It’s Time to End the Silly Season of Negativity About Apple

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It’s silly season again. The recent negative slant on press coverage of Apple has reached epic proportions.

Here are some examples from news reports over just a single day (last Thursday):

1. MacRumors irresponsibly reported that the firm TrendForce concluded Mac notebook share dropped from 8.8% market share to 7.1% market share. But they based this by declaring: “MacBook, MacBook Air, and MacBook Pro sales totaled an estimated 2.53 million in the first quarter of the 2016 calendar year, down from an estimated 3.4 million in the year-ago quarter.”  But this directly contradicts Apple’s reported sales in their recent quarterly results call: “Sales in March came in at 4-million units versus 4.6-million for the same quarter a year earlier. In mid-tier markets, [Apple CFO Luca] Maestri said the Mac actually saw double-digit growth. Even with the overall fall, he said they believe they still gained share in the PC space.” So how can a third party make an estimate that is dramatically lower than the Apple reported numbers?
2. Investors Business Daily reported that Kore, a startup developing bots for enterprise platforms, wrote in a blog that Apple was doomed without bots. Really? A supplier of bots criticizing Apple for not using their product?  That’s objective news?  Hardly. In the article, Kore asserted that “Apple’s Siri is a question/answer bot. You ask it a question, it gives you an answer. End of discussion.”  That is a huge understatement of what Siri already does, and suggests that Apple is not continuing to make improvements in Siri. That is a ridiculous observation and assertion.
3. Digital Music News reported that “Apple terminating music downloads within 2 years” and “Apple is preparing to abandon music downloads.” Really? Apple was quick to offer a rare response: “Our response is that it is not true, we are not shutting down iTunes downloads per your story yesterday,” Apple media executive Tom Neumayr flatly told Digital Music News. Yet the original story quickly got picked up in scores of sites. Cutting off downloads would be akin to NetFlix’s premature abandonment of its DVD rental business in 2011 – a move that sent Netflix’s stock collapsing downward. Apple is smarter than that, since maintaining its downloads business takes little incremental investment or attention.
4. Fed by this frenzy of negativity, Apple’s market cap slipped below Google’s for a few hours on Thursday, before moving back ahead of Google by the closing bell. Yet there were scores of articles with headlines like “Google Surpasses Apple as Most Valuable Company in the World”.  Of course, when it flipped back and Apple was once again more valuable, there were (as far as I could find) no articles reporting that.

So how is Apple really doing? Here is some info that you’ll rarely find in a news article about Apple these days:

Apple remains “insanely” profitable, to paraphrase a favorite term of Steve Jobs. While profits have flattened out for the current fiscal year, net income is still over $53 billion.  For perspective, consider the following:

• Apple’s $53 billion in net income is 40% of the combined profits of the 150 largest companies in Silicon Valley and bigger than the next six largest combined
• Apple’s $235 billion in revenue is 28% of the combined revenue of the 150 largest companies in Silicon Valley and bigger than the next four largest combined
• Apple’s $205 billion in cash is 31% of the combined cash of the 150 largest companies in Silicon Valley and bigger than the next five largest combined
• Apple’s $11.7 billion in dividends is 38% of the combined dividends of the 150 largest companies in Silicon Valley and bigger than the next five largest combined
• Apple’s $37.1 billion in stock repurchases is 40% of the combined stock repurchases of the 150 largest companies in Silicon Valley and bigger than the next twelve largest combined
• And for those that complain about Apple not paying its fair share of taxes, Apple’s $18.9 billion in taxes paid is 46% of the combined taxes paid by the 150 largest companies in Silicon Valley and bigger than the next eight largest combined

Here is the data from a recent SiliconValley.com article supporting the above comparisons:

Even if Apple’s revenue growth stalls, their strong cash flow and aggressive stock buyback program make it highly likely that earnings per share will continue to grow. Apple’s current PE is 11 versus 23.6 for the S&P 500.  But adjusting for Apple’s $233 billion in cash, Apple’s PE is only 5 = ($495 B Market Cap - $233 B cash)/$53.7 B Net Income.  So while Apple’s glory days of growth are likely over, it remains a cash machine that is grossly undervalued.

It’s time the media starts behaving more responsibly, and ends its embrace of the negative spin.  Apple deserves that no more than it deserved the unrelenting positive spin cast on Apple during that last years of Steve Jobs’ life. It’s time for media to act responsibly and refrain from propagating outrageous stories without verifying the underlying assertions.

It’s interesting that today’s “reality distortion field” is quite different than that term often used to spin things positively during Jobs’ heyday. Realistically, the media will continue to distort reality.  In the meantime, I expect the doomsayers will continue to have their fun.

In conclusion, as I write this Apple is hovering just above $90/share – a great time to buy! It's especially timely as the world figures out that the hundreds of unicorns that don’t make money are not worth billions – in the next couple of years the market will move back to blessing with higher valuations those companies that have solid businesses that make lots of profit. And Apple is at the top of that list.

Disclosure: I have owned Apple shares since 1985.

The Sky is Not Falling – At Least Not for Apple

Batten down the hatches. After a long sustained bull market, we are in the midst of an overdue market correction.

But now is a particularly strong buying opportunity for Apple shares.  WHY?

There are two problems with the recent 27% selloff in Apple shares since February 2015:

1. AAPL is now ridiculously cheap – at $97/share it is selling for 10.5 times earnings vs 19.8 for the S&P 500. Adjusting for AAPL’s $142 B in cash (net of debt), the PE ratio is only 7.8x. This compares to 33.9x for Microsoft (27.9x after net cash) and 29.3x for Google-Alphabet (25.3x after net cash).
2. Panic over reports of a 30% drop in iPhone orders is unfounded:

• The media is in a frenzy all based on reports by Japanese business publication Nikkei that iPhone production orders have been cut by 30%. In January 2013 this same publication issued a similar “sky is falling prediction” claiming that production had been slashed by 50%, noting disappointing sales and weakening demand; Apple iPhone sales for every quarter of 2013 (including Q1 calendar year) beat iPhone sales of the comparable quarter in the previous year.
• CEO Tim Cook has repeatedly warned against trying to predict sales by observing isolated supply chain checks.
• For the last nine quarters, Apple has exceeded their iPhone guidance every quarter. Their guidance for Q4 2015 (calendar year) was that Apple would be on track to beat last year’s 74.5 M iPhones.
• Many of these irresponsible attention-grabbing headlines are comparing calendar year Q1 2016 to Q4 2015; that is ridiculous, because sales ALWAYS drop on a sequential quarter basis after the holiday sales surge. The only meaningful comparison for Q1 2016 is versus Q1 2015, which was 61 million iPhones.
• Concern over China sales are at the root of the clamor, yet Stifel analyst Aaron Rakers just reported that sales in China of non-Android phones (which are mostly iPhones) grew 33% (year to year) last quarter to an all-time high of 24.3 million phones.

Is Apple approaching a point where it can no longer report strong unit growth in iPhones? Most likely, yes. Is there any sign that iPhone sales will actually decline any time soon? Absolutely not.

How does this growth picture compare to Microsoft, for instance? Since MSFT’s cash-adjusted PE is 3.6 times Apple’s, Microsoft should have much more expected growth than Apple. However, that is not borne out by recent results. In the last fiscal year, MSFT revenue declined 12% and Apple grew revenue 22%. MSFT grew EPS 5.5% and Apple grew 38%. Looking at the underlying business is even more concerning -- MSFT’s two biggest businesses are under siege by strong cash-rich “free” competitors, and Microsoft has failed miserably in Mobile (which is the future):

• Windows is slipping
• PC shipments declined 11% last quarter – the largest drop ever
• Windows share of OS continues to decline in 45 of the last 46 quarters
• Microsoft’s two OS competitors (Apple and Google) are both offering their OS and upgrades free of charge
• MS Office is losing share
• Apple offers Pages/Numbers/Keynote free of charge, and Google offers Google Doc’s also free of charge
• Mobile has left Microsoft behind
• Microsoft’s OS share is only a dismal 2.9% despite major investments including a disastrous acquisition of Nokia and the failed Zune

How does Apple’s growth compare to Google? Since GOOG’s cash-adjusted PE is 3.3 times Apple, Google-Alphabet should have much more expected growth than Apple. However, that is not justified by recent results. In the last fiscal year, Google grew revenue 13% and Apple grew revenue 22%. Google grew EPS slightly more (44% vs. Apple’s 38%). But that does not warrant a PE ratio 3.3 times higher. And while Google continues to dabble in many businesses, they remain more dependent on their search advertising business than Apple is on iPhone; and with Google’s extreme dominance of search, they are limited to market growth in that business (which should cool as global economic growth slows.)

Concern over Apple having flat-lined in growth has been expressed for several years. Yet in the last fiscal year, Apple’s revenue grew 22% and EPS grew 38%.  That’s faster earnings growth than any of the top 20 market cap stocks.

Here is a comparison of the key stats:

	AAPL	GOOG	MSFT
Market Cap ($B)	$538.5	$477.6	$407.3
Market Cap less Cash ($B)	$396.9	$412.1	$334.7
Net income ($B ttm)	$53.4	$15.4	$12.3
Free cash flow ($B ttm)	$55.9	$12.3	$19.0
PE (TTM)	10.5	29.3	33.9
PE (Forward)	9.3	20.3	16.3
PEG	0.8	1.5	2.0
Quarterly EPS growth (yoy)	38%	44%	6%
Dividend Yield	2.1%	0.0%	2.8%

Even if AAPL’s revenues flatten, EPS growth will continue from Apple's aggressive stock buyback program using all that cash. Apple’s annual free cash flow is $55.9 B, compared to $12.3 B for Google and $19.0 B for Microsoft. So Apple has much greater potential for continued EPS growth fueled by stock buybacks.

So for all the Cassandra’s out there preaching the impending Fall of Apple – Apple is not Troy.

Disclosure: I have owned Apple shares since 1985. I bought Microsoft shares in 1986, but have sold most of those between 176 and 466 times my investment. I bought Google in 2010 and still hold those shares.