmarket to compete with Android and the new Kindle Fire, but the fact remains that only so much of the world can afford $600 gadgets -- with the rest not being able to afford them anytime soon.

Tim Hanson's "Global View" column appears every Thursday on Fool.com.

Tim Hanson and The Motley Fool own shares of Google. Motley Fool newsletter services have recommended buying shares of Apple, Google, Amazon.com, and Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 29, 2011, at 4:37 PM, theHedgehog wrote:

    The only thing preventing the commoditization of the whole industry is the US Patent office. Given the life of a patent, this can't last. Companies are looking to ever smaller and smaller bits to call "novel". Sooner or later the whole charade is going to come crashing down.

  • Report this Comment On September 29, 2011, at 4:39 PM, foolindeed1 wrote:

    B&N is coming out with Nook Color 2 shortly that will have Netflix app among others. Kindle Fire is no more media tablet than even current Nook Color, most specs are the same, just a bit faster. Kindle Fire doesn't have microSD slot that Nook Color has thus it is stuck with 6 GB usable internal storage unlike Nook Color that can get up to 32 GB card in. Also, current e-Ink Nook Simpletouch is still better designed than even the new Kindle Touch with battery lasting two months with ONE hour reading with Wi-Fi off thus it's still twice as long as new Kindle's two months with HALF and hour a day with Wi-Fi off. More, Kindle Touch still flashed black on each page turn while Nook Touch reduces the flashing by 80%. If you walk in with the Nook to Barnes & Noble store, you’re allowed to read ANY available eBook for free while in the store via free provided in the store Wi-Fi. 

    Also, the prices that you hear around for the new Kindles are all for models that force you to look at advertisements. Normal units cost $30-50 more. For example, Kindle Touch goes for $139 that is the same as Nook Touch while Kindle Touch 3G goes for $189.

  • Report this Comment On September 29, 2011, at 4:41 PM, lgcret wrote:

    A long drawn out opinion, but useless information. People, not families buy their products, and it is easy to save-up the amount needed to purchase the wanted item.

  • Report this Comment On September 29, 2011, at 4:42 PM, bsimpsen wrote:

    Good grief, the lack of critical thinking here continues to amaze me.

    "They've all been commoditized. In the case of the laptop, for example, the average selling price dropped from $1,640 in 2001 to $615 last year -- a roughly 10% annual decline"

    What's happened to the ASP of an Apple laptop over that time period? What's happened to PC/Apple laptop margins over that same period of time?

    How much reality are you willing to ignore to make your argument?

  • Report this Comment On September 29, 2011, at 4:44 PM, futurewalk wrote:

    I agree with the above 2 comments, the writer seems to miss the point entirely

  • Report this Comment On September 29, 2011, at 4:45 PM, macdanewf wrote:

    You've got to be kidding me! You're going back 20 years to get the cyclical business. Lets be real, Apple is a different company since it re-started 10 years ago. You know... when Michael Dell suggested breaking it up and selling it off!

    You should find a new line of work.

  • Report this Comment On September 29, 2011, at 4:53 PM, baldheadeddork wrote:

    ^ What you said about Apple being a different company than it was ten years ago applies to all of its preceding boom periods, too.

  • Report this Comment On September 29, 2011, at 4:54 PM, dstb wrote:

    Where do I even start with this article?

    Go back 20 years?! How many of their current world changing products did they have back then? What dominating ecosystem did they have back then? $70-$100 billion in cash? It's like calling current Microsoft a DOS company or current IBM a typewriter company.

    Commoditization?

    The music player was a commodity for years before the iPod came out. Then it was no longer a commodity because everyone had to have the iPod.

    Tablets had been tried and failed in the past. Apple comes out with the iPad and overnight every other company has to have a tablet. Most have or will fail. Apple stands alone. Amazon's tablet will sell but will primarily target a lower end consumer and will cannibalize their e-readers more than anything else.

    Macs have a small market share but they are growing at a steady clip. The "boutique" market is becoming mainstream and they have plenty of room to grow. Until last year I hadn't even used a Mac since college over 20 years ago. Now I own a MacBook Pro and will never go back. They are simply better than PCs.

    Yes to own Apple you have to believe they will innovate. Believe in their future. But that is true of virtually any company and certainly true of any tech company. No company can just sit back and rest on their laurels and Apple certainly has not.

    I'm tired of defending the same old arguments against Apple that never play out. Android is going to destroy them. And now Amazon. Some of your points would be much more valid if Apple was priced for perfection. I don't understand how you can say Apple isn't as cheap as it looks. It is incredibly cheap. It generates so much cash and has so much cash on the books that it doesn't need to achieve fantastic growth rates to be a screaming buy. It's downfall is almost factored in already.

  • Report this Comment On September 29, 2011, at 4:56 PM, Thiru1973 wrote:

    I totally agree with bsimpsen and macdanewf....I dont understand why are you guys against Apple's growth....Let's face it...Ipad simply crushed all tablets, HP had to close its line of business too....Its even more weird to compare Kindle fire with ipad...to me, it looks like a biggest blunder on Amazon's part to come up with this product which would not only hurt their kindle e-readers sales but projecting this as a competetion to ipad makes AMZN itself look very inferior...as if they gave up half-way in trying to compete with Apple....I mean come on, I would buy an Ipad for $499 than getting 3 kindle fires for that price....You just keep watching and we will see Apple over $500 by December....I am sure on 4th of October we will be around $450 per share if not more....

  • Report this Comment On September 29, 2011, at 4:58 PM, neilmalek wrote:

    Wow. I wish I had gotten to this article faster - other people used up my arguments. But, here goes anyway:

    Competitors have had 10 years to commoditize the mp3 player. An iPod Touch still has a price tag between $229 and $399. And no other competitor has a product you know the name of.

    Competitors have had roughly 20 years to commoditize the laptop. A MacBook Pro starts at $1199. And no other competitor has a laptop with 1% of the brand recognition or allegiance of the MacBook.

    My family only owns 2 iPods, and none of the other Apple products, but you'd have to be living in an alternate reality to not understand that Apple is playing by different rules.

    PLEASE, Motley Fool, do a better job of managing your writers. This piece is an embarrassment to your brand. This writer has no business writing for a site as high-quality as I believed yours was.

  • Report this Comment On September 29, 2011, at 5:01 PM, rodnog wrote:

    Wow, I wonder if all this pro AAPL sentiment is a bearish indicator...

    I'm probably still going to add to my position though.

  • Report this Comment On September 29, 2011, at 5:04 PM, H3D wrote:

    Did you know what company you were writing about when you wrote this article, or did you toss a coin and fill in the name later?

    Apple are the Only company in computing and telecoms that can sustain a decent ASP.

  • Report this Comment On September 29, 2011, at 5:10 PM, eidco wrote:

    My jaw was dropping as I read this article. Thankfully, I read the comments and was brought back to reality.

  • Report this Comment On September 29, 2011, at 5:13 PM, baldheadeddork wrote:

    @bsimpsen: "What's happened to the ASP of an Apple laptop over that time period? What's happened to PC/Apple laptop margins over that same period of time?"

    Apple's laptop ASP's haven't deteriorated, but the revenues from Mac products has been flat for years. Here's a chart tracking the numbers back to 2007: http://www.businessinsider.com/chart-of-the-day-apple-revenu... . That's backed up by their OS market share, OS-X only has a 7.3% market share worldwide. ( http://en.wikipedia.org/wiki/Usage_share_of_operating_system... )

    I think you're missing the point. Apple can keep it's ASP as high as it wants, but it's likely going to come at the expense of market share. At one time Apple had a lead in the desktop at least as large as what it has today in smartphones. But when WinTel computer became widely available they chose to not compete on price. That caused an erosion in their market share.

    Sound familiar?

    If you don't think history can repeat itself with mobile devices, you're fooling yourself.

  • Report this Comment On September 29, 2011, at 5:15 PM, buddyglee wrote:

    1 thing different that means everything

    cell phones are different because they are all subsidized by the contract .

    people are so stupid they dont even realize that a iphone costs 800. they think it costs 200$! lol (ask someone!)

    also note

    as music piracy is fought on the net

    itunes will rule

    also remember iphone is the only phone that has all the apps on ipod touch's . kids know the platform from their ipod touches so they will buy iphones when they grow.

    IOS IS THE NEXT WINDOWS

    and whats scary they have a chunk of all software, hardware, and music sales! imagine if microsoft had that control over windows. government will have to stop apple one day.

    or google.

  • Report this Comment On September 29, 2011, at 5:18 PM, Retroactivist wrote:

    Let's give the author the benefit of the doubt. The market will become commoditized, and everyone will be competing on price for the customer. Apple, all by itself, will foolishly continue marketing to and building products for the limited demographic that can afford their premium pricing. Now compare this scenario to the car market. You've got Mercedes, BMW, Audi, Lexus, Acura, Infiniti, even Bentley, Maserati and Aston Martin all competing for the higher end customer, and everyone else competing for the rest of the world. Who is competing with Apple for the higher end customer? Whose shoes would you rather be in?

  • Report this Comment On September 29, 2011, at 5:20 PM, rpmo wrote:

    I hate to be a conspiracy theorist, but it's interesting that Apple hits an all-time high a week ago and now - right before iPhone 5 and earnings - all the negativity is coming. There's been several Apple bear cases made lately when it seems obvious this thing is ready to run. But I'm just a dumb retail investor. It defies logic really. Amazon Fire will get some buyers, but probably not people who were planning to buy an iPad. It's not supposed to be an impressive product. Yes, you will sell A.F.s to people who wanted a cheap tablet. But consumers who want a real, fully functioning tablet will buy an iPad.

    So good luck to you out there who hope to depress this stock. I'm guessing you're the first in line to buy it.

  • Report this Comment On September 29, 2011, at 5:25 PM, Retroactivist wrote:

    @baldheadeddork: "At one time Apple had a lead in the desktop at least as large as what it has today in smartphones. But when WinTel computer became widely available they chose to not compete on price. That caused an erosion in their market share.

    Sound familiar?

    If you don't think history can repeat itself with mobile devices, you're fooling yourself."

    You're leaving out a big piece of the puzzle here. Compatibility. At the time the computer industry needed an across the board, standard operating system that everyone could use. Bill Gates recognized this and licensed windows to anyone who wanted to build a cheap box for it. Game over.

    Google's doing the same thing with Android, the difference is there's no need for the compatibility. It's apples and oranges to what happened 25 years ago.

    Oh by the way, as computers have needed that compatibility less and less due to the internet being the primary platform, Apple's marketshare in computers has been growing steadily.

  • Report this Comment On September 29, 2011, at 5:26 PM, baldheadeddork wrote:

    @neilmalek: The iPod is a really bad choice to make your case for a two big reasons: First, Apple itself commoditized that market with the sub-$100 iPod Nano's. Second, MP3 players as an entire group were a transitory platform. They were replaced by smartphones as quickly as they became available and even Apple is hinting that the iPod won't be around for ever. (Apple's iPod revenues are down over 80% since the introduction of the iPhone.)

    Your case about laptops isn't much stronger. The MacBook has a near-religious following, but even though it's the best hardware and OS (well, at least until Snow Leopard) Apple has ever made - their marketshare still makes Apple a niche player. Yeah, their advertising budget has probably made them the best-known name in laptops, but it hasn't translated into increased revenues or market share.

  • Report this Comment On September 29, 2011, at 5:35 PM, mieswall wrote:

    New to US trade, perhaps writing nonsenses, but here in goes: My only successful investment so far was my first one: AAPL. Chosen not only because of spectacular numbers, but mainly because on what I think Lynch says: look at your surroundings to decide on what to invest. Apple is the most admired company worldwide and for a good reason: amazing innovation and design, which in turn builds deep loyalty, as comments above show. That not only saves them from commoditization, but made Apple a true "rule breaker".

    By the way, that kind of acid scrutiny should be applied for your very cores... what on earth made me follow Motley's BIDU advice a month ago, even when I promised myself never to invest in China...

  • Report this Comment On September 29, 2011, at 5:37 PM, Thiru1973 wrote:

    @baldheadeddork....."Yeah, their advertising budget has probably made them the best-known name in laptops, but it hasn't translated into increased revenues or market share"....wait another year and see how Apple would bite into laptop market...I have been using HP, DELL, Lenovo laptops for 10 years now and I have moved to Mac Pro recently...and I can tell you I will use Apple laptops for rest of my life...or as long as there are laptops...Year by year...college grads going after macs is increasing...I can see this drift everywhere...in my office...amongst my friends....schools ...colleges everywhere...btw...Apple spends more money on their R&D than marketing while all other pc/laptop makes do just the opposite....

  • Report this Comment On September 29, 2011, at 5:37 PM, baldheadeddork wrote:

    @Retroactivist: "You're leaving out a big piece of the puzzle here. Compatibility. At the time the computer industry needed an across the board, standard operating system that everyone could use. Bill Gates recognized this and licensed windows to anyone who wanted to build a cheap box for it. Game over.

    Google's doing the same thing with Android, the difference is there's no need for the compatibility. It's apples and oranges to what happened 25 years ago."

    Your view on history is wrong. The WinTel PC didn't unseat the Mac back in the late 80's because of compatibility, they achieved enough of a market share to become the de facto standard because of price.

    And, I beg to differ, but we are seeing the same thing happen in smartphones right now. Apple has been overtaken by Android worldwide, because Android devices can be less expensive and hardware manufacturers can offer them in more variations.

    About Apple's marketshare in desktops growing steadily, show me the numbers. It's not showing up in any tracking data or in Apple's revenues from Mac products.

  • Report this Comment On September 29, 2011, at 5:39 PM, wolverine1987 wrote:

    Foolindeed--you seriously think The Nook has a lifespan? I guarantee you that the Nook will not even be a product 2 years from now, nor Barnes and noble a functioning stand alone company. The Kindle will destroy the Nook, and it won't even be close.

  • Report this Comment On September 29, 2011, at 5:40 PM, dctodd27 wrote:

    Isn't it telling that not only are most of the replies to this article pro-AAPL, but some of them feel the need to insult to the author to make their point.

    The fact of the matter is that the largest company in the world cannot grow at the rates the stock price implies, with or without Steve Jobs. It is a mathematical impossibility.

    AAPL is the new MSFT - its stock price has gotten way too far ahead of its average earnings and at some point performance will suffer, even if earnings continue to grow (which they undoubtedly will). It is only a matter of time.

  • Report this Comment On September 29, 2011, at 5:43 PM, baldheadeddork wrote:

    @Thiru1973 "....wait another year and see how Apple would bite into laptop market..."

    Heh. I grew up in a family of devoted/delusional Cubs fans. Trust me, no matter how close you are it is always possible to slide back in a big way.

    About Apple's ad spending versus R&D, I read their financial statements pretty closely but I've never seen where they (or Dell, HP, Lenovo, or anyone else) break it down. Got any numbers to back that up?

  • Report this Comment On September 29, 2011, at 5:46 PM, TheGreatFoolish1 wrote:

    Even if your analysis is completely correct, which I don't think will be the case, Apple would at that point have over $340 per share in cash sitting on the balance sheet. Assuming you are giving the company that kind of valuation, that puts the actual stock far above it's current price.

    Or are you also assuming that they are just going to set fire to the cash they bring in addition to completely failing at everything else for the next decade.

  • Report this Comment On September 29, 2011, at 5:49 PM, Retroactivist wrote:

    @baldheadeddork: "And, I beg to differ, but we are seeing the same thing happen in smartphones right now. Apple has been overtaken by Android worldwide, because Android devices can be less expensive and hardware manufacturers can offer them in more variations."

    But you'll never need and Android phone to be compatible with any other phone. Also, I suppose Apple's market share would overtake Android if they were giving it away.

    "About Apple's marketshare in desktops growing steadily, show me the numbers. It's not showing up in any tracking data or in Apple's revenues from Mac products."

    http://netmarketshare.com/2011/09/01/Mac-Share-Tops-6-percen...

    Scroll back and you'll see it was just over 3% in November '07. So it's doubled since then. Let's circle back in another three years and see where we are.

  • Report this Comment On September 29, 2011, at 6:27 PM, TMFKopp wrote:

    Great article Tim!

    Matt

  • Report this Comment On September 29, 2011, at 6:28 PM, writerfred wrote:

    What everyone seems to have overlooked is Apple's approach to retailing. Their stores are bright, inviting and functional. Most important, their staff people are friendly, knowledgeable and helpful. I base that on dealings I've had with four different Apple stores in three states.

    The retailers of competing products don't seem to have a clue on how to retail what they make and provide customers with the help they want and need to get the most of what the products offer.

    In my opinion, that's an important difference that will continue to be recognized by those willing to overlook price in their search for solid value.

  • Report this Comment On September 29, 2011, at 6:40 PM, baldheadeddork wrote:

    @Retroactivist: I checked the marketshare chart and the date range only goes back two years, when OS-X had ~5.5% market share. Did it nearly double from 2007 to 2009 and has been mostly flat since then?

    http://netmarketshare.com/2011/09/01/Mac-Share-Tops-6-percen...

    ******

    "But you'll never need and Android phone to be compatible with any other phone. Also, I suppose Apple's market share would overtake Android if they were giving it away."

    I don't understand your hangup with compatibility. I was there, and it was never a big issue when Windows was overtaking the Mac. Back then computers running networked programs were on Unix. For everyone else (which was almost everyone), computers didn't talk to one another at all. The idea of networking computers in offices didn't take hold until the mid 90's, when Windows had blown past Mac.

    But, since you keep bringing it up, you're right that you never need an Android phone to be compatible with any other phone. But I imagine familiarity and being comfortable with Android would be damn handy to have if you're considering an Android tablet. Something to maybe keep in mind when you're looking a year or two ahead for the tablet market.

    About Apple's market share being greater if they gave away their products - would you like some cheese to go with that whine?

    Android phones aren't given away, but I suspect you know that. They have a cost advantage because they don't use proprietary hardware, and because one manufacturer can spread development costs across several models, so they can serve various price points while still making money. (If history is any guide, this is a much bigger advantage than Apple's much-ballyhooed ability to get parts at the lowest cost.)

  • Report this Comment On September 29, 2011, at 6:41 PM, smartin619 wrote:

    So, according the article, Apple share price will end up somewhere between $340 and $550. I know my math is unsophisticated, but downside risk is 12% upside potential is 41%. I'll take my chances.

  • Report this Comment On September 29, 2011, at 6:53 PM, TheDumbMoney wrote:

    This thread is hilarious. While I don't agree with the article entirely, it is (dare I say it?) refreshing to see a cogent, contrarian, negative take on Apple.

    Clearly there is some reason why a company with Apple's growth has like a 12 forward P/E, even before cash and post-tax foreign cash is backed out. This is a nice contrarian thesis for why that is. Senorita Marketita is always telling us something, even when she is wrong.

    One thing I really agree with is that Apple's P/E should be treated as derived from a cyclical high, and thus should not be entirely trusted, even if one thinks further top-line growth and new products await. (At every stage in the renewal, people have doubted what they could come up with next -- first after the colorful iMacs, then after the iPod, then after the iPhone, and now after the iPad.)

    At this point in time, given the amount of cash they have, and the low P/E (even if earnings are in a short-term peak), I'm willing to acknowledge the risk while giving them the benefit of the doubt.

    Long MSFT, GOOG, and AAPL

  • Report this Comment On September 29, 2011, at 7:05 PM, Thiru1973 wrote:

    @baldheadeddork..."About Apple's ad spending versus R&D, I read their financial statements pretty closely but I've never seen where they (or Dell, HP, Lenovo, or anyone else) break it down. Got any numbers to back that up? ".....I know this ever since I started selling Macintoshs in 1995....in fact this was the reason why they even failed initially 'cos though their products were top notch they could not market them well.....Cant you look at the products yourself and validate this statement....pick any apple product and see how much research went it and how much was it publicized.....I do not mean to go after you or after this author for that matter....but honestly I have this bad feeling that all bears are trying their best to bring down AAPL now without a fair reasoning....I made some good money on AAPL options recently and am hoping I will continue to make more.....My picks are October Call options for $425 and December call options for $500.....Good luck everybody...I am done posting here :)

  • Report this Comment On September 29, 2011, at 7:10 PM, damastr wrote:

    Seriously, this article is neither here not there. Is the writer saying do not buy AAPL or short it? It would be better if he would put his money where his mouth is and actually short it.

    When you could not rule out AAPL over a decade ago when it was near bankruptcy, how can you rule it out when it is sitting on $76B cash and generating over $6B a quarter? It's cash alone is enough to qualify it to be a top 20 companies in the world. It's trading at PE of 15 (are you simply looking at it's price when it looks expensive to you -- c'mon, you can do better than that?) and growing at crazy rates of over 50%. Even if you are willing to consider only an ultra conservative view of only 15% growth, AAPL is still cheap..

    @baldheadeddork.. the main difference between the Wintel days and today is that computers in those days were VERY expensive. When windows PCs would cost about $2000 when Apple's would cost over $4000, the choice was obvious. When you can guy a top of the line iphone today for $300 and an android phone for $200, that price difference is not enough to deter a MAJORITY of people from buying a premium product. Same is the case with Macbooks now. For the first time ever in my life I bought a Macbook Air because paying $200-$500 more for a premium product is as big a factor as paying over $1500-$2000 for a premium product. That's why you are seeing Macbooks post over 10% growth while overall PC market is shrinking. This simply is the biggest reason for Apple's tremendous growth.

    Just reading thru the tread above, it's clear that many people are switching to AAPL products and wouldn't go back.

  • Report this Comment On September 29, 2011, at 7:13 PM, damastr wrote:

    meant to say "paying $200-$500 more for a premium product is NOT as big a factor"

    Also wanted to give customary disclosure that I am long AAPL. I am also long MSFT but that's not relevant :)

  • Report this Comment On September 29, 2011, at 7:36 PM, memoandstitch wrote:

    Why does the financial statement show Apple only has $12B in cash? (rather than $70B or whatever ppl are talking)

    Because the major chunk of cash is outside the country and Apple will have to pay taxes to bring them back?

    Oh that's right. If Apple were to bring the cash back, it has to restate it's earnings. And that's a scary thing for AAPL shareholders.

  • Report this Comment On September 29, 2011, at 7:36 PM, TruffelPig wrote:

    Next: Why writers of dumb articles could go bust.

    Apple is as cheap as cheap gets. No one should hold forever when the wind changes.

  • Report this Comment On September 29, 2011, at 7:40 PM, damastr wrote:

    @memoandstitch

    You probably didn't add "Short-term marketable securities" and Long-term marketable securities.

    Apple woudn't have to restate earnings if they were to repatriate -- just pay US income tax (but they will get refund for any foreign taxes paid).. so it's really not that bad..

  • Report this Comment On September 29, 2011, at 7:42 PM, rupertkaufmann wrote:

    While I understand and agree with some of the tech trends and basic math applied in the article, I think some of the application to Apple and conclusions are flawed:

    The two products that drive most of the revenue and profit, iPhone and iPad, weren't even around at the beginning of the last "boom". Apple did not grow the revenue by simply growing the number of units sold or ASP, but by inventing new categories! There was no smartphone or tablet market worth speaking off when those products were launched.

    Also, both are supported by a content ecosystem - Apple has increasing revenue from music, books, apps and other content, which is independent from the unit ASP or will even benefit from a lower ASP! This independent revenue stream isn't even mentioned in the analysis!

    While it is likely that Apple will loose market share in each (still growing!) market, their revenue can still grow for a long time while maintaining above-average profit margins!

    In addition, it is not only "not impossible" but very likely that Apple will launch new products or services that create new revenue streams, iCloud has already been announced, Apple TV is a growing "hobby" and there are plenty of other opportunities for some tech innovation!

    So, after reading the article and comments, and some reflection, I'll hold on to my AAPL shares a little longer, thank you very much!

  • Report this Comment On September 29, 2011, at 7:47 PM, guiganol wrote:

    I appreciate the lesson on ASP's---the Fool articles always give me something nice to walk away with. But you really have to be more careful with the arguments you make, especially when it comes to Apple.

    A $3,000 laptop? Where? You mean with an SSD, of course? Throw one of those in any Vaio, HP or Alienware and you're going to get a laptop at $3,000+. The baseline big 17" is only $2500 and that's comparable to any Vaio or Alienware at the same size (and this is in the premium market). The 13-inchers will go with the consumer market and the 15-inchers are pricey but really not that bad. Sure, I could buy an $800 laptop but it's just a hunk of plastic with shiny stickers that'll look nice for a few months.

    As for the declining ASP's: I guess this is what causes the most problems for the commenters above. Really, Apple has the most ingenious pricing policy. They don't undercut but leave the price points where they are year over year. Of course there have been cuts where they simply couldn't justify their price with what's happened with component costs, and in some cases to aggressively attack their competitors---i.e. the $999 ultra-portable Air. But for the most part, they play this crazy update game that still has people coming back for more.

    And you can try to compare Apple to other computer companies if you want, but you simply can't forget/ignore their Appstore. If they didn't have this, then sure they would be closer to all those other companies.

  • Report this Comment On September 29, 2011, at 8:14 PM, Bonefish100 wrote:

    With all due respect, let me just say "bunk!"

    As we speak, you never know what Apple is developing that could blow the competition out of the water. I'll still take Apple over all of the other competitors. And I hate my Droid.

  • Report this Comment On September 29, 2011, at 8:35 PM, neilmalek wrote:

    Y'know, I think I wrote my last comment too quickly. Here's what I really feel (long GOOG & AAPL):

    The central thesis of the article, so far as I caught it, is that competition will cause the price of the products to drop. From everything I've been able to see, Apple has refused to drop their prices on basically anything. Instead, they steadfastly remain at the forward edge of quality, innovation, and cool.

    Because of this, the competitors either undercut on price with a vastly inferior product (Kindle Fire), or they try desperately to keep up on quality while hitting the price mark nearly on the center. Recently, I read this blog post that resonated with me on this topic:

    http://daringfireball.net/2011/09/amazons_new_kindles

    I do not doubt, for a second, that millions and millions of devices (Android phones, Android/Win8 tablets) will be sold to consumers instead of iPads. But the simple truth remains - that's not what Apple is striving for. They are building their empire on creating the greatest products on earth, for the people who are willing to spend money on them.

    I work everyday in the tech world, and I have yet to see a single competitor with as good a product as the iPod. I have yet to see a single laptop as good as a MacBook Pro. I have yet to see a single tablet as good as an iPad. So, if you have the resources to do so, and you want the best product on the market, you buy a Mac. If you don't have the resources to do so, maybe you buy a Sansa mp3 player, or a low-end tablet, or any of a number of quality PC laptops. And that's OK. But to assume that Apple will now change their stance after a full decade assumes quite a lot.

    Finally: I don't own an iPad, a MacBook, or an iPhone. I have 4 HP laptops, an Android phone, and an iPod for commuting. But to not see the reality of the world around you is terrifying.

    What would kill AAPL is an end to their innovation and striving for the greatest possible products; THAT possibility scares me, as an investor.

  • Report this Comment On September 29, 2011, at 8:42 PM, TMFMmbop wrote:

    I appreciate all of the interesting comments. That said, I want to address one question that has come up...

    I am neither long nor short Apple. The value of the stock, to me, is neither far enough above nor below the current price to justify a position. Some seem to think that means this article is worthless. To you I saw that you have been watching too much cable news. Remember that there are no called strikes in investing. Making the point that something is worth passing on is an opinion that should be considered in any capital allocation process.

    Tim Hanson

  • Report this Comment On September 29, 2011, at 9:07 PM, Johnf30 wrote:

    Apple is considered CHEAP at 362 Billion?? I think i'm living in another fuggin planet.

  • Report this Comment On September 29, 2011, at 9:25 PM, damastr wrote:

    Tim,

    I agree that the comment about being long or short was unwarranted. But it was just out of frustration after reading something that i felt wasted my time (and apparently I am not alone). Most of the logic was flawed. It's almost as if you got stuck by way of a coin toss to write something negative about AAPL. Go bust?? Are you serious?? What such a sensational title?

    @Johnf30 -- 362B has got nothing to do with valuation. It's the valuation that matters. Apple earned over $20B in the last 12 months and most likely will make over $25B in 2011. Divide the market cap with earnings and check out what the valuation is..

  • Report this Comment On September 29, 2011, at 9:34 PM, vialactea wrote:

    I see that AAPL has a loyal following, just like the company :).

    I don't know how things will play out. Frankly, nobody does.

    I like to see contrarian opinions on my holdings. It helps to keep me honest. For those who disregard the article, beware that the "this time is different" (here phrased as "Apple is a different company now") has burned many people before.

    Over my many years of investing I've also learned that more often than not, when I thought that no one got it, it was I who was making a fool (lower case) of myself. I'm more humble these days. I wonder if everyone who is keeping Apple at these prices (seemingly cheap) don't get it. Perhaps they do get it and know that the current boom cannot go on forever).

    Good luck to you guys.

  • Report this Comment On September 29, 2011, at 9:34 PM, baldheadeddork wrote:

    @damastr - "the main difference between the Wintel days and today is that computers in those days were VERY expensive. When windows PCs would cost about $2000 when Apple's would cost over $4000, the choice was obvious. When you can guy a top of the line iphone today for $300 and an android phone for $200, that price difference is not enough to deter a MAJORITY of people from buying a premium product."

    If you are correct, then shouldn't Apple have regained a big chunk of market share as the price of their laptops and desktops came within a few hundred dollars of a comparable Windows computers?

    I see Apple like BMW or Coach. Some people care deeply about the brand and what they see that it does better than a Camry or a bag from Target. Others like the status the product projects upon them.

    But the other 90-95% of the market either likes other premier brands/designs better, or they don't care enough to see any value in the premium. They don't see enough in a Mac - or an Alienware system - to pay even a hundred dollars more. Call them unwashed heathens if you want, but if there's even a $50 difference between a iPhone and an Android that does what they want - you're not going to call them an Apple customer.

    Also, let's be honest: Being an iPhone owner isn't all rainbows and sunshine. iTunes for Windows still sucks. The apps don't always work. On average I have to reboot my 3GS once a week because an app hung trying to get online. Even without Flash I've got a couple of apps (TSheets in particular) that can drain a fully charged battery in three hours. It's a good phone, but is it clearly $150 better than my wife's WP7? Not really.

    ******

    @guiganol - "A $3,000 laptop? Where? You mean with an SSD, of course? Throw one of those in any Vaio, HP or Alienware and you're going to get a laptop at $3,000+. The baseline big 17" is only $2500 and that's comparable to any Vaio or Alienware at the same size (and this is in the premium market)."

    You should fire up the Google before you write something like that. The most expensive 17" Vaio you can buy is $1900 - with a 3D screen. Stick with a comparable 2D display and it cost half as much as 17" MBP with the same processor and hard drive. (And more RAM on the Sony.) It's the same with Alienware. A 2D M17X comparable to the MBP is $900 less.

    And you don't need a SSD to get a 17" MBP to three grand. Choosing a processor that's 100MHz faster ($250) and going from 4GB to 8GB of RAM ($200 - WTF?) will put you at $2950.

    (FWIW, the price of the same upgrades on an Alienware cost $100 less - and they're the same parts.)

    I bought a Lenovo T420i last month. Just for giggles I priced out a 15" MBP with the same processor, screen, memory and hard drive. It cost $1000 more.

    *******

    @neilmalek - "So, if you have the resources to do so, and you want the best product on the market, you buy a Mac. If you don't have the resources to do so, maybe you buy a Sansa mp3 player, or a low-end tablet, or any of a number of quality PC laptops. And that's OK. But to assume that Apple will now change their stance after a full decade assumes quite a lot."

    I think you're last sentence hit the nail on the head. I will be stunned if Apple makes a serious effort at competing at lower price points. (Serious effort defined as new products for those markets.) This has been Apple's MO literally since the beginning of the company.

    The question is, can they continue to keep 20% of the global smart phone market doing that, or will they slip back to the 7% they have in desktop/laptops?

    But going back to the beginning of what I quoted, I'm not sure that Apple makes the most desirable smartphones any more. Ten years ago Apple marketed itself as the ultra-cool brand for young people. Remember the dancing silhouette ads for the iPod? Now they're selling the iPad 2 to their parents. Android device makers have made a huge amount of progress in marketing itself to young buyers, and it's worked. Apple has lost the stranglehold it had on young buyers in the iPod years.

  • Report this Comment On September 29, 2011, at 9:53 PM, baldheadeddork wrote:

    I've responded to a lot of comments, but here are my reasons for being...skeptical about Apple.

    1) Tim only got half of the ASP story. Apple's phenomenal ASP on the iPhone is a carry over from when AT&T had an exclusive contract to carry the iPhone. That hasn't changed, but everything else has.

    Apple could get that kind of coin out of AT&T because it came with exclusivity. Now their strongest competitor has it, too, and soon Sprint will join in. And all of the carriers now have a full line of Android phones that people actually buy more often than the iPhone.

    So, if you get to make these decisions for AT&T, Verizon, or Sprint - why would you continue to eat more than $400 on every iPhone you sell? What do you get in return for taking a bigger loss than you would selling them an Android phone?

    Apple's ASP for the iPhone is an unsustainable trend for it's customers - the telcos. It's in their best interest to let the retail price of the iPhone float up to $300 or more, and steer price conscious customers to an Android or WP7. Everything else with an Apple logo costs 50% more, why should the iPhone be different?

    At some point in the not too distant future, either Verizon or AT&T will do this and the other will quickly follow suit. When it does happen, Apple will sell fewer phones.

    2) Apple - Jobs = ? I posted this in a couple of threads after Jobs announced he was stepping down and I'll repeat it here.

    Someone mentioned GE post-Jack Welch at the top of the comments. As I posted on another Apple story, companies with a visionary leader typically do not do well after that leader steps down.

    It's not just GE. Chrysler went into a tailspin after Lee Iacocca retired. Microsoft shares have dropped by half since Bill Gates stepped down. Disney has been through this twice, after the death of Walt in the 60's and in the six years since Michael Eisner was forced out in 2005. McDonald's stumbled and floundered for more than a decade after Ray Croc died in 1981. Citigroup struggled following Sandy Weill's departure even before their derivatives time bomb exploded three years ago. Southwest Airlines is a larger and stronger airline today than when Herb Kelleher left in 2001, and it's by far the best-run company in its industry. But it's share price is down almost 60%. Home Depot is down about 50% from when it's founding team departed in 2000.

    I asked this question in that other story, and I'll ask it again here: Can anyone name one large company that had strong share price growth after the departure of a superstar CEO? I'm not asking to be snarky, I really can't find one. Even if its a clean transition, and even if the succeeding CEO continues to grow the company and dominate his industry (see Microsoft and Southwest), shareholders are likely to get clobbered.

  • Report this Comment On September 29, 2011, at 10:22 PM, knittedmichigan wrote:

    Been an Apple user for over a decade, however, when my MacBook Pro crashed last year I went with a PC. The Apple revolution has just turned into a commodity as identity product craze. Furthermore its advertisements are based on arrogance and differentiation. Android is rapidly outpacing Apple in the cellular market, has an incredibly strong brand, and only needs one strong tablet.

    Apple's days are numbered.

  • Report this Comment On September 29, 2011, at 11:16 PM, FutureMonkey wrote:

    Judge: Mr. Gambini?

    Vinny:: Yes, sir?

    Judge: That is a lucid, intelligent, well thought-out objection.

    Vinni: Thank you, sir.

    Judge: Over-ruled.

    Always good to read Tim's stuff and those that disrespect him in their post are missing his point. His points are valid, but as Judge Haller says "over-ruled."

    Tim's argument would apply if AAPL was priced to perfection for the recent growth. Indeed the opposite is true. The market seems to be pricing AAPL for terminal growth on the assumption this incredible run of cash flow has got to slow down sometime. The argument usually follows Tim's line that Apple will lose market share on the iPhone or iPad to lower priced competition. Incredibly iPhone and iPad sales seem to accelerate away from the competition in spite of (or perhaps because of) the higher price.

    A cautionary note such as this is valid for a company trading at premium P/E (cough Netflix cough) based on speculative growth. Seems to me AAPL is trading at a discount based on speculative failure.

    FM

  • Report this Comment On September 30, 2011, at 12:02 AM, jpt249 wrote:

    Well, it seems like any comment pointing out how incredibly ridiculous this article is has already been made. All that's left to do is remove TMF from my bookmarks.

  • Report this Comment On September 30, 2011, at 12:37 AM, TaoOfPatrick wrote:

    Thanks Tim i'll read anything and keep an open mind.After whats happen lately i keep a close eye on all my stocks.Even the Apple of my eye!

  • Report this Comment On September 30, 2011, at 1:58 AM, damastr wrote:

    @baldheadeddork

    You seem to be in that camp who really hates AAPL regardless of the facts. AAPL HAS been growing market share and now has over 10% of US market share. But you are likely to ignore everything just like you have ignored everything else. Let's just agree to disagree. In fact, it's because of such negative sentiments that AAPL is very reasonably priced by Mr. Market. Do you have any position in AAPL? As for me, I have already mentioned I am long AAPL.

  • Report this Comment On September 30, 2011, at 3:49 AM, m9ie3 wrote:

    I'd hold on to this stock right up to the release of the iPhone5 and then follow it to iPad 3. I'd be hesistant to hold on to ANY stock, let alone a "tech/consumer electronic" stock for too long. That said, @ $390.82 / share. I'd hold on to it. Investors forget, Apple has among the most sophisticated legal team in the business (next to google). The iTunes music store is their most sustaining and continuing revenue grower, as transistions from 'traditional media purchases', i.e. Physical compact disc music cd's, paper bound books, newspapers, magazines, dvd movies, physical software installation discs (appstore), and mobile app purchases, advertising, geo-location data, etc. This is Apple's golden egg! The new iphone and ipad will be huge upgrades and many purchases are expected, however, that's all a smoke-screen; it overlooks the real business! Publishing and distribution! The tablet industry is going to remain competitive, as is the smart phone industry. That said, apple continuously has the best products, in terms of the physical hardware (not a means to an end). however --- I sustain the case for aapl value, excluding hardware operations, by their enormously succesful and expansive itunes media store / publishing house / distributor and shared successor of millions of new/old media liscences (now expanded to books and periodicals) which aapl takes cuts from about all mediums sold on the digital store. It reaches an enormous amount of current apple product owners, and this is the business that can be sustainedwith extremely low overhead, high yield, and it's almost incomparable. I excpect the nee iPhone and new iPad to be huge, but irregardless, Apple is the Publishing giant of the decade. That's the crux of the entire situation. As a bearish option, aim for a October through January target price to break $442.40, at very least by next year.

  • Report this Comment On September 30, 2011, at 4:45 AM, daveandrae wrote:

    For 362 billion, you could buy two whole businesses the size of GE. In return, you would be given back 368 billion in revenue backlog, 281 billion in net working capital, 206 billion of which, was in cash, and 28 billion in operating income, annually. It should be noted that the 28 billion in operating income is also the 2001-2011 ten year average. All of this assumes no top line, or bottom line growth going forward.

    Or, you could buy all of Apple.

  • Report this Comment On September 30, 2011, at 7:28 AM, ayaghsizian wrote:

    I am so Long AAPL. Maybe all the bad stuff I'm worried about will happen. Maybe earnings won't top $7.15 in a couple weeks, guidance will be horrible, and I'll lose my shirt. But I'm a gambler, and the smart money says follow the trend. If Apple's been innovative in the past, kept their price point's high, and beat earnings every quarter for the last few years, there's no reason to think the future will be different. I'm long 40% of my net worth until the PEG ratio goes way up.

    In his prime, by betting on Tyson every time he fought you would have eventually lost money one day. As I will with Apple some day. Until that day, stay long, and bet on the favorites. We're getting some great odds.

    I'd be rich if the other 60% of my net worth wasn't doing as bad as Apple is doing good. Stupid diversification. Most expensive word I ever learned.

  • Report this Comment On September 30, 2011, at 7:53 AM, TMFMmbop wrote:

    Every comment thread gets better with a My Cousin Vinny reference.

    Well done sir.

    If you're bullish on Apple, just watch the ASPs going forward. I think that is the most significant "trigger" -- to use an investment term from Michael Maboussin -- for either the long or short case here even if you believe that my (and other) hypothesis about ASPs declining is incorrect.

    Tim

  • Report this Comment On September 30, 2011, at 9:55 AM, griderX wrote:

    +1 Rec for the comments...very intresting feedback.

  • Report this Comment On September 30, 2011, at 10:02 AM, wildnatives wrote:

    I am glad to see contrarian opinions too. I love AAPL and think Steve Jobs is a genius but I think like another author said that he has a tremendous effect on the share price of AAPL. I think it odd that folks don't pay more attention to the health and state of Steve Jobs. I wish he was totally healthy and had not stepped down. I acknowledge that the inventions he has come up with and the marketing that Apple has done has changed the world and will continue despite him but nonetheless, I think his influence is enormous. I am long Apple but on a long timeframe and I would be very reluctant to devote too much money in it since I think any change in Steve's health or place in the company will cause a great decline.

  • Report this Comment On September 30, 2011, at 10:44 AM, FutureMonkey wrote:

    Tim,

    I am long AAPL and am definitely keeping an eye on ASP and Apple's ability to continue to command a price premium. "Halo" effect hypothesis of the iPad on Mac sales appears to be intact as the tablet phenomenon has clearly impacted PC sales, but interestingly not Mac sales. Mac sales appear to be accelerating. Apple is also building as solid foundation for the future around a younger user base than the competition. College Students favor mac line over PC by a wide margin.

    However since iPhone is 50% or more of Apples cash flow the ASP on iPhones is really the critical piece. I'm much more interested in the impact of gPhones on iPhone ASP than gPads on iPads.

    The reason I asked Judge Haller to over-rule Tim's objection is that looking at his own numbers Tim is basically saying there is a 15% downside risk if his worst case scenario comes true (10% decline in ASP = $340 fair value vs current $400), but a 125% upside with perfection prediction ($900 fair value vs current $400). So my point is, the ASP decline argument is valid objection if AAPL shares were priced for perfection in the 700-900 range, but at 400 even worst case scenario poses minimal downside risk to a well-diversified investor.

    So in fact Tim, the risk associated with an ASP disappointment confirmed my bull position. Thanks.

    FM

  • Report this Comment On September 30, 2011, at 10:51 AM, baldheadeddork wrote:

    @damastr - "You seem to be in that camp who really hates AAPL regardless of the facts. AAPL HAS been growing market share and now has over 10% of US market share. But you are likely to ignore everything just like you have ignored everything else. Let's just agree to disagree. In fact, it's because of such negative sentiments that AAPL is very reasonably priced by Mr. Market. Do you have any position in AAPL? As for me, I have already mentioned I am long AAPL."

    Ah, when reason fails it's time to pull the "haters gonna hate" card.

    I have no position in Apple and I don't own any short funds or ETF's. And I don't hate Apple at all. It's a good company that makes good products, and makes a lot of money doing it.

    My complaint is with analysts/fanboi's who have come to confuse this good company that makes good products with the second coming of Christ Himself. There is a scary absence of critical thought when it comes to Apple.

    ********

    @TMFMmbop - ASP isn't the metric to watch. If Apple follows it's past behavior it will keep the ASP up regardless of sales.

    Watch the retail price on the iPhone in subsidized markets like the US and global market share, especially in tablets.

  • Report this Comment On September 30, 2011, at 11:13 AM, TMFMmbop wrote:

    @FM

    Important to note that those scenarios don't all carry equal probabilities. Apple retaining all of its earnings and earning a 40% ROE forever is basically a zero probability event. Let's say on the other hand I think there is a 75% chance ASPs decline 10% annually and a 25% chance they only decline 3% annually (obviously there are more scenarios, but let's keep it simple). Then the valuation might look like:

    0*900+.75*340+.25*550=$375.50 -- essentially where we are today. So this is basically what the market foresees. (Note that this also credits the company for its cash 1:1, which, depending on your view of Apple, is either wildly conservative or wildly aggressive.)

    Fun stuff!

    Tim

  • Report this Comment On September 30, 2011, at 11:18 AM, wealthychef wrote:

    The one thing I haven't seen mentioned is the real reason AAPL does so well: Apple cares about making things easy to use! The user experience with an Apple product is that it is well thought out. It is a quality product. That's why people like iPods, iPads, MacBooks, etc. People who are dumping AAPL because HP has a new cheap rival just don't get it. Either that, or I just don't get it! :-) Apple makes money by focusing on high quality. Its competitors do not bother with that high level of concern.

  • Report this Comment On September 30, 2011, at 11:38 AM, damastr wrote:

    @bald..

    So you do agree that all reason has failed to convince you.. In fact you are pulling the fanboi card.. FYI -- fanbois are not investors. I am just looking at it as an investment. In fact I am long MSFT as well simply based on valuation.

    As for ASPs, talking about it in isolation doesn't tell you much. Show me a company whose asp's are declining and I will show you a tech company. Look at the margins. Apple has not only maintained but increased their margins. Their profit margin has increased over 200 basis points in the past couple of years. Hence the flaw in looking at asp in isolation.

  • Report this Comment On September 30, 2011, at 1:05 PM, BxBruce007 wrote:

    "Disney has been through this twice, after the death of Walt in the 60's and in the six years since Michael Eisner was forced out in 2005."

    Not sure where you get your facts but Disney stock is currently higher than when Eisner was forced out. As to dear old Walt, the split adjusted price the month before he died was .15. I think you would have well enough holding the stock after the visionary's death.

  • Report this Comment On September 30, 2011, at 1:29 PM, TMFKopp wrote:

    Motorola Razr rulez!

  • Report this Comment On September 30, 2011, at 3:27 PM, 48ozhalfgallons wrote:

    I remember "Body by Fisher."

  • Report this Comment On September 30, 2011, at 3:47 PM, TMFZahrim wrote:

    What Matt said, Tim -- great stuff. It's nice to see that I'm not the only Apple skeptic on staff.

    Anders

  • Report this Comment On September 30, 2011, at 9:07 PM, baldheadeddork wrote:

    @BxBruce007: It is up, but the stock has significantly underperformed compared to the Eisner era.

    During Eisner's tenure DIS share prices grew at nearly 15% annually - and that's not including the dividends. (Adjusted for splits it went from 1.23 to 24.37.) Since he's left it's up, but at barely-beating inflation rate of less than 4% annually. (From 24.37 to 30.16)

    If you own Apple stock today and goes from double-digit annual gains to not keeping up with a utility that pays a decent dividend and has no gain in share price, are you going to be happy with the performance?

  • Report this Comment On October 01, 2011, at 1:04 PM, slpmn wrote:

    The level of passionate reaction from the Apple boosters makes me want to go out and short it Monday AM. Makes me wonder how much of it's price is supported by emotion like that. Any shareholder of any company should be open to criticism of their favorite stock. It doesn't matter what Apple has done in the past, it's about what they will continue to do in the future. As soon as its growth peaks, the stock will plummet and will be dead money for a decade (see MSFT). Won't matter how good its iPhone 10 is, won't matter if iPad 6 is 3D, won't matter if it still has $100billion in cash on the balance sheet. The luster will be gone and so will the returns. Guaranteed. The only question is when.

  • Report this Comment On October 01, 2011, at 11:14 PM, Johnf30 wrote:

    So you people really believe that it's plausible that apple is really worth more than half a TRILLION dollars... i'm literally laughing now. I'm shorting Apple very soon.

  • Report this Comment On October 02, 2011, at 1:41 AM, G44ca wrote:

    Fools will be Fools. It amazes me how much someone will overlook facts to make an argument.

    ---------

    Apple is likely to have $300B cash and investments within about five years.

    ---------

    It would truly be Foolish to believe the world's most successful innovator of consumer technology will not have several new products in the coming decade.

  • Report this Comment On October 04, 2011, at 11:54 AM, miles60 wrote:

    I want to disagree with most of the posters here and state that the arguments the writer makes are not ridiculous.

    Looking back 20 years to see a company's business cycle is a perfectly reasonable, no matter how much it seems the company has changed.

    Bringing up the competition is also reasonable.

    HOWEVER, I still think that Apple is in a very strong position in this marketplace because its competitors are not producing end products that compare to Apples. Everything else out there seems to be 30% cheaper and 50% lower quality.

    Here's an anecdote to explain why I went long on Apple in the most recent dip:

    I work in a lab full of engineers and scientists. Most of these people have been using windows for years. They are knowledgeable, comfortable and proficient with windows. The software they need to do their work was just not readily available on Mac until the switch to Intel processors. Now that all of these programs can be run on mac either through unix or windows (usually on top OSX with parallels), the uptake of Macs has been huge. Of my working group of about 30 people, approximately 12 of them have switched to macs, and all of us are using something along the line of the "Macbook Pro that nobody needs" because we actually need that much power to run windows on top of OSX, and run multiple processor and RAM-intensive programs on top of that. Three of these machines were purchased within the last few months. I think that we're beyond the critical mass that macs need to win widespread acceptance, and now software developers will really start paying attention to this community, rather than seeing it as a side project.

    Disclosure: I am not a fanboi.

    Further Disclosure: I am long AAPL

  • Report this Comment On October 04, 2011, at 12:14 PM, osho2025 wrote:

    Wow, so many Apple religious zealots chiming in. Classis. I'm reminiscing over the debate between the mac and Windows 95.

    Tim's point is, there is more potential for a fall here than a rise in stock price over the next 3-5 years. Not that the products are poor.

    As the world's economy continually grinds to a halt, high commodity priced products will loose market share. Its natural.

    Windows 8, android, and all the rest will begin to dent...

    Tim's logical and rationale thinking is hard for AAPL die hards to accept.

  • Report this Comment On October 05, 2011, at 5:09 PM, xmmj wrote:

    This is a typical anti-Apple type of presentation. The performance history of Apple is totally irrelevant to the current state (except for the study of an interesting company)

    What you miss in all this is the total differentiation of Apple products. The Mac exists in the commoditized PC industry, yet continues to be the most profitable producer of PCs without commoditizing.

    Going into the future, one key is the iCloud service. Most analysts miss the deeper implications of this service. Amazon has not and they are scrambling.

    For a provocative analysis, See:

    - http://jmmxtech.wordpress.com

    PLEASE - let me know what you think!

  • Report this Comment On October 05, 2011, at 5:35 PM, mikecart1 wrote:

    AAPL is going bust because nothing last forever. Based on what I learned in the Matrix Trilogy, everything has a beginning and an end. There was a tme when everyone thought this other company named Microsoft was going to keep going up. They made this software callled Windows that everyone thought would improve year after year and companies and consumers would keep buying over and over again. There was this other company Research in Motion that created this device called the Blackberry that everyone thought was awesome. Fortune 500 companies bought thousands of these devices and RIMM was thought to be the greatest stock on Earth.

    Apple's day is coming soon. Mark this post and follow me as I get rich or die tryin'!

  • Report this Comment On October 05, 2011, at 5:58 PM, neilmalek wrote:

    I'll finish my own trilogy of comments with this -

    I am, at heart, a value investor who loves dividends. I also recognize the great potential for any stock, not just a high-flyer that just lost their celebrity CEO, to go bust. So, obviously, AAPL has a great potential for loss here. As someone just stated, probably greater than their potential for gain.

    My stance is, though, that price differential will not be the thing that brings down AAPL. What will bring down AAPL is a departure from their current culture, and a failure to innovate. At its core, AAPL is a stock which relies on being able to deliver the next big thing - and they've had a string of success stories: Mac, iPod, iPhone, iTunes, iPad... the successes have been big enough that their failures have been swallowed up.

    I'm a little concerned that they didn't release iPhone 5 at yesterday's announcement.

    What will concern me, is if either iPad 3 or iPhone 5 is an actual failure, or if their next huge 'one more thing' is a failure. If any of those happen, I think we have the indicators that Apple after Jobs is going to falter.

    Until that time, here is a factual statement for you:

    Apple is a growing tech company, one of the great growth stories of our time. They've consistently innovated and given the world products it didn't know it needed. And they have $76,000,000,000 in cash.

    The Southern Company is a solid, dividend-producing utility company that no person alive has ever called exciting.

    Which one has a P/E ratio of 17.6, and which one has a P/E of 14.97?

  • Report this Comment On October 05, 2011, at 6:53 PM, TLassen wrote:

    "Apple, however, has never sustainably earned a 40% return on equity or even a 20% return on equity"

    That may be true, but it is difficult to maintain high ROE when stockholder equity grows at that pace!

    Investors should keep in mind that ROE or stockholder equity (Book Value) by itself does not mean much.

    The market will trade AAPL at 5 x BV because AAPLs ROE to cost of equity ratio is around 5.

  • Report this Comment On October 05, 2011, at 11:22 PM, TMFDukenewkirk wrote:

    Funny, all the outrage! Great article, Tim. For those of you that don't get it, Tim's job in writing articles such as this is to generate discussion, and boy, did he. The rage, the fury, the endless/infinite optimism are truly entertaining. Frankly there was too much discussion for me to follow through all the enraged responses.

    Personally, say what any of you will, I don't see AAPL hitting a 1 Trillion dollar market cap any time soon. I think there are some valid points regarding how Microsoft was once viewed and what apparently 'had' to happen to put a stop to it. More significantly, probably far greater than 50% of everything Apple was just died today. My ride likely ends soon after the excitement over the iPhone5 is midway through complete insanity and everyone is talking about the infinite market cap.

    Apple was Steve Jobs. Now Apple is (Apple minus Steve Jobs). Go ahead folks, stretch this page to infinity denying that will make a significant difference going forward. If he was the true genius everyone seemed to agree he was during his reign as supreme commander/innovator at Apple, in the long run, his passing will prove a devastating blow. Can't have it both ways and suggest the lay of the land isn't forever changed. A few years from now, virtually any trace of Jobs' influence will be gone.

    None of us can really know if the remainder of parts all combined together can hold a candle to Steve. In my mind, that's the biggest factor being conveniently ignored by the infinite optimists.

    Rest in peace, Mr.Jobs, you were a genius, a pioneer, and a great company.

  • Report this Comment On October 07, 2011, at 12:44 PM, jrj90620 wrote:

    Unless Apple can continue to come up with "insanely" great products,for the foreseeable future,the company and it's stock may be near a top.

  • Report this Comment On October 07, 2011, at 5:18 PM, mjtri wrote:

    I enjoyed reading the contrarian article. I think many of the ideas in it are wrong, but it's good to hear the other side.

  • Report this Comment On October 11, 2011, at 11:13 PM, guiganol wrote:

    @baldheadeddork -- "You should fire up the Google before you write something like that. The most expensive 17" Vaio you can buy is $1900 - with a 3D screen. Stick with a comparable 2D display and it cost half as much as 17" MBP with the same processor and hard drive. (And more RAM on the Sony.) It's the same with Alienware. A 2D M17X comparable to the MBP is $900 less. "

    A late reply but just got to get it in there: The point is he's souping up the numbers to make his argument. A 17" Macbook is $2500. If we could use the extreme end to make a point, I could easily say: A 17" Alienware for $4000? Or a 13" Vaio for $3000? I fired up "the" google just for you.

    As for prices: the keyword is "comparable" (though---in Japan where I'm living right now---you can easily get a Vaio that's not insanely superior to a Macbook that'll reach $2300+. Get last year's model and you can bump $800 off that.) Add a decent screen to an Alienware (that's not a dinky 1600x900 on a 17" of all places) and you're closer to $2000. But again, we're talking "comparable" pricing. Should you get a Macbook? That's not for me to decide. If you want to game, definitely don't get something from Apple (on their PC end). It's all trade-offs: raw power and a fat freakin' laptop with 3 hours of battery life or an elegant slab of aluminum with a much, much higher price.

    But you definitely have a point with pricing (and it does draw me to the point of insanity thinking about what I could be getting for my money in the PC-sphere), but fire up a video of Jonathan Ives talking about his designs and you'll know why people love their Apple products. There's just a whole lot of passion and love there that you won't get from all the market research and focus group testing that Sony or Dell put in.

  • Report this Comment On October 14, 2011, at 12:31 AM, stockwiz98 wrote:

    Apple still has many great years ahead. They will begin by taking more market share. They have started with their 3G for free, iphone4 for 99, and 4S for 199. Apple has an incredible hardware / software pricing advantage. While other companies are shipping and selling in the hundred thousand ( which gives them limited bargaining power) Apple is selling millions. Their cost is much lower per unit than others. Now the chinese of all economic levels will be able to own one. Apple can even lower their prices and still keep margins where they are. The ipads are spreading to wall street, colleges, high schools who are using them to put the contents of the required books on them and save the schools and students money. Corporations are using them as productivity boosters. The ipad is spreading to the corporate world, as is the iphone. The next step will be iphones replacing all the RIMM phones. Apple will be blowing everyones socks off for quite awhile and could even put some competitors out of business in the not so distant future.

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