In all fairness to Pedro De Noronha of Noster Capital, his comment (video below) on Apple Inc. (NASDAQ:AAPL), which went viral last week, appears to have been blown out of context. He stated on a CNBC interview that Apple could be rendered obsolete in 2-3 years.
In my view, his opinion was likely centered on the susceptibility of the products of companies such as Apple to be snuffed out by the advent of a new and innovative technology (think Friendster, MySpace, Altavista, film cameras, VHS recorders) or litigation (Napster).
Noster Capital – Nobody is invincible
To be sure, Apple was an unfortunate choice for making the point, and so was the time period for its demise:2-3 years. Well, Apple has hundreds of billions of dollars in cash and is richer than quite a few countries, not to mention that it also happens to be the most valuable company on earth today. Besides, no one really knows what innovations could be brewing in the company’s notoriously and obsessively secretive research and development.
But think back not many years ago when Apple was, indeed, on its deathbed and resuscitated only by the return of Jobs and some white knight financing. Think of Blackberry in the not so distant past, as well as Nokia, both handset makers that once ruled the markets – how the mighty have fallen! And it was what Apple did to the mobile phone that pulled the rug out from under their feet.
Bottom line: no one is invincible, not even Apple.
Noster Capital – Apple’s huge strengths
Again, Tim Cooks is no Jobs, and the company surely misses the latter’s intuitive understanding of exactly what the consumer needed or wanted. Yet, Apple’s culture and legacy of innovation that Jobs left behind, its financial strength and global goodwill are all assets that can help Cook through execution difficulties.
A couple of products may fall prey to obsolescence – note that Apple’s tablet sales fell for the second straight quarter, succumbing to cutthroat competition – but as a company, Apple will probably be around a lot longer than 2-3 years.
Noster Capital – Value investors at odds with technology businesses
Noronha is a value investor, just like Buffett, and quoted the latter’s famous ‘voting/weighing machine analogy’ during the interview. And judging from his remarks, he probably does not understand technology companies, something which Buffett admitted to as well (before he made his IBM investment). Nothing wrong with that, but Noronha’s remark that the valuation of Netflix, Inc. (NASDAQ:NFLX) bordered on the ‘make-believe’ piqued my attention.
In response to a question he clarified that he had no position in the company, and said, “you cannot put yourself in front of a moving train and tell it to stop, just because in theory it’s overvalued” referring to ever-increasing P/E ratios that could move from 25 to above 100 before they reverted to rationality.
Noster Capital – Standing up to the bull onslaught
Point taken, but someone did stand in front of just such a moving train back during the 2000 tech bubble. Sir John Templeton shorted tech stocks at the height of their boom, making millions of dollars in the process. A true value investor himself, he said, “this is the only time in my 88 years when I saw technology stocks go to 100 times earnings; or, when there were no audience, 20 times sales – it was insane, and I took advantage of the temporary insanity.”
The Netflix P/E ratio was 126.87 as of the Friday close.
Make-believe? Insane? In the world of technology, who can tell?