On Apple, Cash and Why the Stock is Undervalued

Apple recently released quarterly earnings numbers that were Mickey Mouse in scope. EPS beat consensus analyst estimates by 50%. Apple sold every iPad they could manufacture. 1/2 of Mac sales were to consumers that had never owned a Mac before. The iTunes store continued to flourish. A sparkling new store in Grand Central Station just opened. Apple now has 76 billion in cash. Accordingly, the stock popped up to above $380 (the sketchy run-up in price prior to earnings suggests insider knowledge to me, but that's another story). The stock was all the way down to $315 in mid to late June and had been underperforming the market as a whole. It seemed that analysts didn't trust their valuations, Apple's crazy growth numbers or Apple's ability to stave off myriad competitors. Presently, the stock sits at $404 and a P/E ratio of 15. But we'll come back to the stock in a bit. Cash. 76 billion. Apple has more in cash than the entire market cap of Goldman Sachs. What will it do with all that cash? For one, Apple has and will continue to throw around its weight with suppliers. The sheer size of Apple's orders allows it to dictate terms to suppliers, including locking in supply and locking out supply for competitors. The cash also allows Apple to get iPads to market when the unforseen demand predicated it. Apple has also been extremely proactive in the legal and patent world, paying huge money for Nortel patents and expending resources to stave off lawsuit plays. We haven't seen much in the way of large acquisitions, although the Hulu rumors are definitely fodder for conversation. I see Apple continuing to be aggressive with its suppliers and defending patents. But overall, the cash cushion gives Apple operational freedom, phenomenal Research and Development latitude and a general Ace up the sleeve. Back to the stock. Growth numbers of this scale are hard to accept as reality and even more difficult to trust when extrapolating forward. And of course Steve Jobs' health is an issue. But I see a company that has rolled out product after product that was best-in-class, obsesses over details, fully understands the value and impact of the customer experience and has shown an uncanny ability at getting consumers to spend income in the gray area between disposable and non-disposable, on products that exhibit high profit margins. Throw in other components on the periphery like the cash balance, impending Chinese mobile deal and possible Hulu acquisition, and I see no reason the growth cannot continue. Bold Prediction: AAPL will be trading at least at $550 on August 1, 2012. Buy, buy, buy! (Full disclosure, I own some).

The Apple Tablet

Apple’s new tablet has garnered much of the buzz around their upcoming event on Wednesday. While tablet pc’s have been around for a little while, the consuming populace is anticipating a beautiful, functional, industry-changing product. While I have faith in Apple to provide a product with all these aspects, and while I trust Apple has done their market research, I don’t see where the market will be. At an expected starting price of $999, this is a niche item. This is an ancillary device, which limits it’s potential sales. Plus There is no way you’d buy one over a MacBook or other competing laptop or computer. A large part of their target market is Apple lovers. But these consumers likely already own an Apple computer (iMac, MacBook, MacBook Pro) and an Apple handheld (iPod, iPod Touch, iPhone). I can’t see people forking over the money for another product that doesn’t do a whole lot more than what they already have. That last sentence is a huge one. If Apple’s tablet has capabilities beyond MacBook’s and iPhone’s, it does have a chance to be a revolutionary product. Without it, I can’t see it being more successful that the MacBook Air.

I don’t see it as a big gaming advice. Developers may have the incentive to write games for it, but I can’t see consumers paying the normal $40+ for a game for the tablet. It’s not like the tablet is a big upgrade over a gaming system.

I think battery life is a big issue. The tablet will likely be appealing to watch movies on, but with Apple’s already shoddy record of poor battery life, I can’t see this one bucking the trend.

It’s not appealing to the e-reader market, mainly for the price reason. Also, many people don’t like reading words on a screen; that’s why many of the current e-readers have new technology that’s easier on the eyes.

For some people (I can see designers, architects, artists, etc), it will be an awesome device. Transportable, loads of applications, sync-able with existing Apple devices, large touch-sensitive screen.

Sales may be buoyed if it can somehow take hold in the academic community. But again, the price will drive away consumers.

In conclusion, if Apple surprises up with something like 6-hour battery life during maximum use, drastically reduced price tag ($600), or deals with game makers for reduced price video games, the tablet can succeed. Without a headline stealing improvement on rumors, it will not meet expectations.

Outliers by Malcolm Gladwell

I am currently reading "Outliers" by Malcolm Gladwell. So far it's really captured my interest and stimulated my thoughts. I'll be writing about it in this post, updating at the end as I read.

Gladwell delves into the world of the genius', the prodigies, the experts. How have they gotten to where they are? Is it innate talent, unique opportunity, extreme dedication?

In chapter 1, Gladwell talks about opportunity. he shows how those who were lucky enough to be grouped into the advanced or the elite early on in life, reaped the benefits of better instruction, more instruction, better competition, and better opportunities. Because of age cutoffs, hockey players that are born early in the year are at a physical maturation advantage. As a result, those players born early in the year are accepted onto club and travel teams at an early age, and are more privileged all the way up. They become they best because they were lucky enough to have been born in January, February, or March, not because of innate talent. Bill Gates had unique access to computers and programming opportunities all throughout his childhood. Gladwell doesn't want to underscore innate talent; he wants to illuminate the effect opportunity has.

In chapter 2, we learn about the 10,000 hour rule. Gladwell posits that 10,000 hours are necessary to become an expert in a given field. He points to Bill Gates, Steve Jobs, The Beatles, Mozart, and Bill Joy-the creator of UNIX. While extremely innately talented, all showed a special devotion to their craft. Gladwell finds that rarely does a "special talent" float by on less than 10,000 hours. Also, rarely does a "grinder" put in the 10,000 hours and not become an expert.

In chapter 3, we learn why two people, both with an IQ above 150, will not both succeed at a high level. He give the example of two people, both with fantastic IQ's, who are given the task of listing the uses of a brick and a blanket. The first one:

Brick-To use in smash-and-grab raids. To help hold a house together. To use in a game of Russian roulette if you want to keep fit at the same time (bricks at ten paces, turn and throw, no evasive action allowed). To hold the eiderdown on a bed tie a brick at each corner. As a breaker of empty Coca-Cola bottles.

Blanket-To use on a bed. As a cover for illicit sex in the woods. As a tent. To make smoke signals with. As a sail for a boat, cart or sled. As a substitute for a towel. As a target for shooting practice for short-sighted people. As a thing to catch people jumping out of burning skyscrapers.

The second one:

Brick-Building things, throwing.

Blanket-Keeping warm, smothering fire, tying to trees and sleeping in (as a hammock), improvised stretcher.

"Which of these two students do you think is better suited to do the kind of brilliant, imaginative work that wins Nobel Prizes?"

Gladwell uses this fantastic illustration to show that intelligence (high IQ) alone does not guarantee being an outlier.

In chapter 4, we learn that upbringing matters. Practical intelligence is as important as analytical intelligence. Those born into middle-class and wealthy homes know how to share information and ask for attention. They know what to say to whom, when to say it, and how to say it for maximum effect. They have the knowledge to read situations correctly and get what they want.

In chapter 5, Gladwell says, "Those three things--autonomy, complexity, and a connection between effort and reward--are, most people agree, the three qualities that work has to have if it to be satisfying." 149

Also, "...if you work hard enough and assert yourself, and use your mind and imagination, you can shape the world to your desires." 151