Investing Curiouscatblog

Tag: Apple

  • Profiting from Self Driving Cars

    I believe a huge amount of money will be made due to self driving cars. Figuring out who will make that money is not easy.

    The value of being able to use the time you are moving to your destination instead of concentrating on driving is huge. And the reduction in deaths, serious injuries, injuries, damages, frustration and waste of time caused by accidents will be a huge benefit to society. Many people attempting to focus on phone calls or whatever else instead of driving create lots of that damage due to accidents.

    There will also be big restructuring in how the economy works. Car sharing (such as Zipcar) will greatly increase I think and Uber and Lyft will likely be big players in a move to driverless cars. It sure seems like fewer cars will be needed. Space wasted on parking cars should be greatly reduced. Deliveries will likely see big changes. The impact on the economy will be huge. Even the health care system may see billions in savings.

    Toyota is an amazingly well managed company. They should capitalize on any important shifts in the auto industry. But will they do so for driverless cars? Will there be a decrease in demand for cars so large that Toyota losses more than it wins? My guess is the decrease in demand globally will not be huge for the next 10 years (of course I could be wrong). My guess is Toyota will do well, but may be caught a bit behind, but then will come back strongly.

    For those that don’t think Toyota can innovate, remember the Prius. Also they have been big investors in robots. That they haven’t turned robots into a big business yet though may be a sign of weakness (related to turning innovation into business profits).

    I think Toyota will do the best of the large traditional car companies at taking advantage of this opportunity. Honda would be my second pick.

    Google has been at the forefront of the driverless car efforts; I first wrote about self driving cars in 2010 about Google’s efforts (on my Curious Cat Engineering Blog). They are willing to take big gambles. They have a very good engineering culture. They are very profitable. They haven’t done much at creating profitable businesses outside of search and ads though. Still I think they may be huge winners in this area. I would guess by licensing technology to others, but things are involving quickly we will see how it plays out.

    Tesla has a great engineering culture with a priority given on innovation and customer focus. They are in the car industry though I don’t lump them with the “traditional car companies.” I give weight to the value Elon Musk will bring them. They have big potential to be one of the big winners in a self driving car future. But they have yet to create much profit. Will they be able to turn promising engineering and leadership into a huge business? I think the odds are good but that is still a difficult challenge. Others have much more money than Tesla. Apple has so much money they could even buy Tesla easily.

    Elon Musk recently spoke about the current state and near term future:

    “maybe five or six years from now I think we’ll be able to achieve true autonomous driving where you could literally get in the car, go to sleep and wake up at your destination,” Musk said. He added that it may take a few years beyond the point when the technology is ready for regulators to sign off on it.

    Musk also stressed that the new Tesla autopilot system, which uses radar, ultrasonic sensing and cameras to create a sort of super-smart cruise control, obstacle avoidance and lane-keeping system, is not the same as a self-driving car.

    Apple seems like a long shot to me. It doesn’t seem like the type of business Apple has gone into in the past. The argument for doing so is the huge pile of cash they have (over $170 billion which is an absolutely huge number – it is also a bit fake in that they have started borrowing tens of billions instead of spending that cash). The moves with the cash are based on 2 circumstances. First they would have to pay large amounts of taxes to use that cash in the USA (taxes are delayed as long as they hold it overseas). And second interest rates are so low, borrowing money hardly costs them anything.

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  • 12 Stocks for 10 Years – May 2013 Update

    The 12 stock for 10 years portfolio consists of stocks I would be comfortable putting into an IRA for 10 years. The main criteria is for companies with a history of large positive cash flow, that seemed likely to continue that trend.

    Since April of 2005 the portfolio Marketocracy* calculated annualized rate or return (which excludes Tesco) is 7.5% (the S&P 500 annualized return for the period is 6.8%).

    Marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that (it is not like this portfolio takes much management), the return beats the S&P 500 annual return by about 270 basis points annually (9.5% to 6.8%). And I think the 270 basis point “beat” of the S&P rate is really under-counting as the 200 basis point “deduction” removes what would be assets that would be increasing (so the gains that would have been made on the non-existing deductions in the real world – are missing). Tesco reduces the return, still I believe the rate would stay close to a 200 basis point advantage.

    I make some adjustments (selling of buying a bit of the stocks depending on large price movements – this rebalances and also lets me sell a bit if I think things are getting highly priced and buy a bit if they are getting to be a better bargin). So I have sold some Amazon and Google as they have increased greatly and bought some Toyota as it declined (and now sold a bit of Toyota as it soared). This purchases and sales are fairly small. Those plus changes (selling Dell and buying Apple for example) have resulted in a annual turnover rate under 5%.

    I am strongly considering buying ABBV and maybe ABT. Abbot recently split into these 2 separate companies. I probably would have added this last year but I wasn’t sure what to do given the breakup so I waited (luckily I bought it, personally, as they have performed quite well) I may also sell some or all of Tesco and PetroChina.

    The current stocks, in order of return:

    Stock Current Return % of sleep well portfolio now % of the portfolio if I were buying today
    Amazon – AMZN 486% 8% 8%
    Google – GOOG 311% 17% 15%
    PetroChina – PTR 104% 6% 6%
    Templeton Dragon Fund – TDF 89% 4% 4%
    Danaher – DHR 78% 9% 9%
    Toyota – TM 70% 13% 11%
    Templeton Emerging Market Fund – EMF 50% 6% 8%
    Apple – AAPL 22% 12% 15%
    Pfizer – PFE 20% 7% 7%
    Cisco – CSCO 19% 4% 5%
    Intel – INTC 9% 7% 7%
    Cash – 7%* 4%
    Tesco – TSCDY -5%** 0%* 4%

    The current marketocracy results can be seen on the Sleep Well marketocracy portfolio page.

    Related: 12 Stocks for 10 Years: Oct 2012 Update – 12 Stocks for 10 Years, July 2011 Update – 12 Stocks for 10 Years, July 2009 Update – hand selected articles on investing

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  • Apple’s Outstanding Shares Increased a Great Deal the Last Few Years

    One of the frustrating things for shareholders is how readily companies give away stock. A huge company like Apple has been giving away huge amounts of stock (through stock options) even while adding tens of billions in cash to their stockpile.

    Outstanding stock for Apple

    Jan 2006 – 848 million shares
    Jan 2007 – 862 million shares
    Jan 2008 – 879 million shares
    Jan 2009 – 891 million shares
    Jan 2010 – 907 million shares
    Jan 2011 – 921 million shares
    Jan 2012 – 932 million shares
    Jan 2013 – 939 million shares

    So even in the last year, while promoting a $10 billion buyback – the net result was 7 million more shares (not fewer as a “buyback” suggests); it did reduce the amount of increase to less than it has been recently. 7 million more shares * $425 = $2.975 billion more stock in place. If Apple uses $50 billion more to buy back stock that would allow purchase of 100 million shares at $500 a share ($500 is less than I would guess the average price will be, but we will see what actually happens). That would get the share balance back to the Jan 2006 level, if there were not huge new additions during the buyback period (which there probably will be).

    Companies certainly like to heavily publicize share buyback programs. They don’t trumpet how much additional stock they issue each year with the same zeal (most of which, for successful companies not in desperate need for cash, is provided through extremely sweetheart stock options for executives and board members at the expense of diluting stockholder’s equity – the easiest form of excessive executive pay to give away as it doesn’t cost the company cash).

    It will be interesting to see to what extent share buybacks actually decrease the share balance and to what extent they just eliminate the exploding issuance of shares Apple has engaged in while piling up the largest cash reserves ever recorded.

    Given Apple’s financial position I do not believe diluting stockholders equity by issuing huge amounts of stock was a wise policy the last 7 years. I think reversing that policy is wise. Buying back the stock they gave away is sensible but it would have been wiser not to give so much away in the first place. I’ll be surprised, and happy, if the outstanding share balance drops below 890 million (the Jan 2009 figure).

    I do think Apple is a great buy at these levels (I bought some more last week). The earnings reported today are not as spectacular as those reported recently but they still made a profit of $9.5 billion in the quarter (and had positive cash flow of $12.5 billion bringing total cash on hand to $145 billion). It isn’t like this is a company that is failing. It is just a company that isn’t growing earnings as rapidly. They are still earning enormous amounts of cash.

    The decline in margins is disappointing (but not surprising) but the margins are still great (just not as amazingly great as recently). The worry over further declines in margins seems justified to me and is one of the big risks for the stock going forward. I think margins will remains at a level that justifies a much higher price than the stock has today, but only time will tell.

    I would have liked to see the dividend increase more, but a dividend increase was a good move.

    Related: Is it Time to Sell Apple? – Apple’s Impossibly Good Quarter (Jan 2012) – Google to Let Workers Sell Options Online

  • Is it Time to Sell Apple?

    No, it is not time to sell Apple, if your portfolio is not already too heavily overweighted in Apple it would make sense to buy. There is about as much wrong with Apple today as Toyota 3 years ago, which means essentially nothing is wrong. Yes, neither company is perfect. Maybe people were carried away with how awesome Apple was, but I don’t think the stock price every was.

    Apple was a great buy at $700. Of course in the same situation buying it at $500 would be even better. I think it is a great buy at $500 today. I think Apple is going to move ahead just as Toyota has the last few years. The people jumping around at every single rumor of a data point are going beyond reacting to each data point they are reacting to rumors of data points.

    I could be wrong. If Apple’s earnings cave over the next 5 years people can claim they say early signals. After a long time watching investors react to data and rumors and speculation I think they are just being foolish. Even if Apple is deteriorating, there needs to be a much better explanation for why investors should believe that than I have seen.

    The best reason to question Apple is how long of a run they are on. Figuring the “law” of convergence in mean should make investors wary. That isn’t really true but that idea – that you just don’t stay on such a run (especially when you are huge and the have the largest market capitalization in the world).

    But that is more just saying Toyota can’t keep being awesome. There is some sense that most likely they will stumble. But the problem is it is more likely about every other company will stumble first. The winners keep winning more than they start failing. But they also do often start failing. 100 years from now there is a decent chance Apple doesn’t exist. But there is a greater change most of the other companies you can invest in won’t. And there is a greater chance most other investments will do worse than Apple. That is my guess. Other investors get to place their money where there mouth is and we will see in 5 and 10 years how things stand.

    I’ll stick with Apple and Toyota and Google and Danaher and Intel and….

    Related: Apple’s Earning are Again Great, Significantly Exceeding High Expectations (April 2012) – Apple Tops Google (Aug 2008) – 12 Stocks for 10 Years: Oct 2010 Update

  • 12 Stocks for 10 Years – October 2012 Update

    The 12 stock for 10 years portfolio consists of stocks I would be comfortable putting into an IRA for 10 years. The main criteria is for companies with a history of large positive cash flow, that seemed likely to continue that trend.

    Since April of 2005 the portfolio Marketocracy* calculated annualized rate or return (which excludes Tesco) is 7.1% (the S&P 500 annualized return for the period is 5.4%).

    Marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that (it is not like this portfolio takes much management), the return beats the S&P 500 annual return by about 370 basis points annually (9.1% – 5.4%). And I think the 370 basis point “beat” of the S&P rate is really under-counting as the 200 basis point “deduction” removes what would be assets that would be increasing (so the gains that would have been made on the non-existing deductions in the real world – are missing). Tesco reduces the return, still I believe the rate would stay above a 300 basis point advantage.

    The current stocks, in order of return:

    Stock Current Return % of sleep well portfolio now % of the portfolio if I were buying today
    Amazon – AMZN 473% 11% 8%
    Google – GOOG 252% 18% 15%
    PetroChina – PTR 104% 6% 6%
    Apple – AAPL 94% 15% 13%
    Templeton Dragon Fund – TDF 84% 6% 4%
    Danaher – DHR 60% 10% 10%
    Templeton Emerging Market Fund – EMF 43% 5% 8%
    Pfizer – PFE 6% 6% 7%
    Toyota – TM 5% 7% 12%
    Intel – INTC 1% 5% 7%
    Cisco – CSCO -3% 3% 4%
    Cash – 8%* 4%
    Tesco – TSCDY -18%** 0%* 5%

    The current marketocracy results can be seen on the Sleep Well marketocracy portfolio (the site broke the link, so I removed the link).

    Related: 12 Stocks for 10 Years: Jan 2012 Update – 12 Stocks for 10 Years, July 2011 Update – 12 Stocks for 10 Years, July 2009 Update – hand picked articles on investing
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  • Apple’s Earning are Again Great, Significantly Exceeding High Expectations

    Apple posted quarterly revenue of $39.2 billion and quarterly net profit of $11.6 billion, or $12.30 per share (an increase of 94% in net income). These results compare to revenue of $24.7 billion and net profit of $6.0 billion, or $6.40 per diluted share, for the same quarter in 2011. Apple’s Gross margin was 47.4% (the best ever) compared to 41.4% in the year-ago quarter. International sales accounted for 64% of the quarter’s revenue.

    Apple sold 35.1 million iPhones in the quarter, 88% unit growth over the year-ago quarter. Apple sold 11.8 million iPads during the quarter, a 151% unit increase over the year-ago quarter. And they sold 4 million Macs during the quarter, a 7% unit increase over the year-ago quarter. Apple sold 7.7 million iPods, a 15% unit decline from the year-ago quarter.

    “Our record March quarter results drove $14 billion in cash flow from operations,” said Peter Oppenheimer, Apple’s CFO. “Looking ahead to the third fiscal quarter, we expect revenue of about $34 billion and diluted earnings per share of about $8.68.” Don’t be surprised to see Apple significantly beat these numbers, they usually provide “estimates” that are far bellow what results turn out to be.

    Apple built their cash stockpile to over $110 billion. Even paying the dividend that they have announced, they are going to be building their cash stockpile going forward without some amazingly large purchases. The announced dividend will cost Apple about $10 billion annually. I wish Apple would increase the dividend. They have also announced a plan to repurchase about $10 billion in stock starting in about 6 months. That would be a huge commitment for most companies, for Apple it seems to be about 2 months of cash the business will generate. I worry they will make foolish purchases just because having that much sitting in the bank makes it so easy.

    The results are again fantastic. Apple’s stock price, relative to earnings, continues to be very reasonable (even cheap). Increases in the stock price have been more than outpaced by profit growth. It does seems profit growth has to slow, and likely dramatically (of course it seemed incredibly unreasonable to expect increases of even 33% of what Apple has done in the last 3 years). The stock price is not expensive, even if earnings growth collapsed, which it isn’t expected to do in the next year. On fundamental factors the stock remains very attractive.

    The biggest risk is that when so much has gone so right for Apple for so long aren’t they poised to suffer some major setbacks? I can accept the case for a dramatic slowing in earning for the iPhone, which is their primary driver of earnings. It is hardly certain but there is this potential. I don’t foresee significant actual declines (earning less in 2013 than 2012, for example). But even assuming no growth in iPhone profits from 2013 to 2016 at this price Apple seems to be a good investment (and few expect no growth for iPhone earning for that period). iPhone sales now account for 58% of Apple’s revenue; three years ago, they totaled 27% of revenue.

    Other areas should be strong in 2012, 2013 and beyond: iPads, Macs, iTunes and App sales. And everyone is expecting some huge new product or products. The leading candidate is a new Apple TV that actually makes a big move into the market. The stock price doesn’t even need some big new product but if it comes that is just more reason to be positive on Apple as an investment.

    I don’t see any signs of troubles brewing. The only reason to be nervous is that it seems crazy that such extraordinary success on such a huge scale can continue. That can explain being nervous but it doesn’t justify missing out on this attractive investment.

    Related: Apple’s Impossibly Good Quarter – The Economy is Weak and Prospects May be Grim, But Many Companies Have Rosy Prospects (Sept 2011) – Leadership quotes from Steve Jobs – Intel Reports Their Best Quarter Ever (March 2010) – 12 stocks for 10 years portfolio

  • Apple’s Impossibly Good Quarter

    Apple has been performing amazingly well for years. They keep producing blockbuster hits over and over. Not only are these hits enormously popular they are enormously profitable.

    The only real objections to Apple’s stock I can see are: the overall market value is so huge it just has to collapse (over $400 billion – the largest in the world) or it has to be time for a huge reversal of fortunes.

    The problem with the view that it will fall is that the stock is very cheap by any rational measure. You are not paying much for all the earnings. Even if Apple does not continue the trend of the last 5 years, if it just stopped growing altogether, it is still cheap (if it does continue that trend it will break $1 trillion by 2014 – but I don’t think it will). The biggest risk is the profit margin shrinks drastically. That is possible. It is even somewhat likely to shrink a fair amount. But there isn’t much reason to think revenues will not grow. And to me, the current price makes sense only if revenues fall and profit margins fall. It takes the worst case scenario to make this stock seem overpriced.

    The data on the last quarter (and for 2011 overall) are impossible (except they actually happened).

    • record quarterly revenue of $46.33 billion ($26.74 billion in 2010)
    • record quarterly net profit of $13.06 billion ($6 billion in 2010)
    • Gross margin was 44.7 percent compared to 38.5 percent in the year-ago quarter
    • $17.5 billion in cash flow from operations during the quarter (and $38 billion in the last year)
    • $100 billion in cash now ($97.6 billion to be exact but since the data was gathered they probably passed $100 billion anyway). That is more than the market cap of all but 52 companies in the world.

    You can’t grow quarterly sales from $26.7 billion to $46.3 billion. $26 million to $46 million, fine that is possible, billions however – not possible. Except Apple did. You can’t grow a $6 billion quarterly profit to $13 billion in 1 year. Except Apple did. You can’t generate a cash flow of $17.5 billion in a quarter. Except Apple did. You can’t have a stockpile of $100 billion in cash. Except Apple does. These figures would not have been seen as unlikely just 3 years ago. They were impossible. But Apple achieved them.

    These figures are not short term blips. They are the latest in a long stream of amazingly results.

    Related: How Apple Can Grow from $200 Billion to $300 Billion In Market Cap – Apple Tops Google (August 2008)

    Apple has numerous, incredibly strong businesses. Each could be the linchpin of an extremely valuable company.

    • iPhone initial sales and reoccurring income (over 50% of Apple’s revenue)
    • app sales (for iPhones, iPads and Macs)
    • iPads
    • iTunes
    • Macs
    • Their retail store business – selling all their products

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  • How Apple Can Grow from $200 Billion to $300 Billion In Market Cap

    Apple currently has the 4th largest market capitalization for USA stocks, behind ExxonMobil (over $300 billion), Microsoft ($250 billion) and Wal-Mart and ahead of Berkshire Hathaway, General Electric, Procter & Gamble and Google ($180 billion). Eric Bleeker has a nice article on fool.com looking at how Apple can grow to a $300 Billion market capitalization.

    what needs to go right for Apple to become the largest technology company in the world? Simply put, it needs to become the Microsoft of mobile.

    In many ways, the mobile race is similar to the PC battle of the ‘80s. In one corner we have Apple, packaging its hardware and software in a limited number of systems. In the other corner, there’s Google (replacing Microsoft), licensing out software to any number of hardware vendors.

    Apple could actually learn from Microsoft. It needs to be more than just the best smartphone on the market right now. Microsoft never controlled the operating-system market because it was the best — it won because it locked users in, and most people essentially had to use its products. Microsoft has released some real clunkers over the years, but it took few hits from them. Likewise, even though Apple’s unparalleled in its commitment to quality-unlike a certain competitor we just discussed — with a price tag that implies sustainable long-run dominance, Apple needs a margin of safety to ensure that even with a hiccup or two, it will continue to rule the mobile world.

    The $300 billion question
    So it all boils down to one question: How well can Apple lock users into its ecosystem? As developers continue building apps at rates far in excess of competing platforms and more users synch their digital lives around iTunes, you can see Apple creating a platform that’s sustainable well beyond just the next upgrade. From there, no company possesses a virtuous circle like Apple. Higher iPhone market share begets high-margin sales of apps and media, as well as increased Mac sales. Given the size of the smartphone market, the margins Apple collects from each iPhone, and the boost to other Apple products, you can see a path to $300 billion forming.

    I missed out on investing in Apple. I came close to buying in, but didn’t quite do it – that was a big mistake. And I am still not buying now, which could be another mistake. We shall see. I am very comfortable owning Google. But I think Apple could well be good also. My 12 stocks for 10 years portfolio has Cisco, Intel and Amazon which I am happy with and Dell which has been a mistake.

    Related: Apple exceeded Google for the first time since Google went public (Aug 2008) – Amazon Soars on Good Earnings and Projected Sales – It is Never to Late to Invest – Great Google Earnings (April 2007)