Thanks for the intelligent, reasoned response. Addressing some of your comments...
The current estimates around $43 seem about right for FY2014. I think that the softness in the US will be offset by continued growth in Japan/China as well as the impact of the buyback. I also wouldnt be surprised if Apple starts to press harder on the pricing lever in some markets. If they press harder on pricing and their own lowered revenue forecast (which included Japan/China) is indicative, wouldn't your concern be that the modest sales growth coupled with lower margins wouldn't achieve $43/share? If you look at the past year in global mobile OS market share, Android has really started to run away with the lead. For Apple to counter this, do you think that mild price decreases will do the trick, given that many of the Android devices responsible for the market share shift are priced substantially lower and yet are still in the same "high end" category?
If you're correct and $43/share holds, and if the profit growth continues for the next several years, then AAPL is the most insanely undervalued stock I can think of right now. Backing out $90 or so in post-tax cash per share, paying just $420 or so for $43+ *and increasing* earnings is a 10% return that will just keep growing. That's why I posted the earlier poll and am soliciting opinions on profit growth (you're the only one who responded)... the stock is priced as if there's substantial risk of profits declining. I happen to think they will decline, but I'm trying to gain insight into why those who disagree think it will increase.
FY2015 depends on the launch of a large screen iPhone. They absolutely need this handset to continue to grow iPhone units as the high-end has become a zero sum game. I agree. After all, the iPhone is responsible for most of Apple's profits. One thing they need to worry about is the reputation of the iPhone itself, as they've insisted that the 4-inch form factor was the only thing customers needed for years. Now they'll have to convince people that what they used to tout as an advantage is no longer, and that consumers who want a big screen should buy the iPhone instead of the many very refined and yet cheaper alternatives already on the market. In other words, if someone is going to upgrade to a bigger phone, they'll need a convincing reason to pay more for an iPhone when they can easily jump ship.
I will need to be convinced about the watch category so I mostly view this as an upside call option. I agree, with two caveats:
1) Given the continued hype and the resulting investor expectations, I think that Apple *must* have a hit with the watch (or similar new category) to meet predicted sales growth, and soon. If they wait until summer and/or it's not a stunning hit, I don't see how they'll meet even the toned down sales targets without implementing big price cuts.
2) Along with a new product category comes new costs. Some are sunk, as they've been developing this (these?) hot new items for some time. But the launch and sales and promotion of them will increase expenses greatly, eating into profits as well. This needs to be factored in along with any upside from new product success.
Your doomsday scenario makes little sense. There has to be slope down to that $10 to $15 a year in earnings. It isnt going to happen tomorrow. They have about $135 in cash per share if you discount foreign cash by 30% or so....add in the next few years of cash flow and the multiple on $10 to $15 in profits and you are going to get a number well north of $200 a share. You have to discount that cash (which is actually higher than $135) because they simply can't access it without the taxes. My doomsday scenario assumes a slope down - not a sudden drop - to $10-$15 share in a few years. Under that scenario, Apple would throw in the towel on trying to combat their dwindling global share and they would hunker down and focus on maintaining profits from their loyal base (which is willing to keep paying the premium). So if they makde $35/share over the coming year, then $30 the next year, then $20, then stabilized at $15, it's something I could see happening if they don't reverse this trend soon. While that would justify a stock price of only $250 or so, I see it as a worst-case scenario where it almost couldn't go lower. Most companies can't say they have that assurance. For it to go lower, they'd have to lose their appeal even with their loyal base, and as we've seen with their Mac lines, that's just not likely to happen. |
