Brendan Byrnes: Let's talk about some of the flashier stocks out there. Apple (AAPL -2.88%); you've been a bear on Apple. Also Amazon (AMZN -0.87%), 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 (SONY 0.87%) in this area, it happened to Motorola in this area, it happened to Nokia (NOK -0.37%) 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.
