Marketocracy General Forums

each good time seems to last about two years.
each bad time seems to get longer and longer.

"I was arguing that your long term terminal ROE of 8 was too low based on the historical ROE ten year average of 13 "

i think that's a valid counter-point. would you suggest the terminal cost of capital be set to 13%? 8%?

Let's see if this works. Here's a chart showing ROE vs. the stock price. Historically, they were unable to maintain more than a few years of high ROE.

ahknaten wrote:

Over the long term, I have a hard time seeing the ROE stay at the current levels -- it certainly has had a hard time historically.

I'm not arguing that AAPL will maintain mid to high 20 ROE. I was arguing that your long term terminal ROE of 8 was too low based on the historical ROE ten year average of 13 (based on MSN's numbers).

A DCF model implicitly assumes a long holding period. It isn't predictive over the short term, in my experience. It is great for setting entry points for long term holdings and, based on DCF, AAPL is still probably too expensive. But I'd still guess AAPL will be higher than it is now 6-12 months from now. Otherwise, you have to argue that there will be significant earnings misses or significant PE ratio compression which doesn't seem likely to me given the lower interest rates.

"Reading it, it appeared that you wanted the result to show Apple as overpriced and then proceeded to adjust the parameters until that result was achieved"

Actually, when I do a DCF, I assume the analyst forecasts of EPS and sales growth are right. So, I create a model that uses those and then after a 10 year period I adjust the terminal values levels so that the terminal ROE and sales growth seem reasonable. Then, I try to figure out what assumptions would lead to such a high valuation, and in this case, I couldn't justify it. It would've required much higher terminal ROEs and sales growth estimates.

Historically, Apple hit ROEs in the high 20s before. Wasn't that considered innovation back then? Then it dropped and then it rose again and then it dropped and then it rose again. In the late 80s it had innovation and had high ROEs and a stock price of $10. Then the stock and the ROE fell and in '96 or so it sank to $3. In '98 both ROE and stock picked up again and the stock went to $30, but that ROE was short lived for about 2 years. Some more innovation comes along and in '04 it shot up again and so did the stock. See the pattern? Over the long term, I have a hard time seeing the ROE stay at the current levels -- it certainly has had a hard time historically.

ahknaten wrote:

Here's a very simple and naive method of valuating the stock. Sadly, many folks do this and it's not a great method. Even worse, many analysts do something this basic and that's quite sad.

I like DCF modelling as much as the next guy but as you surely know, you can tweak those parameters and make them say about anything you want. Your Apple analysis is a case in point. Reading it, it appeared that you wanted the result to show Apple as overpriced and then proceeded to adjust the parameters until that result was achieved. That may not be the case, but your description didn't seem to provide much analysis beyond 'I don't think they can grow as fast as they have' While I think that is certainly true, I think your ROE of 8% is too low assuming AAPL continues to expand into new markets. Over the last 10 years, AAPL has averaged about 13% ROE and that includes the one of the worst bear markets in techs ever.

I'd also argue that your disdain of the P/E * EPS is a bit too strong. In the last few years, I've frankly found that to be a lot more reliable than a DCF model. I generally look at average PEs and do some comparison to the industry PEs rather than just current ratios but I've found them to be very helpful in identifying peaks--much more so than DCF models.

If you really do plan to hold your stocks for 5+ years (which I do for some industries and in some accounts) then DCF makes a lot of sense but, as you said, a lot of analysts don't go through that efforts and normalized PE multiples appear to work much better for medium term investments. There are very few tech companies that I would want to hold for 5+ years. I've spent a lot of time in that industry and I can tell you that most companies don't have any visibility out that far. If they don't, then I certaintly wouldn't assume I did.

I can also tell you that, having worked for an AAPL supplier and competitor, they are likely to protect their margins much better than you think. WMT has nothing on AAPL when it comes to squeezing suppliers and AAPL's industrial design talent gives them an ongoing competitive advantage that is pretty hard to penetrate. AAPL is only mediocre when it comes to pure technology improvements. But they know how to make it aestheically pleasing and easy to use.

you can tell why i would suck as an analyst at a firm. i'd be quite critical.

Here's a very simple and naive method of valuating the stock. Sadly, many folks do this and it's not a great method. Even worse, many analysts do something this basic and that's quite sad.

Take the 2008 year end EPS estimate: 4.42
Take the trailing PE: 39.17

Multiply: = $173

what is it trading at now $139

naive stock analyst. i think it should be $173, it's at $139 now. buy. but other analysts have it at $170, so i should make it at $180 or $200. that sounds good.

Well, it seems to me that someone is bullish on AAPL. I wonder if MOFQX owns any?

The Times Online, Elizabeth Judge
September 13, 2007

O2, the mobile phone company, laid the groundwork yesterday for an announcement of a tie-up with Apple to sell the US firm’s iPhone handset.

Peter Erskine, the O2 chief executive, defended Apple’s insistence that it receives a share of revenues from calls made on iPhones.

Apple has struck an unconventional deal with the network operator AT&T in America, under which the iPhone has sold more than one million units since its launch on June 29.

Apple is expected to reveal that O2 will be its British network within the next few days.

Mr Erskine defended Apple’s insistence on sharing subscriber revenues with network operators, saying that such agreements were still advantageous.

Revenue-sharing deals with handset manufacturers are unheard of within the mobile industry. Manufacturers such as Nokia usually receive no cut of the calls made on their devices.

Vodafone is thought to have pulled out of the bidding war for the iPhone in Britain because of its reluctance to give 10 per cent of revenues from calls to the California-based company.

Asked about the revenue-sharing deals that Apple is expected to adopt with European mobile operators, Mr Erskine said: “If sharing revenue brings a bigger pie to the table, then we’ll be happy to share that pie . . . The revenue-sharing model will play an increasingly important role in the future of converged communications.”

Link to Full Article

O2 won a fierce battle for exclusive rights to the iPhone, but hacks, high prices and slow network speeds may reduce its appeal

Times Online, Jonathan Richards
September 18, 2007

So, the "Jesus phone" finally arrives in the UK.

Apple has confirmed, as expected, that the UK partner for its much-hyped - and occasionally sabotaged - iPhone, is to be O2, and that the device will go on sale on November 9.

At £900 the starter package - including the £269 device and a minimum 18-month contract at £35 a month - is no snip.

It's likely, however, that many early customers - among them the tech cognescenti and the fashion-conscious who have become its disciples - will view the purchase not just as of a phone, but as a combined music player/internet browser/personal organiser device, and therefore as one worth the expenditure.

Apple says the £269 phone, player and surfer comes on 18-month minimum contracts, lifting the cost to £1,000

The cost, however, will arguably be the least of O2's worries.

UK customers have long been used to their phones being heavily subsidised by their contracts, and analysts have pointed out that several other top-end handsets, particularly 3G handsets, would cost twice what the iPhone does were the cost not absorbed into the monthly tariff.

In trying to lure in as many new customers as possible with the promise that theirs is the UK's only iPhone-compatible network, the more significant issue for O2 may turn out to be whether Apple can contain the menace of 'iPhone unlocking'.

The reality is that today's event was not the UK launch at all, and that hundreds of iPhones bought in the US and on the internet are already being used to make calls on UK networks, courtesy of the many unlocking services now available on the internet.

Unlocking software, which in five minutes frees up the device to work on any network, can now be bought for as little as £25, meaning that an existing T-Mobile user can embark on life with an iPhone with his or her existing contract for an outlay of just under £300. (There are now also free versions of the unlock, though the level of expertise required to install them is greater.)

Another issue is network speed.

The iPhone is marketed as a phone, internet browser, and music player wrapped into one, but it is not a 3G device. That means that many of its most endearing features, when used via the phone network, can be painfully slow. (Owners typically report an internet page taking between 30 seconds and a minute to download on a 2.5G network.)

This is doubly disappointing for O2: firstly because it probably hoped that Steve Jobs would wait until the iPhone was a 3G device before launching in Europe, and secondly because it now has to upgrade its existing network to be compatible with Edge - the iPhone's designated network.

(Edge - 2.75G - is slightly faster than GPRS - 2.5G, which is faster than GSM - 2G. The analysts' analogy goes: if GPRS is like a one lane country lane, Edge is two lanes most of the time, standard 3G is like the M25 ,and HSDPA, one of the most advanced networks, is like a Los Angeles freeway, but without all the traffic.)

According to analysts, the cost to O2 of upgrading its network - which chief executive Matthew Key said today would offer 30 per cent coverage for iPhone on Edge by launch time - is likely to be in the millions, though not tens of millions, of pounds.

Link to Full Article

July 5, 2007
O2 beats rivals in battle for the rights to Apple’s iPhone

Elizabeth Judge, Telecoms Correspondent

O2 has beaten its rivals to win the exclusive UK rights to offer Apple’s iPhone. The tie-up, the mobile phone industry’s most sought-after deal in years, marks a major coup for the 18 million-customer group. The final contract is expected to be signed imminently.

The phone, which should be on sale in time for Christmas, is expected to prove a key weapon in enabling O2 to win and retain customers in one of Europe’s fiercest mobile markets.

It is understood that negotiations are continuing with mobile phone retailers including Carphone Warehouse over an agreement to sell the