Brendan Byrnes: Let's talk about some of the flashier stocks out there. Apple (NASDAQ:AAPL); you've been a bear on Apple. Also Amazon (NASDAQ:AMZN), at that astronomical valuation right now. What's your thesis on these companies over the next 5-10 years or so, in the longer run?
Bruce Greenwald: OK, let's talk about Apple because I think that, for investors, it's both a more difficult case to make and a more common case. Apple is clearly, at the moment, a huge profit machine, and it's not overvalued. If you buy Apple today at multiples of...
Brendan: Around 12 times earnings...
Bruce: Yeah. I would say you're earning a little less than that, but say 7.% on next year's earnings. Growth has been, say, close to 20%.
Now, you don't get a big dividend, but they do accumulate in cash. Let's say you probably get, effectively, not going back into the business, 5 of the 7.5% of earnings, and a business growing at 20%, say, to be generous, is a 25% return at the same multiple.
The problem is that this profit machine, we know is going away. It happened to Sony (NYSE:SNE) in this area, it happened to Motorola in this area, it happened to Nokia (NYSE:NOK) in this area, and we just don't know when it's going to happen.
At some point, and it's going to happen very quickly when it happens -- you only have to look at what happened to Nokia -- this profit machine is going to disappear. Now, if you think that it's going to happen in the next five years, that's a probability of close to 20% a year.
At a 20% fade rate, which is effectively what you're risking, even though it's improbability, you don't know when it's going to happen, you have to subtract that from your 25% a year return, and you're looking at a five percent return on a stock that's very risky.
But at least there, there's a real business and real profits. It's just, I think that it's a very risky choice to make, given that we know that the lifetime of companies like Apple, with products like Apple -- and it may be that Apple can avoid this for a longer time because they're so superb at what they do -- but the lifetimes of these kinds of companies with this kind of profitability is not long.
Brendan Byrnes owns shares of Apple. The Motley Fool owns shares of Apple and Amazon.com and is short Sony and has the following options: long JAN 2013 $22.00 calls on Sony. Motley Fool newsletter services recommend Apple and Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.