Whitney Tilson’s thoughts on Apple Inc. (AAPL)’s stock price and on Doug Kass. Also he comments on drinking breast milk and is looking for condo space if you have..
Whitney Tilson – Apple Looks Cheap, But I’m Not Buying
Apple sure looks cheap, but I’m not buying as I think Doug Kass is likely right that the stock should be avoided for the reasons he outlines below.
I remember thinking to myself after reading Steve Jobs (one of the best books I’ve ever read; you can order it here), “Other than Berkshire Hathaway, I can’t think of any company that’s so dependent on its founder. After he’s gone, will it ever have magnificent, breakthrough innovations again?”
Thus, I avoided the stock after his death – and felt like an idiot (a very common feeling these days!) as it doubled – but this was almost entirely due to the company FINALLY launching big-screen phones, years behind its competitors. This wasn’t innovation – it was lame catching up.
Looking elsewhere at the company, where’s the innovation? The iPad – different screen sizes – yawn. Thinner notebooks, better screens – it’s all incremental stuff that every competitor has as well. What about the long-rumored AppleTV? The Apple car? Under Jobs, Apple disrupted/revolutionized/created SEVEN industries. I see none of that today.
With the iPhone accounting for two-thirds of Apple’s sales, I think the real question isn’t, “What’s going to drive future growth?”, but rather, “What’s going to prevent a meaningful decline in revenues and profits over the next year?”
I think my family is pretty typical: my wife and three daughters have all had iPhones for years, which they love – nothing could persuade them to switch off the Apple platform. Like pretty much everyone, they upgraded to the 6 roughly a year ago and were/are very happy with their phones – but they didn’t even consider upgrading to the 6s and I think they’ll continue to happily use their current phones for a number of years more.
Sure, Apple will collect small revenues from their purchases of apps, music, etc., but that’s only a few percent of the ~$600 that Apple collected from each of them when they bought their phones. Yes, maybe one of them will lose or smash their phone and it will need to be replaced; maybe we’ll buy an iPad here, a notebook or desktop computer there – it all adds up, but it’s nothing compared to the ~$2,400 Apple collected on my family’s iPhone 6 upgrade cycle.
Of course there will be lots of new buyers of Apple products all over the world, but at Apple’s price points and given what’s going on in the economies of many of Apple’s biggest growth markets (first and foremost, China), I wouldn’t bank on upside surprises here.
In conclusion, I think this is the first of four quarters in which the comps are going to be very tough – and, I suspect, analysts and investors haven’t fully come to grips with exactly how tough. These two charts show very clearly the enormous four-quarter surge thanks to the iPhone 6 upgrade cycle – and then what happened last quarter:
Thus, I suspect that Apple likely has three more “miss-and-lower” (guidance) quarters before, a year from now, it might finally “beat-and-raise.”
My experience, especially in the tech sector, is that, no matter how cheap a stock appears, it won’t work until it starts to “beat-and-raise.”
(This is why I won’t touch WMT, by the way, at anything close to 14x trailing earnings – I think, thanks to Amazon, it may be in a permanent miss-and-lower cycle. Talk to me a 8-10x earnings…)
I’m chronically guilty of being early (what Bruce Berkowitz wonderfully calls “premature accumulation”), so I’m trying to do a better job avoiding this.
There may be a great time to pile into Apple’s stock – it’s an insanely great company – but I suspect that it will be roughly a year from now, when, after four consecutive “miss-and-lower” quarters, sentiment will likely be horrible. Analysts and the media will be piling on in their hatred, the stock will be even cheaper – yet the year-over-year comps going forward will be easy, making it likely that the company will be able to start reporting “beat-and-raise” quarters once again…
Below are Doug Kass’s thoughts on Apple:
I believe it’s now foolish to own Apple shares. If I owned the stock, I would sell it — as my analysis continues to suggest that the company’s best days are behind it. I think AAPL’s future sales-and-profit outlook is worse than consensus expectations, and that the tech giant’s valuation faces numerous headwinds.
Is Wall Street Defending the Indefensible?
Despite bullish protestations from the sell side and numerous large Apple stockholders (e.g., Carl Icahn), my negative view has been firm and consistent over the past year. (This chart chronicles AAPL’s underperformance since year-end 2014.)
I now expect Apple to produce three consecutive quarterly earnings-per-shares results over the balance of the company’s fiscal year that are down on a year-over-year basis.
And I project lower and below-consensus results for the full fiscal year as well, down 7% to 10% to around $8.50 a share vs. $9.20 a year earlier. Furthermore, I don’t expect fiscal 2017 EPS (which I estimate at $8.75) to meet FY 2015’s results.
This means that in order for Apple’s shares to rise over the next two years, its price-to-earnings ratio must rise even higher — something that I don’t expect for many reasons.
6) This insightful op-ed in the NYT about a woman’s experience on Wall St. was written by a parent at my daughters’ school, Maureen Sherry:
I was then 11 years into my career, and seven months pregnant with my second child, and I hoped her journey would be different and better than mine.
Of course she would have to avoid stereotypical female behavior, and so she could never cry. She would work long hours and hide her pregnancies and her preschooler’s art. One of my co-workers even hid being married. When confronted, she practically swore never to reproduce, and she never did.
I did not mention my first maternity leave, from which I returned to find a curly-haired stranger sitting at my desk, his feet propped on a cardboard box with my client account list packed inside. I had to re-earn the contents of that box, starting that morning. I also didn’t mention the “moo” sounds that traders made when I headed to the nurse’s office with a breast pump, or the colleague who on a dare drank a shot of the breast milk I had stored in the office fridge. I thought of the guy known for dropping Band-Aids on women’s desks when the trading floor was cold because he didn’t “want to be distracted,” and the many times I had heard a women share an idea at a meeting, only to see later that same idea credited to a man.
But I didn’t bring