Bruce Greenwald: Apple's Profit Machine Will Disappear

In the interview below, Bruce Greenwald, distinguished investor, professor, and advisor, sits down with Brendan Byrnes to discuss a variety of topics as they relate to investors today. Professor Greenwald is a famed value investor, always trying to buy mispriced assets at a discount to their intrinsic value. Our own superinvestor, David Gardner, takes a different approach and seeks out paradigm-shifting companies before Wall Street is on to their potential. Both have trounced the market for years, and I invite you to learn more about how David discovers his winners today. Just click here now to read more.

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.


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  • Report this Comment On January 03, 2013, at 6:33 PM, demodave wrote:

    That made no sense whatsoever. What are the purported data that support Greenwald's assertion that Apple's profit machine will go away?

  • Report this Comment On January 03, 2013, at 7:43 PM, JokerJoey wrote:

    So let's see here...

    "Professor Greenwald is a famed value investor, always trying to buy mispriced assets at a discount to their intrinsic value."

    And what better way to do that than trying to talk the stock price down by doom and gloom predictions?

    OK, let's argue that eventually Apple may no longer have their profit machine so to speak. This thesis assumes that NOTHING ELSE WILL CHANGE. It assumes that Apple will not continue to innovate on their current products and that there will be no new products. Both of these scenarios are highly unlikely

    It also assumes that no new markets either for existing products (do I hear China Mobile anyone?) open up, or no new markets for future product(s) are created (and usually in Apple's case, like they did with the iPad "creating" the tablet market, this could be something TOTALLY UNFORSEEN). Both of these scenarios are highly unlikely.

    You can see where I'm going with this without my being specific. Relax and enjoy as you load your portfolio now to enjoy the profits and appreciation of Apple shares in the coming months and years.

  • Report this Comment On January 04, 2013, at 1:21 AM, deasystems wrote:

    The professor said, "The problem is that this profit machine, we know is going away. It happened to Sony." Yes, Apple pretty much took care of that company. And then the professor added that, "...it happened to Motorola." Yes, Apple did Motorola in too. And finally the professor noted that "...it happened to Nokia." By golly, he's right again, and Apple is the culprit again!

    Hey, wait a minute...

  • Report this Comment On January 04, 2013, at 10:12 AM, chopchop0 wrote:

    I used to be skeptical of AAPL but einhorn is correct in assessment.... AAPL isn't a hardware company, it's a software company that sells hardware. The ecosystem and the pretty designs they put out will be enough for people to continue to part with their cash for shiny new-generation IGadgets.

  • Report this Comment On January 04, 2013, at 10:13 AM, chopchop0 wrote:

    Per einhorn:

    "Many mistakenly assume Apple is a hardware company, but it's a software company. Its value comes from iOS, iTunes, iCloud. Future competitor of Apple has to make a product that's A LOT better.

    "I believe Apple is software company that monetizes its value from repeated sales of high margin hardware," Einhorn says."

  • Report this Comment On January 04, 2013, at 10:23 AM, JohnCLeven wrote:

    Interesting video and comments.

    Everytime I evaluate AAPL it ends up in my "too tough to predict" pile. However, I will say that AAPL is a very cool and interesting company and I hope it continues to do well for its shareholders.

  • Report this Comment On January 04, 2013, at 11:39 AM, Same1234 wrote:

    As the author, Brendan Byrnes, points out that Professor Greenwald is a famed value investor, always trying to buy mispriced assets at a discount to their intrinsic value.

    In the interview, his remarks on future Apple’s profit growth definitely disappoint many APPL stock investors, in particular, those small investors might buy it at high after Wall Street analysts came out, raced each other to raise the Apple stock (AAPL) target price to $1000, $1001, $1100, $1200 per share, --etc while it was traded in the neighborhood of $600 per shr or higher, in the mean time, those analysts downgraded the Nokia (NOK) stock price like there is no tomorrow.

    Indeed, many small investors might buy AAPL stock at high and had a day dream sitting under an APPLE tree and expected golden APPLES falling into their pockets. If I read the article correctly, it seems to me that Professor Greenwald gave a hint that savvy investors should buy Apple stock in 1997 when Wall Street analysts downgraded it just like what they did on today’s NOK stock (on pessimism).

    Luckily, after 15 years’ hard study for investing disciplines, strategies, and vision from those well-known greatest investors, I became one of their disciples and bought excellent companies at the distressed price when a buying opportunity comes. Here are some examples that I read them from time to time to remind myself to be a value investor.

    Several of The wisest investing maxims ever uttered are said to have come from late Sir. John Templeton who advised:

    1. Buy when others are despondently selling and sell when others are avidly buying requires the greatest fortitude and pays the greatest potential reward.”

    2. Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

    Another well-known, wisest, greatest live investor, Warren Buffett, advised small investors of his investing wisdom, visions, and strategies. Warren Buffett is a man of action and he gave the secret of getting rich on Wall Street. He advised as follows:

    1. Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.

    Does NOK stock fit in with what they preached for?

    Since I do not have the capability or vision of timing a stock market, I follow Warren Buffett’s advice that “If you do not want to hold the stock for 5 years, you should not hold it for 5 minutes.”

    On the one hand, what is my risk of holding NOK stock? At the worst case, the NOK stock may become ZERO value that the majority of analysts wish for. On the other hand, what is my reward of holding NOK stock? A short answer is that Mr. Market will reflect NOK’s intrinsic value in the long run.

    Finally, as [Warren] Buffett said, if you want to shoot rare, fast-moving elephants, you should always carry a loaded gun. I do not know about you but I did load up NOK stock in my long-term portfolio when it was below $2 per shr, and I will hold it long as long as Nokia turnaround strategies work. Maybe just maybe you own the NOK stock today, it may turn out to be another golden Apple in next 10 years just like the rotten AAPL stock in 1997, that I wish I had learned investing skills, knowledge, and became one of disciples from these well-known, greatest investors and bought the AAPL stock at the distressed price, held it long and sold it at $700 per shr which it was after 2 for 1 split price.

    I am long NOK.

    Happy New Year!

  • Report this Comment On January 05, 2013, at 11:14 PM, Same1234 wrote:

    For Apple investors, If you bought and held the Apple stock (AAPL) because of its popular products, good management teams, lots of cash in the company’s coffer, no debt, low P/E, Iphone5’s high margin in the world, many more just name a few, --- etc, you should thank Professor Greenwald for his remarks on " Apple's Profit Machine Will Disappear" which brought Apple stock down $15.10 per shr (2.78%) at a closing price of $527.00 on Friday, 1/4/2013 (if that’s a case but I am not so sure) that gives you another buying opportunity at lower price.

    One of the well-known, wisest, greatest live investors, Warren Buffett, advised small investors of his investing wisdom, visions, and strategies. Warren Buffett once said, "It doesn't bother us (Berkshire Vice Chairman Charlie Munger and himself) if what we own goes down 50%. In fact, we like it -- we'll buy more.... Once you think the market is telling you whether you're right or wrong, or once you're looking to the market for guidance, you're in trouble."

    I am long NOK.

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