Up until recently I have been adding Dell, Intel and Western Digital. I added more Intel specifically yesterday and if I have the opportunity the position will probably grow. Now that markets are becoming more focused on the US fiscal cliff I might have a chance. Low prices could come, specially with the help of another possible US recession on the news. In other words, the fiscal cliff could be a perfect catalyst for uncertainty, fear, and market declines.
I bought those companies for some family members whose portfolios I manage. I have been taking US$ debt in order to make several of those and previous investments. That’s equivalent to shorting the dollar. That debt is fully covered by Euros that are at bank savings accounts which give more or less 2% depending on the bank.
One of the many reasons I like Intel is because it has most of the world computing power and its own semi conductor fabs to adjust to market changes. They design, build, and sell their products. Not many do that. They control the whole supply chain, and even make some of the machines to put on their fabs, the rest are bought to companies such as Applied Materials, which I also own. Applied materials, no matter who wins on the product side will sell their machines. Intel’s competitors do not own their fabs nor have the knowledge to make them. I think that the stock has fallen because of ARM’s power efficient processors and products from Apple that have been taking share in mainly low end computing machines.
Intel’s focus now is on power efficiency. I’m sure it will catch up because of their history, good R&D and deep control over the supply chain. It’s right now building two fabs. Each is worth more than 5 billions, those costs are comparable to nuclear plants and the knowledge to build them is unique. Those plants are made to compete. They are several years ahead their competitors, they can build up to 14 nano-meter processors and are backwards compatible to build using any older or bigger nano-meter size.
Apple has a big fan base but also a lot of their users are not fanatics. Fans might be growing less due to competitors products and access to good alternative options at low prices. That should be estimated if you plan to invest with them. Their competitors are getting good and many sell at or below cost. Personally I do not feel comfortable in general when I invest on high margin products that rely on fanatics or fashion, specially not when I see low barriers to entry.
It’s products are difficult to upgrade, in some cases not even the ram memory can be changed. The only upgrade possible is buying a new product and I guess their own fans could get tired of that business model when they see newer and better gadgets constantly being offered.
I also do not feel comfortable investing when earnings are at their peak and have my doubts if they can be sustained. P/E seems low because E is at a historical peak. But normalized P/E is quite high, too high for my taste. That said I would not bet against Apple, but also not for it now. Bruce Greenwald summarizes well the risk associated to investing in Apple:
I am not sure what Apple can do with its money, it can reinvest it making more iPhones, iPads, or iTV’s etc.. I’m not sure that will work anymore so good because of diminished returns on product experience and due to the huge competition that caught up quite well. Basically all tech companies are making products that can do the same as Apple’s, maybe not as nicely yet but that can change and is already changing. Some companies as Google or Amazon sell their hardware at or below production cost. Apple can not do that without eating its cash and margins. As competition, pessimism and doubts grow bigger maybe it should wait for a good opportunity and simply buy back a big bunch of its shares. Unfortunately doing that could send the message that they do not have anything better to do with their cash. I’m always wary and do not over emphasize dividends or buy backs.
My ideal type of company is a compounding machine that reinvests most in their business increasing their rates of return. In the recent years Apple has done a good job in that sense but cash starts to get too big, hardly offers any yield, and it’s not clear how they can profitably use it. Having too much cash in a company makes me nervous. It reminds me of Microsoft when they almost used their cash to buy Yahoo. Fortunately for Microsoft Yahoo declined the 40+ Billion offer. Then they decided to invest several billions in search, billions that have recently been written down. Finally they spend billions in buying Skype, not a great investment if you ask me. It also reminds me of how Hewlett Packard managed to spend more than its current market capitalization in the last few years. Mainly doing bad and big acquisitions. Hopefully Apple will not do the same with their cash, there is no reason to think they will. But there is also not many reasons to think they know how to use their excess cash, specially when you see how it keeps on hoarding to almost ridiculous levels. That’s why sometimes I think that the best that they can do is to give it back to their investors.
Google sells hardware at cost to get market share because their income is in advertising and they are interested in massive adoption. The android smartphone market share is constantly growing, quite fast. Billions have been invested by Microsoft and Yahoo to dethrone Google from the online ads market. It has not been possible. Even many more billions are now invested simultaneously by several high tech companies to dethrone iPhones and iPads. The smartphone and tablet consumer choices are now hard to keep up with. The outcome could be painful to Apple. Maybe not, but I doubt it too much to invest on it.
Amazon is interested in selling things such as books and they sell their devices probably at cost to get more readers. Like telecoms, they basically subsidize or give away hardware in order to grab market share for their other more dependable sources of income.
Even Microsoft is selling tablets and phones now. They can arguably be worse than Apple. But it can hardly be denied that that adds to Apple’s competitive pressures.
Apple depends on companies such as Samsung to get their chips. A company which they sued recently, that does not look too reliable to depend on. Apple could work on getting vertically integrated to build their own hardware and processors but that requires money and time. Worse of all that requires knowledge in areas where they do not have expertise. Maybe they could buy a company to do it though. Who knows maybe they buy Intel. I doubt though that they are interested and at a 100 billions dollars or more it could be too expensive for them.
Apple has been dependent on cheap Chinese workforce subsidized by their government. That can change any time. It is already getting quite more expensive to manufacture in China. As China gets more developed that advantage will be lost. I try to avoid investing in companies that benefit from a politically subsidized supply chain. Like Apple’s case through Foxconn. That dependency, if you ask me, is not reliable nor sustainable.
Please do not take my words too seriously and trust your own research. I have thought about and researched Apple because it’s in the same ecosystem where some of my investments are. I have chosen to invest in other options I feel better about. I respect Apple and agree that the company has done a great job until now. Both for them, for their investors and their customers. It has set an excellent high standard for others to follow. Their sales have grown at an amazing pace. I just have too many doubts about its future as an investment. With so many competitors and choices on the market one thing I do not doubt so much about is that the consumer will be the winner.