Apple is 'absurdly cheap' - TechCentral

Apple is ‘absurdly cheap’

Not everyone is worried about Apple’s future fortunes (see main story), or its direction under CEO Tim Cook. Local Apple bull Paul Theron, the founder and CEO of Johannesburg-based private client asset management firm Vestact, believes not only that the company’s prospects remain solid, but that the share price, at about US$120, is “absurdly cheap”.

Apple, which is trading below its 18 May 2015 all-time high of $134,54/share, has an historic price-to-earnings ratio of 14.

“That’s lower than Toyota, lower than IBM for goodness sake. It’s lower than banged-up banks like Citibank and Wells Fargo. That’s madness,” Theron said.

The smartphone market is not mature, but is in fact still in its infancy, he said. This will play strongly in Apple’s favour.

“Apple dominates the top end of the world’s most important product market — smartphones. The potential market is every person in the world. People who don’t have one want one. People who have one now want a new one.”

What Apple needs to do, Theron said, is simply to “go on doing what it does best”, namely “designing, manufacturing and distributing smartphones”. He predicted the next iPhone — possibly to be called the iPhone 7s or iPhone 8 — could sell over 300m units a year. (In its fiscal fourth quarter — to 24 September 2016 — Apple sold 34,5m iPhones.)

Paul Theron

BMI-TechKnowledge director of research Brian Neilson is less bullish, and believes Apple’s reliance on mature markets is a handicap. “Apple is far less successful in emerging markets, and in some cases almost irrelevant, especially in the emerging low-cost smartphone market, the ‘next billion’ if you like,” he said.

Google’s Android dominates in emerging markets. In the third quarter of 2016, Android had captured 87% of the global market, according to International Data Corp. Apple’s iOS had just 12,5%. However, the iPhone continued to mop up the bulk of smartphone industry profits in 2016, according to various research houses.

Sasha Naryshkine, Theron’s colleague at Vestact, where he is a portfolio manager, is also strongly bullish on Apple. He said its valuation is even cheaper if one strips out the company’s cash balance of $240bn.

“Even if you add the taxable amount in – for cash repatriated to the US – you could get a huge reinvestment or greater cash distributions to shareholders, increasing the attractiveness of the stock,” Naryshkine said.

He also defended Cook, saying that although he “may be a corporate type,” he “may be exactly what the business needs right now”.

“The bottom line is that Apple makes products and offers services that Mr and Mrs Consumer love. If that changes, then watch out.”

  • This article was also published in the Sunday Times of 15 January 2017

8 Comments

  1. Greg Mahlknecht on

    >People who don’t have one want one.

    Um… no. People who buy pretty much any flagship phone could choose to have an iPhone for a similar cost, but the majority haven’t done so, because they don’t want one.

    >The smartphone market is not mature, but is in fact still in its infancy, he said.

    Clearly this guy isn’t a tech guy. I think anyone that keeps pace with the tech industry will see this statement and steer well clear of Vestact when it comes to investing their money! Industry figures suggest that smartphones are nearing saturation point, with sales numbers flat or slightly declining. And the argument “target market: everyone” is fallacious because Apple have made a conscious decision to only target a small segment of the market.

  2. “People who dont have one want one” – I think he is referring to smartphones here, and not Apple specifically. He says Apple dominates the top end of this market, which may or may not be true, but certainly illustrates Apple’s problem – they have positioned themselves as a niche only in a potentially huge market.

  3. I’m not that sure I agree, but not for ‘overly scientific’ reasons:

    1. There are definitely signs amongst my peer group, in which there are a few tech pundits / thought leaders, who are moving away from Apple. Reasons: Lack of real innovation at an insanely high price point.

    2. I’m not in love with the mobile network supply chain model. But then that’s not an Apple-only consideraiton.

    To Greg’s point, the notion of “target market everyone” falls away strongly when you consider how ridiculously expensive Apple products are.

  4. Perhaps Paul Theron knows a lot about this topic. But the opening musings of this article (and in a way most of the others) smack of the kind of ‘insight’ I often hear financial types give over technology. All broad strokes and no nuance, often hiding critical differences. For example, it would be nice if Theron could explain why he is still so bullish despite clear shifts of the innovation culture under Tim Cook as opposed to Steve Jobs. It’s gotten so stark that some longtime Apple supporters are questions if Cook isn’t eroding Apple’s innovation edge. I’m not saying Cook IS worse, but he is certainly doing things differently. Knowing Theron’s reasoning for glossing over this would be nice, as it is definitely not been business as usual for Apple.

    Though personally I do think Cook is dropping the ball. Apple hasn’t invested in cloud to take on the emerging big three, it has orphaned the iMac world so badly that Microsoft (of all companies) is swooping in and stealing it, it is about to see its home beachhead (established by TV and Airport) degrade because Amazon’s Echo is defining the smart home market, it is falling behind practically every serious competitor in the connected car platform/services markets, and it has not managed to create a significant new hardware channel since the iPhone.

    Apple is resting on its laurels. Tim Cook may be running a healthy and productive company, but it sorely lacks the kind of thinking that under Jobs catapulted it forward.

  5. Greg Mahlknecht on

    He’s just plain wrong. He doesn’t have the necessary knowledge. He also doesn’t seem to understand fundamentals, like why Toyota and IBM have higher P:E. IBM might be in the same broad market segment as Apple, but their bread and butter is in massive decades-long contracts; Toyota is in an industry that changes very slowly. Apple’s bread and butter is in a market segment with effectively 2 year contracts and has a history of companies falling out of favour and dying in a few years. I’m not suggesting that it imminent, but the threat is there in a way it’s not for the other companies he mentions.

  6. The Navigator on

    “Financial types” should not be allowed near to systems engineering technology like phones. They’re “financial types” because the’re not systems engineers. Maybe stick to Marketing. That’s what Apple does exceptionally well.