Earlier we noted that we had obtained a copy of Dan Loeb’s letter to shareholders for the first quarter of 2012. The investment maven discussed his position on Apple Inc. (NASDAQ:AAPL) at length pointing to several features of the company he things most important going forward.
On Apple, a stock that Third Point had picked up a position in last March, the letter reveals he has serious hopes for the future of the world’s largest company. His first comment on the company offers justification of the purchase. He cites the company’s cash flow as a necessary driver in the purchase, knowing “we were buying in with a healthy margin of safety, a likely cash return catalyst and a favorable product cycle”.
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On the company’s future growth Loeb looks increasingly to China to drive the firm’s future sales. As activations of iPhones slow in the United States he may be right. Loeb is excited for Apple on several fronts, the three most important being the opening up of the Chinese market, the development of the ecosystem and the possibility of the introduction of an Apple television.
He uses the term “halo effect 2.0” to describe the increase in sales of Macs derivative of iOS device ownership. “The maturation of the Windows 7 installed base and pending Windows 8 launch will drive decision points into 2013, with many consumers looking to close to the device loop and tie their devices together with a Mac” according to Loeb. If such a circumstance does come to pass the “headroom in PC space” Apple is endowed with could become a huge asset in 2012/13.
China has long been touted as a huge opportunity for Apple’s sales prospects. Loeb doesn’t dissent on the prevailing mood on the far east suggesting the ecosystem as again the most important aspect of the company’s strategy there. He suggests that “Apple will need to invest in distribution and carrier relationships in China to set the stage for the ecosystem to take root” and contends that “If Apple Inc. (NASDAQ:AAPL) can drive multiple device households, iTunes and iCloud adoption, then China will provide a substantial growth opportunity for several years”.
In keeping with the theme of Apple’s ecosystem Loeb points to a full blown Apple Television as a necessary and almost inevitable next step. He contends that “the living room stands as Apple Inc. (NASDAQ:AAPL)’s next frontier, potentially leading to an Apple TV in late 2012.” Relying on the iTunes and iCloud platforms as perfect backlog systems for the devvice.
Loeb’s views on Apple and the far east do not rely on the company trying anything radically different. His ideas are entirely based on Apple simply picking up its model in the United States and implanting it in the world’s biggest market. He portrays the things that Apple need to do to expand as simple and inevitable. Such is his ability to write and convince his audience.
Despite Loeb’s confidence, and surely it is not misplaced in the tech giant, taking China is not an easy road. The expense of the company’s products limits its reach in the country and cultural differences may raise unforeseen challenges. Despite this Loeb is assuring in his position holding Apple long. He doesn’t mention any of the problems facing the company. Those problems are the ones that have shaven the firm’s value to around 560 in the last couple of weeks. The possibility of an end to subsidies in the US and a knock on effect from that elsewhere still weighs heavy on investors minds.
Loeb is reassuring about the decisions of Third Point as always. His treatment shows a clear and direct path to success for the Cupertino firm. Investors are still wary though those at Third Point may now feel justified in the firm’s buying decision.