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Apple Too Big For the Dow Jones Industrial Average
An anonymous reader writes "Apple is clearly the hottest tech stock on the market right now and the company is clearly at the vanguard of technological innovation. Consequently, many have wondered why Apple isn't part of the Dow Jones Industrial Average (DJIA). As it turns out, Apple's astronomical share price effectively prohibits the company from joining the DJIA as it would disproportionately influence the index."
The only people who really pay attention to the Dow are the talking heads. The money runners look at the S&P 500 when benchmarking market returns.
The Dow is an archaic measure that for some reason sticks around.... tradition?
How so? I am genuinely curious, as I don't follow US stocks closely.
*Shrugs*
So? If they want to be in the Dow they can run a few stock splits.
-- IANAL, this isn't legal advice, and definitely isn't legal advice for you. Also, Squee!
I've never heard it called the DOJA. And apparently neither has google.
So they don't want to split their stock - that's a horrible thing now? The trades are too granular now?
If it's really a problem, get enough of your fellow traders together, make a giant offer to buy Apple, then set the prices what you want them to be. Business decisions are made for worse reasons, I guess.
Why is this a story?
Ryan Fenton
Its importances is over valued. Put it this way, If Exxon shut its doors there would be an enormous impact to the western world's energy supply, disrupting the economies of many countries. If Apple closed its doors, well.... one less consumer products company...
Don't worry, with Jobs leaving as the day-to-day brains behind the company, and especially on his eventual death, that will change.
Do not look into laser with remaining eye.
Dow Jones Industrial Average (DOJA)
Reasonably sure that no one in the world abbreviates it like that. In fact, Googling "dow jones" and "doja" together, brings up... This exact news story. And no others.
DRM: Terminator crops for your mind!
Get out while you still can
time for the stock to split!
Um, Jobs hasn't been CEO since January. But please, go on reassuring people not to "worry," because Steve Jobs will die.
It is white collar gambling and no more about company valuations than Full Tilt was about legit poker playing. Sure you can make money if you're smart/lucky/know the right people/have the right fiber connection/have the best and brightest market manipulation master from the major STEM universities, but other than that the house is stacked against you. The distribution of wealth in the country (and world for that matter) among individuals is reflective of those at the top of the game rigging it to their advantage, politically, technologically, and otherwise.
Or am I just another FUD spewing pinko-commie?
'We are trying to prove ourselves wrong as quickly as possible, because only in that way can we find progress.' RPF
FTFA: "Dow companies are ranked by stock price, not market value"
This seems to me to be a stupid way of calculating a stock market index.
It's the market cap.
The other reason they're not part of the Dow is because Apple is overvalued by about 30x.
Apple has about 10% of its market cap in the bank as cash. With that said I'd be happy to buy any $20 bills you have in your wallet for $2 each.
They have $69 Billion in equity, $23 billion in annual income (generously taking the four most recent quarters), and market cap of 382 Billion. That means it would take 13.6 years of income, at present rates (which are MUCH higher than historical rates) to break even. Around 207-230 Billion would be a fairly safe price, assuming they can keep up this level of income--and is a tad under 60% of their current market value.
They're not overvalued by 30x -- that would imply they were worth $12 billion, and their equity alone is better than five times that. But they are overvalued by at least 20-30% from the standpoint of a prudent investor.
-- IANAL, this isn't legal advice, and definitely isn't legal advice for you. Also, Squee!
Although come to think of it, being overpriced has never bothered Apple in the past. :)
-- IANAL, this isn't legal advice, and definitely isn't legal advice for you. Also, Squee!
I assume that he is either trolling or has some sort of longer-term issue in mind(presumably being linked to the fact that they are just another consumer electronics vendor, so all it would take is a failure of taste on their part to tank them...); because their P/E is only 16.3(definitely higher than some; but the assertion that a P/E of .54 is correct is bold... Even someone like RIM, about which optimism is pretty limited, is at 3.95)...
Do they know what an "average' is? That's the problem with averages, one outlying value can skew the result. Maybe they should stop using something as dumb and simplistic as an average to indicate the collective state of stock prices?
The Dow Jones is an older index in which each company's weight in the index is determined by its stock price. In more recent indicies like the S&P500, stocks are weighted by market capitalization. Assigning weights by stock price is silly because it makes no intuitive sense and means extra work is needed to prevent events like stock splits from moving the index around.
So anyway, this isn't really about Apple, it's just a technical detail about a legacy index. Apple's share price is high ($412 as I type this), but so are plenty of other companies like Google ($539) and Berkshire Hathaway ($101250!).
As in Dow Jones Indus--oh never mind.
The writer and the reasons for Apple now being in the Dow 30 are both high.
GP is claiming that speculators gambling on what other speculators will later pay have driven the stock price up 30 times over what they would be worth to someone who was simply investing in the company itself.
Patience. All good things take time.
The index is too narrow. S&P 500 and Russel 2000 have much better coverage of broad economy. Not coincidentally S&P500 and Russel2K ETFs, futures, and options are among most traded on capital markets.
The publisher of the index, Dow Jones agency also owns Wall Street Journal and that maybe why DJIA is not forgotten just yet.
He's probably referring to the health of Steve Jobs and the fact that Apple doesn't have anyone who currently can replace him. A bad successor can turn that nice P/E ratio to a really bad one. All they have to do is start losing money.
Um, I've got some news for you...
I understand the claim, I was only curious about the specific logic behind the round number :)
×
That's unicode! How the hell did you get that to show up correctly?
Apple has a market cap of $382 billion and $70 billion in net asset value, so even if they appointed a no-talent ass clown like Michael Dell as CEO and he immediately liquidated everything, they're less than 6x overpriced.
Do you even lift?
These aren't the 'roids you're looking for.
Wait, wait, wait, wait, wait. The media has been using the DJIA practically religiously to tell us whether or not our country has an economy. But if they can selectively ban companies that do well, are we really in a state of near financial emergency?
Are we only in a recession because companies who are going to say we're in a recession are allowed to be counted in the DJIA?
Let q be a radix > 1. I am in ur base-q, killing 10 d00ds.
Out of curiosity, why should Apple split the stock? Their revenues aren't impacted by their valuation, and by keeping the price high they're deterring the day traders. Only serious institutional investors will be willing to buy the stock, and they're more likely to hold it long term, making it much more stable. Day traders and speculators tend to make a company's market cap gyrate wildly since so many of them base their stock picks on hearsay, gut feelings, the phase of the moon etc. The only reason they'd have to split the stock is because they have a burning desire to be on the Dow, which is a pretty piss poor reason in my opinion.
My eldest brother is the majority shareholder of a privately-held financial company, and over the years he's been bombarded with queries about when he's offering an IPO. His answer? "Never. I refuse to have the stock price of my company set by know-nothing day traders. They're busy watching the fluctuations on the scoreboard, not the developments on the field."
If you want a better investment strategy, use the S&P 500.
Actually, not this either, because the S&P was designed before index funds too, and isn't ideally suited to them. The S&P has a committee that unpredictably handpicks which stocks go into it, and when a new one enters the index, a lot of people buy them up because the S&P index funds are forced to buy it.
A better simple idea is just to buy an index fund that invests on the whole US stock market—e.g., Vanguard's Total Stock Marked Index funds. It's also more diversified—3,500+ stocks instead of just 500.
Are you adequate?
They're not overpriced, it's just a convenience fee on their stock price for investors who have the good taste to buy iStock.
Random Thoughts From A Diseased Mind (Not For Dummies)
Yeah, but dang it, I can get HPQ or DELL stock for under $25!
Village idiot in some extremely smart villages.
The Dow Jones is not exactly a price weighted average.
When it first started it was. They averaged 12 stocks and there you go. No fancy market cap calculations. (Or course, back then it was hard to figure out a companies market cap, but that is something else.)
Then, as stocks issued dividends, spit, and companies were replaced, Dow switched over to weighing each stock price with a factor. So, it does not matter how high Apple's price is when it introduced into the Dow, it's stock will be given a factor that will make the change invisible. For the first few months, a 5% change in Apple's price will basic the same influence as any other company - kind of. Of course, as time goes on, the "winners" (i.e. those who have been around a long time and have had a large price increase) will tend to dominate. But that would come latter.
The Dow is a poor index. It was great when you had to calculate a index in a hour and all you had was pencil and paper - it's simple. However, as soon as people got a second rate spreadsheet they could do something better - like the market cap weighted S&P. (Well, mostly market cap - they adjust for float). The one good thing you can say is that it's been around forever so you got a lot of data to work with. The S&P has been around for only 1/2 as long.
shamelessly misapplying "reductio ad absurdum" by extending the items which have a direct relation to defense to those that don't.
I think Wyatt Earp's point was that he'd like to see a precise definition of such "a direct relation".
Wow, am I alone in thinking the story submission is just fan-boy astro-turf?
"vanguard of technological innovation"
Three Squirrels
there aren't really any DJIA mutual funds.
There is DIAMONDS (DIA), a SPDR exchange traded fund that tries to track the DJIA.
In that case, DJIA has a weight problem. DJIA assumes the same weight for each stock, as if someone were to buy 7.57 shares of each. S&P 500, on the other hand, weighs by the number of shares outstanding, such that each stock's influence is proportional to its float, or the publicly traded portion of its market capitalization.
There used to be downside to having a high stock price because of odd lots. Nobody cares about that anymore. Here is a quick history lesson.
Jargon - a odd lot is any sale where the number of shares bought / sold is not divisible by 100.
Prior to the 70's when you traded stocks you traded stocks. When you sold stock you would take you stock certificate down to your broker, they would send it to the main office, they would send it to the company to be registered, the company would send it to the new broker, who would send it onto the person who bought it. Took 21 days. Lots of fancy paperwork. And I mean fancy - you should see the old stock certificates. Anyway, dealing with small change was a headache.
Market Makers could put you at the end of the line because you were not a "real" trader - so a worse price.
Extra fees would be applied - both by the exchange and by the broker.
etc.
So, from a historical perspective, different industries tended to have an optional price. Electric Utilities would tend to be in the 15 to 25 range because people looking to retire could save $2,000, buy a 100 shares, and not get hammed by fees. If the company every got out of this range it would split to get back in.
This lasted until the late 90's. NYSE would charge an extra fee for odd lots. Legacy computer systems from the brokerage houses would charge an extra fee - and some still do.
And then the internet came along - and Internet brokers - not limited by a legacy computer system - no longer cared it you bought a 100 or some odd lot.
Google, at $500, has as much granularity as most people need. (Unless you are looking to buy less then $100). Look at a daily stock chart and you really have to zoom in to see granularity. The only stock I can think of that has that issue is Berkshire which trades at 100k
Walmarts listed on the Dow... and they are WAY bigger than apple. There are a lot of other companies on the DOJA that are as big, if not larger than apple. Apple keeps their stock price high for PR reasons.
With that logic, Microsoft should be worth around $520 billion, given their $52 billion in cash on hand and short term investments...
Browsing at +1 - no ACs, I ignore their posts. So refreshing!
I'm not saying that companies should be worth X times their cash, but the grandparent was claiming that Apple should be worth less than it's cash, which is ridiculous.
Title:
Apple Too Big For the Dow Jones Industrial Average
TFA:
Apple, trading at about $420, would have the largest weighting in the 30-company measure because Dow companies are ranked by stock price, not market value.
Apple is not too big for the DJIA, it just has a ridiculously high stock price. On its own this is meaningless. The basic formula for stock price is market capitalisation (company size in dollars) divided by number of shares in circulation, which means that a company can increase their stock price without increasing company size simply by reducing the number of shares in circulation. Don't you love financial illiteracy?
"The most dangerous enemy of a better solution is an existing codebase that is just good enough." -- Eric S. Raymond
Stock Split
Sig this!
Actually Apple has $76 billion in "cash on hand", which is a bit different of a figure than "net assets", which I believe would be much, much higher.
What discount rate are you using?
I love Jesus, except for his foreign policy.
There's something to be said for having a high share price if the company is big and successful- those who tend to buy tend to hold on to it for a long period of time ...
I don't buy that. People tend to think in terms of a dollar amount. If a stock is $40 rather than $400 they just buy ten times as many shares. Letting your stock go up into the hundreds without splitting is just a vanity thing, a PR thing. The behavior you allude to may have some validity with a Berkshire Hathaway share at $100,000 but not something with a share price of $400. The little guy can still buy a single share at $400, unlike $100,000.
... and the day to day operations of the company are directed toward a long-term profit mindset.
This has nothing to do with Apple's share price. It has everything to do with the perspective of management. Apple with a 10:1 split and a share price of $40 rather than the current $400 would be run exactly the same give the leadership of Job's and his hand picked proteges.
When a company is traded constantly and when shareholders are only buying it to look for a short to medium term profit (like a year or two) then they don't are how the company performs down the road, and the board will reflect that, making decisions that make money now but could cost the company everything long term as they didn't invest in the long term.
Even with Apple's high share prices of recent years people are not holding onto Apple shares. It is constantly being bought and sold depending upon the news of the day (especially Apple news events - Apple shares are notorious for this), people's perception of whether Apple is currently at a local minima or maxima, etc. Those that are holding on to Apple are doing so because of the expectation of revenue growth as the expected new products and services are rolled out. Again, "holding on" is not tied to the calendar as you suggest, rather news and expectations, for example sales look to be on track through the end of the year.
Apple has a market cap of $382 billion and $70 billion in net asset value, so even if they appointed a no-talent ass clown like Michael Dell as CEO and he immediately liquidated everything, they're less than 6x overpriced.
I think it's pretty obvious that being 30X overvalued is an exaggeration. The trouble is that the industry they're in is extremely fickle. For example, say Samsung wins their case against Apple and gets an injunction in all the major markets against the iPhone. Or suppose a Chinese manufacturer takes an Android license and gets into the mobile device market, and then drives the retail price for iPhone-comparable devices down to $100. Apple could lose half their revenues practically overnight.
And the fact that they have billions of dollars in cash helps some, but not much -- if they encounter a twist of fate it's far too easy to burn a mountain of cash trying to turn things back around. Look at Microsoft -- they wasted billions of dollars and Bing still sucks.
nominal, i.e. zero. I'm leaving in some big margins, though. Straight 23 billion by six years or so, plus some leeway.
-- IANAL, this isn't legal advice, and definitely isn't legal advice for you. Also, Squee!
Sure, their income is higher than historical rates - that in no way precludes their income going even higher. Remember that they're doing this in a recession - when we come out of this recession in 2 or 4 or 8 years, who knows how much money people will throw to get the latest iphone and/or ipad?
Investors are simply betting on that eventuality. Of course, if that was a certainty, the price would no doubt be even higher than it is.
My point is, it's ridiculous to say they're overvalued by a factor of 30, but even to say that they're overvalued by 20-30% is just an opinion. You could be wrong, you could be right. If you're so sure about the overvaluation, feel free to short the stock and make tons of money when it tumbles.
The stock is worth exactly what people are willing to pay for it at any given moment. No more, no less. I seem to recall a lot of people calling Google overvalued by rather large numbers when it first went public, too.
I've learned that they're worthless, so I don't read AC comments anymore.
Of course it's an opinion, but it's based on fact. If we had perfect information about valuation and it weren't just an opinion, then nobody would buy or sell stocks. In the real world, we have imperfect information and uncertain results. My definition of a prudent investor here may differ from someone else's.
Investors are betting on the possibility that they are undervalued, and one justification for that POV is they believe it will continue to increase. To my mind, that's far from prudent.
-- IANAL, this isn't legal advice, and definitely isn't legal advice for you. Also, Squee!
Fair enough. I would add that buying (or shorting!) this particular stock at this time is pretty much just straight-up gambling either way. I wouldn't call that type of investing prudent either, but here we are, with tons of "investors" just betting.
I've learned that they're worthless, so I don't read AC comments anymore.
>
I feel inclined to call the DJIA "retarded," but that's unfair to the people who invented it in 1896 and expanded it in the 1920s (from 12 to 30 stocks). Back in those days, it wasn't that terrible of an idea.
I think I should expand on this. Back in 1902, a stock broker in the NYSE could calculate the DJIA by pencil in the back of an envelope: add the current prices of those 12 stocks up in the board and divide by 12. When it expanded to 30 stocks in the 20s it became that much harder, but you still could pay a guy to do it by hand and put up the updated values periodically up in the board. The jump to capitalization-weighted indexes with 500+ stocks was only possible with computers.
Are you adequate?
My penis is to large to have sex with! Gawd, I hate iZealots
And what is that news? I should have added that I don't think Steve Job's health merits a 30x devaluation in the stock. But I think it's probably a factor that's not being counted in the stock price.
Steve Jobs retired and Tim Cook took his place as CEO of Apple 24th August 2011.
Which has to maintain a certain level of hype. Not that their products aren't great or simple or whatever adjective you can think of. But simply put they are a manufacturing company of consumer electronics with a closed ecosystem. They need momentum and to maintain a healthy lead or they're going to collapse. All of the current apple-phile news is a product of that momentum. Remember when iMacs were cool for artists and the iPhone wasn't invented? They had a magazine out. Now they have atleast 3-4 on the B&N shelf last time I looked. All of this is part of the marketing of their image. They need to be ubiquitous in a way that Microsoft never was or could be. We've never seen a marketing approach like this before. The closest I could argue was when the 20th century brought about the advertising system all together and the flood of ads changed our world. Apple has to become the "computer" or the "smartphone" or inevitable momentum will wane and their ecosystem will start to suffer. So to wrap up my already too long point, these articles in general are a feeding frenzy for the media and PR alike because they maintain momentum and continue the narrative. Once this narrative ends with a failed product or a less than stellar quarter we're going to get blitzed with these kinds of articles even harder to restart the narrative.
Go look at a long term trend of all. They respond identically, it's basically irrelevant which you use.
And I'll just add for the Apple sycophants. Apple is are in a huge bubble. Almost as big as the Treasuries bubble.
Deleted
AOL much!!!!! What a crock!!!!!
*facepalm*
... why people continue to buy the stock when Apple pays no dividend. Apple's stock price *has* to rise indefinitely at a rate that produces a useful return as a consequence. That's not sustainable for ever and arguably Apple's stock is significantly overvalued because the only way to make money from it is to turn a blind eye to that sustainability. Apple, I imagine, will eventually pay a dividend and its stock price will adjust as a consequence without significantly altering the return to its stockholders. Which raises the question of what indices based on share price usefully measure.
Not to say he won't do a good job, but what has he done since then? We'll see when the iphone 5 is unveiled on 10/4 if he has the "Steve Jobs magic"
Perhaps another reason is that it is the Dow Jones INDUSTRIAL Average. Let's face it, even though Apple makes stuff, it is really in the software business, not the manufacturing business. It just manufactures stuff so that it can better control the experience.
I've been in this industry for about the same amount of time as Apple and the one thing that has been consistent in the last 30+ years is that Apple will make a boneheaded move and will fall into relative obscurity again. The company lives on a cycle. True, they made a good decision to go into the phone market but they've made some pretty idiotic moves in the past to counteract that as well. I wish them well, but I will NOT be investing in them. They've proven over and over again that they are a very bad risk.
Their decisions to keep their hardware and software proprietary (and thus NOT growing to the size of IBM, who is TRULY the king of tech – remember, Apple is about the size of Target; IBM is closer to Exxon) its decision to NOT learn from that mistake and change, its decision to pay for the development of dialup software and then refusing to use it and thus giving full rights to a startup company, soon to be called AOL; these are just a few examples. Apple has imagined themselves as the ‘cool’ company and continues to convince not only themselves but others as well. The day that they can no longer convince people of this is the day that they are doomed to Chapter 13. For me, I learned the lessons of the Dot Com bustdon’t invest in smoke and mirrors.
For example, say Samsung wins their case against Apple and gets an injunction in all the major markets against the iPhone.
I suspect that's quite unlikely... but if so, you'd probably see a large payout by Apple (which with $70+ billion in cash is likely possible). Apple might fight a judgement via appeal, but an actual injunction against iPhone would be settled, and quickly.
Or suppose a Chinese manufacturer takes an Android license and gets into the mobile device market, and then drives the retail price for iPhone-comparable devices down to $100. Apple could lose half their revenues practically overnight.
Seems highly unlikely. iPhone is only $199 on contract, or do you think that a Chinese manufacturer is about to equal the iPhone build quality, and incorporate the long battery life, multi-core CPU, high DPI display, best of breed touch screen and stick 16gb to 32gb of memory in there for about $100 unsubsidized? And even if they did, the iPhone would continue to sell great. Android handsets run with similar specs and similar prices now. Android has taken over the #1 spot in the Smartphone segment at the expense of non-Smartphone sales. iPhone sales haven't slowed at all, even as the lifecycle of the iPhone 4 was stretched beyond that of the previous annual releases.
I almost fell off my chair laughing when i saw this. i even spilled my coffee. what a joke right? they have invented no where near the amount of stuff and high tech things as Sony. give me a break.. apple grr.. how long they been around and only now their stock is going up. i say Bubbles pop. and this one will soon.
On September 17, 2001, I bought one share of Apple. It cost me about $20, and it was more of a symbolic gesture than anything else. The stock split in 2005, so now I have two shares.
I'm not the Apple-zealot that I once was. In fact, I went Linux-only a few years ago. But man, oh man am I kicking myself for not buying more of that stock.
obviously, evidently, patently, unquestionably, undoubtedly, without doubt, indubitably, plainly, undeniably, incontrovertibly, irrefutably, doubtless, it goes without saying, needless to say
He's been basically running the company for a while now. Through the iPad 2 launch anyway. And it's not the first time he's taken over.
Because Apple is already, depending on the day of the week, the largest company by market cap in the world and plenty of people would argue that valuation is out of whack with its actual economic significance - that the growth in the company (however spectacular) does not justify the growth in the share price. If the share price is simply being bid up in order to make a return in the absence of dividends and if that price is not related to the company's real worth then you just have a bubble and for the last people in a "taxable event" is the last thing they'll be concerned about. Dividends at least relate (roughly) to the actual performance of the company rather than its imagined future performance.
Apple is also sitting on a huge pile of cash (which it has amassed largely by *not* having paid dividends) and the stockholders are going to want to get their hands on it if Apple has no apparent other use for it. Taxable or otherwise, they'll want it in their banks rather than in Apple's. That would arguably be much easier to arrange without causing instability in the share price if the company had a history of dividend payments.
I suspect that's quite unlikely... but if so, you'd probably see a large payout by Apple (which with $70+ billion in cash is likely possible). Apple might fight a judgement via appeal, but an actual injunction against iPhone would be settled, and quickly.
And you don't see why being forced into a quick settlement would be a serious problem for Apple?
iPhone is only $199 on contract, or do you think that a Chinese manufacturer is about to equal the iPhone build quality, and incorporate the long battery life, multi-core CPU, high DPI display, best of breed touch screen and stick 16gb to 32gb of memory in there for about $100 unsubsidized?
Who cares? If they're 80% as good for 20% of the price, the competition will by its nature cause Apple to have to reduce their margins to maintain their volume, or vice versa.
It happens rather often, however, especially with small cap stocks. I've stumbled across companies a few times worth less than their balance sheet.
Browsing at +1 - no ACs, I ignore their posts. So refreshing!
Yeah but Apple stock just works. You don't have to fiddle with it when you get home.
And you don't see why being forced into a quick settlement would be a serious problem for Apple?
Besides the obvious one (Apple already pays Lodsys royalties), there's some history of Apple paying one time fees to settle disputes. Also, considering the number of injunctions Apple has won against Samsung, chances are, if both parties had to sit down and negotiate, and both parties really like being in the mobile phone space, I think Apple has a fairly strong negotiating platform.
iPhone is only $199 on contract, or do you think that a Chinese manufacturer is about to equal the iPhone build quality, and incorporate the long battery life, multi-core CPU, high DPI display, best of breed touch screen and stick 16gb to 32gb of memory in there for about $100 unsubsidized?
Who cares? If they're 80% as good for 20% of the price, the competition will by its nature cause Apple to have to reduce their margins to maintain their volume, or vice versa.
There's really not a lot of history of Apple cutting their margins to maintain their volume in the face of an onslaught of slightly inferior but cheaper products. iPhone is on the market a LONG time now. So is Android. I really don't see an onslaught of cheap Android phones keeping Tim Cook up at night. There will be $99 Android phones unsubsidized and free Android phones subsidized. Heck, there already are. At the end of the day, even with a slightly longer than usual time between iPhone 4 and iPhone 5 compared to past releases, they seem to sell okay. I'd cite a source, but come on, we all know they sell them just shy of as fast as they can make them. And they make a lot.
Besides the obvious one (Apple already pays Lodsys royalties), there's some history of Apple paying one time fees to settle disputes [thisismynext.com]. Also, considering the number of injunctions Apple has won against Samsung, chances are, if both parties had to sit down and negotiate, and both parties really like being in the mobile phone space, I think Apple has a fairly strong negotiating platform.
The trouble is that maybe Samsung doesn't really like being in the mobile space. Given Microsoft/Nokia and Google/Motorola, they might just see the writing on the wall. Mobile devices are a small fraction of Samsung's business, but a very, very large fraction of Apple's. If Samsung decides they're better off exiting the business and then demanding a sizable chunk of Apple's profits, they end up in the position of a patent troll with a number of very fundamental mobile device patents and Apple would have no obvious counter if Samsung does not fear an injunction.
There's really not a lot of history of Apple cutting their margins to maintain their volume in the face of an onslaught of slightly inferior but cheaper products.
I completely agree that Apple would sooner accept a reduction in volume than a reduction in margin, but that doesn't take anything away from the need to make the trade off. Apple was on a growth vector before Android, now they have a consistent market share with little to no growth. If Android did not exist then Apple would likely have the whole market right now. If in the future Android devices become even less expensive than they are now, the effect can only increase, and the effect on Apple's volume could be significant.
Naturally there are no guarantees of any of this or the alternatives, but that's the trouble: There is no way to predict whether something like this, or some black swan even that no one has even considered, will cause them to lose the bulk of their customers to a competitor. Whereas if you look at other large companies, e.g. Walmart or Exxon, there is no obvious event that seems at all likely that could cause them to lose half their customers inside of a year or two.
Yahoo finance shows as of Jun 25, 2011 Apple has total assets of $106.7B. Total liabilities are $37.4B, which shows a net equity value of $69B. Since Apple pays no dividends, corporate valuation of $382B, seems to be based on a pretty aggressive growth forecast (11 - 24% per year over the next five years? Five years is an eternity in the tech world.), considering the patent war and the entrance of all those Android smartphones. Let's hope Jobs or Cook had some kind of ace up their sleeve, because most of my friends seem to have moved over to Android and when their iPhone contracts expired.
The trouble is that maybe Samsung doesn't really like being in the mobile space. Given Microsoft/Nokia and Google/Motorola, they might just see the writing on the wall. Mobile devices are a small fraction of Samsung's business, but a very, very large fraction of Apple's. If Samsung decides they're better off exiting the business and then demanding a sizable chunk of Apple's profits, they end up in the position of a patent troll with a number of very fundamental mobile device patents and Apple would have no obvious counter if Samsung does not fear an injunction.
Samsung seems very interested in mobile. Apple's also a HUGE customer. Samsung stopped reporting mobile/tablet sales individually, but I don't think anybody seriously expects their end game to be walking away from selling 20+ million handsets a quarter, despite margins on other products dragging down their profitability last quarter, just so they can hurt Apple, who represents a tenth of their sales anyway. That makes no more sense then those who think Intel's end game is to destroy the MacBook Air with their new ultra notebook initiative. It's to increase sales of their low power chips, presumably to gain a foothold with Microsoft and Windows 8 and stem the tide of ARM taking over a large segment of this sector. The more Intel based systems Apple sells... guess what, Intel doesn't suffer from that.
I completely agree that Apple would sooner accept a reduction in volume than a reduction in margin, but that doesn't take anything away from the need to make the trade off. Apple was on a growth vector before Android, now they have a consistent market share with little to no growth.
There's just no truth that Android has slowed Apple's sales. Apple hasn't quickly become a 25% player in desktop OS either, but sales are SURGING, even though Windows 7 proved to be the release everyone wished Vista had been. Last quarter was the best ever for iPhone sales even though iPhone 5 is perceived as delayed from it's usual lifecycle. It's hard to believe, but Apple consistently just doesn't care about marketshare. They care about profits. So their margins remain high and their sales continue to increase 140% at a time year over year in this sector. Ask HP how they feel about that? Being #1 isn't necessarily the way to profitability. Would you rather run Apple's notebook division or HPs? Yet HP is the number one seller, and Dell fast on their heels. Apple is a distant third hardware wise, and their OS is absurdly lagging Windows in marketshare.
Look, you are right that Android will probably have the highest footprint in smartphones over the next several years. Apple doesn't care about that number, WebOS is as dead as they come, Blackberry is stagnated and Windows Phone hasn't taken off the way MS had hoped. It's just that most people realize it's not important to Apple's bottom line, customer base, or shareholders.
The problem is that Apple is what I would consider a fashion stock. Like it or not the smartphone and tablet market is heading toward the same kind of commoditization that the computer market did. Whether or not Apple can maintain their market shares and profit margins is key to their market cap. If they fall out of fashion with the great unwashed masses, or people start to buy on price when the market gets saturated, Apple will plummet like a rock.
There's just no truth that Android has slowed Apple's sales.
I can't understand how you can even think that. New competition almost by definition reduces the sales of the other competitors. Android has something like half of the market now. Do you really think that 0% of that came at the expense of Apple? Every sale of an Android phone was a potential sale of an iPhone; the fact that their growth is not negative does not mean that it would not have been substantially higher in the alternative scenario.
Being #1 isn't necessarily the way to profitability.
You're arguing the wrong point. The problem for Apple is not that one of their competitors will capture a large market share and force them to lower their margins, or even make them unprofitable. The problem is that if they maintain their margins (as can be expected) in the face of competition which is of sufficiently high quality and sufficiently lower price, their volume will be reduced. That doesn't mean they will stop making profit, but it means they will stop making as much profit. If Android takes 80% of the market and leaves Apple with 15%, even if Apple is making more profit than all of the Android phone makers put together, that doesn't mean they're in a good position relative to the rest of the stock market, only relative to the other phone manufacturers.
Apple has the highest market cap of any company right now. In order for them to be worth that, they can't just make more profit than each of their competitors. They have to make substantially more. Several times as much as their competitors. And there are a number of ways they can get tripped up going forward and be unable to do that.
Apple has the highest market cap of any company right now. In order for them to be worth that, they can't just make more profit than each of their competitors. They have to make substantially more.
Umm... don't they? 7% of sales but 35% of profits in desktop OS. Also see 2/3rds of phone profits in 2Q 2011 for another example.
What's next, you're going to explain to me that Apple is poised to lose it's lead in tablets? If they do, which perhaps they will, I think you'll find they still have a healthy market for them, huge sales, and amazing gross margins. Even if Ice Cream Sandwich, or whatever cute name the next big Android OS opens up things to Android selling more tablets overall.
If if if. And if they continue to dominate in market share, and their profits continue to go up, the stock will go even higher in the future. Like I said before, if you're so sure of your "fashion stock" opinion, you can make a bunch of money by shorting the stock. No? Not so sure? Well, then I guess it's not as overvalued as you say it is.
I've learned that they're worthless, so I don't read AC comments anymore.
It's not if if if, it's when when when. Apple cannot maintain 24% year-to-year growth indefinitely. Spend a few minutes and google "mature industry." Right now, Apple is fighting tooth and nail to shut out competitors so they can push it off as long as possible. But it will come.
And the Apple brand is a fashion stock. It generates higher than normal profit margins for its industry and that is a factor of marketing. If fashion changes and consumers decide something else is the "cool toy" to have, the end will come sooner rather than later. You Apple Fanboys seem to think that Apple can do no wrong. You might want to check back into the Sculley years and recognize that Jobs is now out of the picture again. Unfortunately, it appears he won't be coming back this time.
They don't need to maintain 24% growth indefinitely for their current stock price to accurately reflect its value. Anyway, it's pointless to argue about that because you're missing my entire very simple point. A share of Apple stock is worth exactly what people are willing to pay for it right now.
If you're 100% sure it's overvalued, why wouldn't you short the stock with whatever money you have saved up right now? You'd make a killing, if you're right. Point is, you're NOT 100% sure it's overvalued. No one is sure whether it's over or undervalued - that's the nature of the stock market, by definition, really.
I've learned that they're worthless, so I don't read AC comments anymore.
And by the way, Apple fanboy??? This was a comment on stock prices, not Apple. Whether or not Apple is cool has zero to do with the FUTURE stock price. Whether or not Apple is cool in the FUTURE can affect the stock price, but you don't know which direction that's going, either.
I've learned that they're worthless, so I don't read AC comments anymore.
And yes it is overvalued. And it will correct. The only question is when and I do not have that answer. As for my investing choices, how do you know that I haven't shorted them? Looking at market cap, I'd rather short them today than buy them.
TThe problem is that if they maintain their margins (as can be expected) in the face of competition which is of sufficiently high quality and sufficiently lower price, their volume will be reduced.
There's been no sign *at all* of a slowing of volume growth for iPhone. Because, the alternative to either accepting shrinking margins or shrinking volumes in the face of competition is, of course, to bring new products to market that consumers desire. Like, I dunno, the iPhone 4 and the iPad 2...and of course the iPhone 5 and the iPad 3.
People are having trouble understanding relativity. That is not an alternative.
Scenario 1: Apple continues selling iPhone 4 and does not release iPhone 5. Apple captures only 10% of the market, Android captures 60%, non-Android competitors capture 30%. If Android did not exist, Apple would capture 35% of the market and non-Android competitors would capture 65%.
Scenario 2: Apple brings out the iPhone 5. Apple captures 20% of the market, Android captures 55%, non-Android competitors capture 20%. If Android did not exist, Apple would capture 55% of the market and non-Android competitors would capture 45%.
In any scenario, the existence of additional competition reduces market share and/or margins that the other competitors would otherwise have.
The problem for Apple is that maintaining high margins by continually improving your product in a competitive market becomes a losing battle against diminishing returns. R&D effort into a new product line will sensibly go after the low-hanging fruit first, but once that is gone and all competitors have those features as a new baseline, it becomes more and more difficult as time passes to collect higher margins than competitors by releasing incremental iterations of existing products. The old products achieve most of the features that most people want, and the number of people willing to pay a $200 or $300 premium for version N+1 diminishes.
In order to maintain consistent profitability with tech products (as distinguished, in particular, from services), a company without an intrenched monopoly is required to continually enter or create new markets, as low-cost competitors naturally enter existing markets and drive down profits. Apple has had some success with this by getting into music players, then phones, now tablets. The question is, can they keep it up long-term? And the answer to that question is by no means clear.
Imagine how many people feel for not buying when Jobs was kicked out the first time and John Sculley saved the company.
I agree people are having trouble understanding relativity. Especially in light of the news about neutrinos. But I'm not sure it's actually the word you were looking for here...
Anyhoo: your scenarios describe what happens to *market share*. I was talking about what actually matters to Apple, which is *volumes*. Of course, you're right that over time, the products commoditise (although note that the BCG matrix suggests that this leads to increasing cash being thrown off for a long while, as scale economies improve further -- as has been the case with the iPod, which remains highly cash-generative despite slowly declining volumes). You're also right that the only method to maintain consistent profitability is to create new markets, and that Apple's (indeed any company's) ability to do this over the long-term is questionable. But you've gotta admit, they've had an outstanding track record to date, and this will clearly be *the* major strategic focus for the company, so they'll have been throwing their resource at it for years by now. And in between creating entirely new markets, they can get quite far with product differentiation within a category, again as they did with the iPod, and as they've also done with the laptop.