Analysis

Why Investors Hate Apple — and Are Dead Wrong

in Analysis

In this article I don’t discuss Apple’s valuation, balance sheet, or financials.  I covered these topics in great detail in these articles a few months ago (Part 1: Psychology and Part 2: Value of Ecosystem).  Nothing has really changed since, except that Apple announced an enormous share buyback.  This article focuses on Apple’s products, innovation, emerging markets … and Syrian rebels. It is easy to understand why Apple’s stock is hated so much (despite this morning’s early rise in its share price). The pain inflicted on investors by Nokia and BlackBerry is still too fresh. Both were spectacular successes that dominated their space, and then they burned out and went from high-growth stocks to disasters. Apple’s growth has slowed, and in the minds of investors the company has gone from a growth stock to a value trap. But though it’s easy to draw parallels, Apple is neither Nokia nor BlackBerry; it is still the same innovative company that growth investors could not get enough at $700 a share a year ago. Investors were not swept off their feet when Apple introduced its two latest iPhones during a media event at its Cupertino, California, headquarters on September 10. There were no surprises, no Steve Jobs’s “one more thing” — no...

How HP Can Navigate the Information Superhighway

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When Hewlett-Packard Co. is discussed in the media, it is portrayed as a PC company. On the surface, that makes sense: HP is the largest PC maker in the world, and personal computers are 30 percent of its revenue. But — and this is a very important but — PCs today represent only 10 percent of HP’s operating profits. Also, despite current conventional wisdom, PCs, unlike IBM Corp.’s mainframes in 1993, are not going away. A few years ago, when Apple co-founder Steve Jobs was asked about his vision for the tablets and PCs of the future, he said they reminded him of cars and trucks: We need both, but there are more cars on the road than trucks. Steve was right, but success or failure will come down to how big the total market for personal devices (irrespective of form factor) will be and what the mix between PCs/notebooks and tablets will be. The tablet is a terrific tool for consuming information — reading e-mail, watching movies, communicating on Skype, playing games — but its form factor limits it as an effective productivity device. Large screens, a mouse, high computing power, multitasking and multiple windows open at once are the features for which we’ll still need PCs. Tablets...

No Kodak Moment for Hewlett-Packard

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Investment mistakes usually fall into one of three categories: analysis, behavior or bad luck. In October 2011, after the shares of Hewlett-Packard Co. had been halved from about $48 earlier that year, I made a case for the stock. That was a mistake. There was no bad luck. I made several errors in my analysis. In this column I want to drill down into my mistakes and provide a new analysis of what is still an attractive investment. In 2011 I got three things wrong about HP: printers, services and culture. To better understand the company, it’s helpful to use an analytical framework based on two companies in different time periods: computer maker IBM Corp.circa 1993 and film giant Eastman Kodak Co. since 2006. Kodak was responsible for pioneering work in digital photography as early as the 1970s. In the ’90s, when digital photography was introduced commercially, Kodak’s 35mm film sales at first continued to grow, as digital cameras were an expensive novelty. But as digital cameras got better and cheaper, and thus more popular, sales of 35mm film started to decline. If you were a value investor analyzing Kodak, the stock would have appeared cheap on past earnings. And if you assumed that Kodak’s cash flows would gradually decline years into...

Understanding Apple Requires an Analysis of Fundamentals and Psychology

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So many articles have been written recently about Apple — defending it or explaining why this glorious fruit will turn into a shriveling pumpkin by midnight (with Samsung’s help) — that I really haven’t felt the need to contribute to the unending debate. But then Apple’s stock crashed to $450 last month, and we bought a little for our clients. After receiving an outraged e-mail from one of them calling the purchase “irresponsible” and proclaiming that everyone (including his neighbor) knows that Apple is going down to $300, I decided it was time to join the discourse. Clients rarely (almost never) contact us about stocks we own in their accounts. More important, this is far from the most “radioactive” stock we own or have owned. Here, in the first of two columns on Apple, I have no intention of defending or prosecuting the company, but I would like to share some thoughts about it that many pundits have either overlooked or ignored. What makes Apple stock difficult to own is psychology. The company’s success since 2000 is a black swan. We tend to think of Nassim Nicholas Taleb’s black swans as significant random negative events, but Apple is a positive one. When co-founder Steve Jobs came back to the...

How Much Would You Pay for the Apple Ecosystem?

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Earlier this week I wrote about the psychological challenges that Apple shareholders face. I also discussed the evolution of Apple’s “i” gadgets — the iPod, iPhone and iPad — and how they have created an ecosystem unlike those of other technology companies. Apple’s ecosystem is an important and durable competitive advantage; it creates a tangible switching cost (or, an inconvenience) after Apple has locked you into the i-ecosystem. It takes time to build an ecosystem that consists of speakers and accessories that will connect only via Apple systems: Apple TV, which easily recreates an iPhone or iPad screen on a TV set; the music collection on iTunes (competition from Spotify and Google Play lessens this advantage); a multitude of great apps (in all honesty, gaming apps have a half-life of only a few weeks, but productivity apps and my $60 TomTom GPS have a much longer half-life); and, last, the underrated Photo Stream, a feature in iOS 6 that allows you to share photos with your close friends and relatives with incredible ease. My family and friends share pictures from our daily lives (kids growing up, ski trips, get-togethers), but that, of course, only works when we’re all on Apple products.(This is why Facebook...

Why Hewlett-Packard Is Today’s Most Hated Stock

in Analysis

There is a good reason John Lennon wrote “All you need is love.” We want to be loved and usually gravitate toward people and things that others cherish. But when it comes to investing, love is not cheap. The trick is to identify misplaced (or mispriced) hate that will turn into love. This brings us to the most-hated stock today: Hewlett-Packard Co. It all started with the August earnings call, during which HP’s then-CEO, Léo Apotheker, unveiled a new vision: HP would transition into a software company. At first, Wall Street and yours truly were in disbelief; we thought we had simply misunderstood Léo’s soft German accent. But when on the same call HP announced a possible spin-off of its PC business and the acquisition of U.K.-based software company Autonomy Corp., for which HP will dish out more than $10 billion, valuing it at 40 times earnings, Wall Street realized the CEO was serious, and HP’s stock dropped like a rock. Hey, everyone loves software — it’s not capital-intensive, and there are high margins and a high return on capital. The problem is that HP is not a software company. More than $100 billion of its sales come from hardware: printers, servers,...

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