Apple re-visited: Ed’s Daily Notes for September 26th   6 comments

Darth Jobs

Business Week: IPhone Sales Eclipse Microsoft and Amazon Revenue

I have to tip my hat to Apple:

The iPhone 5s and 5c sold a record 9 million units during the first weekend after its launch. Consider this: The brand’s sales haul over the last four reported quarters eclipses that of such companies as Home Depot (HD), Microsoft (MSFT), Target (TGT), Goldman Sachs (GS), Amazon (AMZN), PepsiCo (PEP), Comcast (CMCSA), Dell (DELL), Google (GOOG), Pfizer (PFE), and UPS (UPS).

If this single product were its own company in the Standard & Poor’s 500-stock index, IPhone Inc. would outsell 474 of those companies—ranking between Wells Fargo (WFC) ($90.5 billion) and Marathon Petroleum (MPC) ($84.9 billion). The iPhone’s $88.4 billion in annualized revenue tops 21 of the 30 component companies in the Dow Jones industrial average—it would be the ninth-biggest stock in the Dow 30…

But there is a cause for concern:

The majority of Apple sales comes from this one product—iPhone sales ($88.4 billion) are greater than the sum of Apple’s remaining products—including the iPad, Mac laptops and desktops, and iTunes—combined ($81 billion).

Basically, Apple is living off of its iPhone rollouts. Everything else is icing on the cake.

I know, I sound cynical. I shouldn’t be, considering this:

Seeking Alpha: Apple’s A7 Chip Reveals Dangerous Trend

The most objective way to analyze a chip’s power and performance is through benchmarking. In this form, Apple’s [A7 chip (used in the iPhone 5s)] beats everything else on the market by a significant margin, even though specs-wise it appears to be less powerful.

At first, the A7, a 1.7 GHz dual-core chip, appears to be rather tame compared to Samsung’s 1.6 GHz Quad-Core Exynos or Qualcomm’s (QCOM) Quad-Core Snapdragon 800. However, in most benchmarks, it completely overwhelms [the] competition.

Read the entire article, which also serves as a warning to Intel (INTC).

If you know anything about computer hardware architecture, you will quickly realize Apple has done a masterful engineering job here. A fast chip is great, but integrating it into the rest of your electronic device’s system is the key to true performance.

But I have three reasons for my cynicism:

First, Apple is without a doubt state-of-the-art now in smartphones. But look at the list of their competition: Samsung, LG, HTC, and Google-owned Motorola. Let’s not forget the “others” working in the industry, including Microsoft, Intel, and Qualcomm. How long before these other companies catch up, or even surpass Apple? Considering Apple’s A7 chip is manufactured by Samsung, I would say “not long”.

Second, and more importantly, Apple’s iPhone 5s is overpowered for most people. I work with a woman who was at the Verizon store last Friday. She bought the 5s. I asked her why, and her answer: To stream music. Really? Spend all that money just for a smartphone that streams music? My old LG Ally could do that just fine, even with just 3G. What she did was like spending $2,000 to buy a gaming pc, just to play solitaire. Let’s be honest: The Apple iPhone has social cachet. While that cachet is well-deserved, Samsung is already nipping at their heels in that regard.

Third, the law of diminishing returns. There comes a point with any electronic device where each improvement to it costs significantly more than it will improve the utility of said device. For example, just using the first benchmark in the article above, the iPhone 5s was 23% better than the iPhone 5, which was 25% better than the iPhone 4s. While that is a good improvement, it is only 5% better than the recently released LG G2. As smartphones reach the limits of their utility, those improvement numbers will come down. Just ask yourself, what could a smartphone do that none of them do now? From a hardware perspective, there isn’t much left to add. At that point, it doesn’t take long for the rest of the “also-rans” to catch up. Then it just becomes a pricing competition, and we know from history that Apple refuses to sacrifice its margins for competition. If you think they will, just price an iMac against the rest of the pc market.

In summary, Apple’s technological superiority is on the clock, and their social cachet will eventually run into “why am I paying twice as much as I need to pay?”

However, I have to upgrade my view on their stock to “hold”. They still pay a nice dividend, and they could be several product cycles away from losing their social cachet. Even when they reach the point of having their market share reduced, they could still remain profitable, so their dividend shouldn’t be threatened any time soon. If their stock drops down to $400/share, I would even rate it a “buy”.

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Posted September 26, 2013 by edmcgon in News, Stocks, Technology

6 responses to “Apple re-visited: Ed’s Daily Notes for September 26th

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  1. “why am I paying twice as much as I need to pay?”…people have been predicting this about apple for a long time…but it is something that hasn’t come to be reality. Infact like it has been reported, it just sold record 9 million with its latest product. I agree that eventually apple will start its decline. However, that isn’t now. You should have bought the stock when it went down to $390 a couople of months ago. You would have made a lot of money. Maybe it is a buy right now…. 🙂

    • Ted,
      It came to reality in the late 90’s, when Apple lost the pc wars. Ignore the history at your own risk.

      That said, the big difference between then and now is that Apple is in a much better financial position than it was then. That’s why I like Apple as a dividend play, but not so much for its growth potential.

  2. Hi Ed,
    You always liked INTC. How do you rate it now?

    • Right now, I look at Intel about the same way I look at Apple: great dividend play, questionable for growth. Apple really changed the processor game with the 5s, and Intel got hurt the most by it. Other smartphone manufacturers can learn from Apple, but Intel needs some help from their partners. I won’t call Intel dead, but they just fell a step behind.

  3. I think INTC, AAPL (and CSCO) are great companies, and I think they are all trading at relatively cheap prices. This stretch reminds me a lot of 1999-2000. Back then everyone was enamored with Internet stocks and the dot.coms and so you had the huge bubble occur while “old economy” stocks actually were quite undervalued. Same thing now, just different cast. All these social media and cloud companies are vastly overvalued like the dot.coms and ironically, the “old guard” tech stocks are languishing and under-valued/under-loved. They are all cash making machines (i’d probably throw QCOM in the mix as well) and in my opinion you could buy a basket of them, not even look at them for next five years and then look and see you’re up 80%.

    • Marshall, since you brought up the dot.com bubble, remember that Intel and Cisco both had their all-time highs then, and they have never come close to it since. In fact, the last 10 years have shown very little movement with either stock. Even if you think we are in a second dot.com bubble, and a reasonable argument can be made for that, that doesn’t mean the old guard tech stocks will come roaring out of the end of this bubble.

      Where I will agree with you is that you could buy and hold these stocks and certainly make a nice profit from their dividends in 5 years.

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