I agree with your numbers. Not with your conclusions. I look at cash flow generated and find that Apple is still growing relative to its own history. Remember, Apple makes several other highly profitable products. Also, Apple uses OSX and iOS in multiple products. Apple's success stems primarily from customer perception of ease of use. Using a common OS across multiple product lines is a distinct advantage. Hence, Apple likely will continue to grow FCF and net profits. Just because Apple created the smart phone market does not mean Apple must dominate share in that market. It would be helpful to me for you to show me your analysis of FCF and your estimates going forward. Finally, Google does not generate cash flow from sale of the Android OS. It relies on search and advertising hits to produce that. Apple's entry with its iAd program is likely to offset sales lost to Android devices, if such losses actually exist. Apple will continue to offer a consistent user experience, while Android sales and implementations rely on numerous OEMs, whose designs vary from one to the next. Over time I expect shareholder sentiment for Apple to decline but for P/E to remain at a higher level than that of its main competitors. The trend of share price will continue to track future expectations and may from time to time be overvalued or undervalued, thus offering multiple opportunities to show off or to look foolish.
"I agree with your numbers. Not with your conclusions."
The numbers aren't mine, they are Apples. As for the conclusions, I haven't stated any publicly yet besides the (IMO obvious) fact that Apple faces margin compression as more competent competition enters the fray. That and the apparently passionate following of their customers and investors may cause many to overlook this basic yet simple law of business and economics.
[caption id="" align="alignleft" width="370" caption="Share of 2010 Q2 smartphone sales to end users by operating system, according to Gartner (12 August 2010). "Gartner Says Worldwide Mobile Device Sales Grew 13.8 Percent in Second Quarter of 2010, But Competition Drove Prices Down". Press release. "][/caption]
"I look at cash flow generated and find that Apple is still growing relative to its own history. "
Agreed, and I don't remember saying anything to the contrary.
" Apple's success stems primarily from customer perception of ease of use."
Agreed, at least in part. Apple is a very potent marketing concerns, and that is the primary force in their success.
"Using a common OS across multiple product lines is a distinct advantage."
"Hence, Apple likely will continue to grow FCF and net profits."
Well, I think there is a causation assumption and error here, but I do agree with your conclusion short to medium term.
" Just because Apple created the smart phone market does not mean Apple must dominate share in that market."
What makes you think Apple created the smart phone market? They entered the market in 2007, nearly 14 years after it was created, and they are still trailing Nokia, RIM, and now the Google based phones. IBM created the smart phone, Nokia and Symbian increased the market and Microsoft increased the popularity of the touch screen GUI on the smart phone - all in the '90's to 2001. Then came Palm with the Treo, and Blackberry, who is still one of the market leaders (behind one of the original smart phone vendors, Nokia). Apple isn't even in the running as a early pioneer. What Apple did do was shake up the industry with a new paradigm and business model, and did so quite profitably and successfully.
You see, it is extreme "myths" such as this that serve to greatly benefit Apple, but also distort the perception of the market, how things have worked, and more importantly what it portends for Apple's future. The number one smart phone vendor has almost always been Nokia, but numbers 2 and 3 have been a very volatile position, difficult to hold. Nokia will probably lose its number one position due to the nature of the upcoming competition, but it definitely has a fighting chance.
Apple actually benefits from quite a few other “myths” as well, ex. The “ease of use” as compared to other OS systems – simply not true, particularly in comparison to Android. All one has to do is use a recent version of both systems to find the truth, but it appears many fail to do that. Instead of actually comparison shopping, they have a preconceived favorite (that was most likely marketed to them) and simply buy that. Another popular misconception is that the Apple phones are more feature rich or perform their tasks better than their new Android competition. Again, this is patently false, and is easily verifiable simply by taking a recent model of both higher end phones for a spin. I will do that on my site soon, and at a major Apple store in NYC, for all to see.
“It would be helpful to me for you to show me your analysis of FCF and your estimates going forward.”
They’ll be available in a few days as a subscription download. I’ll be happy to have you as a customer on the blog.
“Finally, Google does not generate cash flow from sale of the Android OS. It relies on search and advertising hits to produce that.”
Actually, Google does generate cash from Android sales, but that is currently beside the point. Google is brand new in the smart phone space, and is currently in the “rent seeking” phase. They are building (and quite rapidly) market and mind share, and from that critical mass they will extract profits and revenue, if successful. Remember, they did not generate cash flow from search either for the first couple of years, and they literally own search, worldwide, now. They launched their first competitive phone only 7 or 8 months ago, and didn’t get into the fray until 2008.
The iAd platform is interesting and looks promising, but it is little more than an unproven concept now. Google controls nearly 97% of mobile ads. It appears that you may misunderstand the strategies behind Google’s use of Android. Google is looking to become the next Microsoft, with Android as the next Windows. See The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift and Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space for my understanding of the extreme monetization potential of Android as it eats up market share and outperforms the competition, feature wise.
“Apple's entry with its iAd program is likely to offset sales lost to Android devices, if such losses actually exist.”
I understand your point, but currently that is pure speculation. As stated above, Google controls the entire market where iAd is not even blip on the screen. It may grow, and it may not, but it would not be prudent to extrapolate and discount a significant amount FCF generated from iAd into Apple’s valuation at this point in time. If anything, potential benefits from Apple’s iAd should be valued using option theory.
I don’t see how anyone can doubt Apple is losing sales to Android when Android was the only OS to gain market share last quarter as all other OS platforms lost share. If Android wasn’t there, who do you think those sales would have gone too? Microsoft Windows Mobile? RIM’s Blackberry?
“Apple will continue to offer a consistent user experience, while Android sales and implementations rely on numerous OEMs, whose designs vary from one to the next.”
Again, this is another misconception and Apple “myth”. I’ll take it that you haven’t used too many Android phones, but it takes little effort to learn the Android interface and the vendors make tweaks, not major changes so there is not that much difference between them. Android is quite intuitive and receives frequent refreshes, with a major one coming out in about 3 months from the team that developed the Palm Pre interface. Currently, the HTC Sense version of the interface is the most capable, and easiest to use of all mobile interfaces that I know of, and I believe I have used all of the major and popular ones. I literally don’t see where the Apple interface is any easier to learn than the Androids, and neither does anyone that I know of that uses both of them (as long as you discount the familiarity of those that have used Apple in the past).
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