Apple: The Business vs The Stock

by | Jan 17, 2013 | General

What’s wrong with Apple? Not much.

Apple stock has been giving us heartburn since September. But rather than try to explain why the stock behaves in certain ways for short periods, we’d like to focus attention on 1) the underlying business and 2) the current value compared to what we first bought in 2007.

The chart below illustrates the opportunity for Apple and at this point, Samsung. Tablets and smartphones are where technology dollars are flowing right now and according to this chart prepared by Kleiner Perkins’ Mary Meeker (with data from Morgan Stanley) portable devices will overwhelm the sales of PCs for the next three years and beyond.

It’s no accident that Apple and Samsung are the two winners in this market. Unlike PCs and most laptops, portable devices are consumer products, not “industrial” products. By “industrial” we mean utilitarian machines that compete on function rather than touch, feel, and style. Consumer electronics need to do the work we want done, but we want them to be fun, beautiful (if possible) and above all, easy to use.

The computer market was an industrial product space until Apple turned those devices into consumer products. Samsung has a long history in consumer products so it’s the Korean giant that is competing effectively against Apple, not Microsoft, not Dell and not Cisco.

Apple and Samsung will dominate the explosive growth illustrated in the chart above, but Apple will do it with much higher margins, higher returns on capital, and a more focused business model. Both companies will get their share of the growth we see coming, but Apple stock behaves as if its opportunities lie in the past.

Apple’s products make a multi-device life* easy—no other company or software platform comes close. Apple will get a big chunk of the growth in mobile computing units, but an even bigger share of the profits. (*Multi-device life: phone, computer, tablet/reader, game platform)

The current focus on market share ignores a basic truth: shareholders do not benefit from market share, we only benefit when profits increase.

It’s been just over five years since we started buying Apple. Since then the stock has increased more than five fold. Over the same stretch of time Apple’s profits have gone up more than 12 times. The stock has failed to keep up with the business. We think that will change over the next few years.

Meanwhile, the heartburn could continue as we sit and wait while thousands of Apple employees work on our behalf to grow the business, make customers happy, and drive profits to new highs. What a world we live in. 

Best regards,

Daniel A. Ogden


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