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Technology Stocks : Apple Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Kelly G. who wrote (166152)	2/20/2014 12:40:57 PM
From: Art Bechhoefer	Respond to of 213185

Low growth prospects? Well, it's certainly true that many analysts believe lower growth is on the horizon because Apple concentrates on the high end of devices, rather than lower or medium priced devices. There are two misconceptions here. 1. First is the whole idea of innovation. Value oriented analysts tend to agree with investment guru Warren Buffett, who wants to buy companies whose business changes little, and whose prospects are predictable over the next five years, or longer. Warren admits he doesn't understand technology very well and tends to stay away from tech stocks as a result. Anyone who fails to appreciate the value of innovations (measured somewhat in new patents, but almost never on the books, since patents largely do not have a value on the books). These value oriented analysts will miss the intrinsic value of the company. 2. As to the pricing of devices and Apple tending to avoid the lower priced competitors, analysts spend a lot of time and energy arguing that Apple can grow only if it concentrates on lower priced devices, even if profit margins are likely to be much lower. The mistake here is to neglect the value of Apple's ecosystem -- the value of the Apple Store, iTunes, books, apps., etc. Apple doesn't have to widen its hardware markets when this other profit center continues to generate significant profits year after year. The analysts who look primarily at growth in sales and earnings from Apple devices don't understand that Apple's business plan takes in a lot more than devices. If analysts and investors understood these facets of Apple's business, they might bid up the shares to a more reasonable price–earnings ratio. A more reasonable ratio would be closer to Apple's actual growth rate. If there is one complaint I might make, it has to do with the overly high margins that Apple gets on its devices -- margins that no other manufacturer can begin to approach. For example, if you buy an iPhone, iPad, or Mac, you pay a lot more for extra storage memory (NAND flash memory) than you would pay even at retail, if the added memory could be installed in devices with embedded memory. Put another way, an Apple device with SanDisk embedded memory generates more profit on the memory for Apple than it does for SanDisk. I would also add that historically companies make more money on software than on hardware. For example, the Polaroid Land instant cameras were sold almost at cost. The money was made on the film, day after day, year after year. The point was to price the device low enough to encourage people to purchase it, and then make real money on continued film sales afterwards. This is similar to Apple's situation where they sell the device as well as content to use with the device later on. No need to price the device high when you have an almost captive customer later on. Art