My first computer was a Mac 128K. I was a budget-constrained doctoral student from UCLA, teaching my very first class at UC Berkeley. At $2,500, in 1984 dollars, it consumed all of my discretionary income for that year, but it was love at first sight. Having sampled what the PC world had to offer, with its collection of geek speak and inscrutable illogic, I was dazzled by the human interface of the Mac and impressed with the creative spirits that ran the company (Steve Jobs & Steve Wozniak). Suffice to say, I was a Jobs fan, before it was fashionable to be one.
- Even great CEOs have their blind spots: The success that Steve Jobs had at Apple, in his second coming as CEO, had made us forget his missteps in his first iteration as Apple's head. His creativity and focus were still there in the 1980s but I think that his zeal to put his personal imprint on style and features overwhelmed any sense of what the market wanted or needed at the time. The Mac Lisa, in my view the most ungainly of Apple computers ever, stands as testimonial to that era and to Job's lack of market discipline.
- The best technology does not always win: Much as I would like to believe that the best technology wins out in the market place, I learned to my consternation that this was not always the case. After all, not only did Microsoft win the operating system battle against Apple, with a vastly inferior system (in my biased view) but VHS beat out beta in the videotape stakes. Success in the market place requires a lot more than a good product: a recognition of what it is the market wants, good timing and good luck!
- Good companies are not always good investments: When I an enamored about a company, I have to remind myself to separate my views of a company from my views of its stock as an investment. After all, the evidence from history is sobering. As I noted in this earlier post on value investing, the better regarded a company is by the market place, the worse it is as an investment.
- It is difficult to maintain distance when you love a company and its products: Much as I would like to be objective and unbiased, I am human. When I value a company, I start with preconceptions and views that find their way into my numbers, no matter how hard I try. As I noted in this very first post I had on Apple from early last year, all that I can do is be transparent about my biases and let you make your own judgments on whether you buy into my assumptions.
In 1997, I succumbed and bought Apple stock (the split adjusted price was just over $5) just as the company faced its darkest days, as questions mounted about whether the company would make it in a world where Microsoft seemed to have won the PC wars. I would love to tell you that I bought the stock for intrinsic value reasons (because it would make me look good) but as I noted in a post from a little over a year ago, I did not. Instead, I bought the stock out of compassion and loyalty, the former driven by the feeling that the stock may not make it and the latter by the joy its products had delivered to me over time. That “charitable” contribution turned into my best investment ever, a fact I remember whenever I have moments of hubris about my valuation skills.
- Ignore the lead-up to the announcement, with the rumors, stories and opinion that you will see thrown around. Much of it is hot air with no effect on value.
- If you can avoid it (and it will be tough to do so), don’t watch or listen in on the Apple announcement and try not get caught up in the frenzied inevitably follow.
- I updated my valuation of Apple to reflect the financials as they stand today. Incorporating the information in the last annual report and markets (US treasury bond and equity) as they stand today, my estimate of value is $617, about 4% higher than my estimate in April 2013. A factor contributing to the increased value per share is the decline in the number of shares outstanding from 939.6 million to 908.4, a logical consequence of Apple's aggressive stock buyback program.
Once you have the details of the announcement, go through the news stories with a singular focus on how they will impact Apple’s revenue growth path, operating margins and investment requirements for the future. The key is to not only separate the wheat (information) from the chaff (distractions) but also to work out the consequences for value.
In fact, I think that they face a bigger risk in both businesses of someone else disrupting their cash cows. It would be exciting and potentially value changing if Apple announced a new market that they were planning to enter that no one expected them to. In my last post on Tesla, I argued that one of the potential positive scenarios for a Tesla bull was a strategic buyer who would be able to pay a premium over $20 billion. While I named automobile companies as potential buyers, there is no reason why that buyer cannot be a technology company with a large cash balance. Apple clearly has the cash and if it can figure out a way to bring Elon Musk on board, it may have found a new market to disrupt. The Tesla iCar? Probably no chance of it happening, but I can still dream, can’t I?
Mod Note (Andy) to respond directly to Professor Damodaran, please comment on his blog http://aswathdamodaran.blogspot.com