Apple: The Investment Of A Lifetime

seekingalpha2021-04-08

Summary Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E. AAPL is undervalued based on traditional and reverse discounted EPS ...

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Alfred1007
·2021-04-09
A very detail report
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Jazling
·2021-04-09
Wow
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- Jazling:
  Ok
  2021-04-09
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James3128
·2021-04-09
Test
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JAMKKT
·2021-04-09
Good buy
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ICEsh00ter
·2021-04-09
yeah ...
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AndyChiew
·2021-04-08
apple time
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Tazjonz
·2021-04-08
It’s better to chip more when Low & keep long term
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Weilonglek
·2021-04-08
Agree
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sayseng
·2021-04-08
Like and comment please, thanks!
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- Jazling:
  ReSponD pLs
  2021-04-09
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stormlee
·2021-04-08
Like & comment. TQ
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- stormlee:
  Tq
  2021-04-09
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- stormlee:
  TQ
  2021-04-09
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- Jazling:
  ResponD pls
  2021-04-09
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ycwoo
·2021-04-08
I.like apple
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- stormlee:
  ?
  2021-04-08
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- Nebhol:
  Buy
  2021-04-08
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ACCY
·2021-04-08
Wow
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- stormlee:
  ?
  2021-04-08
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Abundance Thankful
·2021-04-08
Great!
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- CocoPosh:
  [财迷]
  2021-04-08
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Kt18
·2021-04-08
Agreed, people who like Apple will stay long
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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"AAPL","symbol_name":"苹果","start_time":0,"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","article_id":"1114647502","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","pubTimestamp":1617892630,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"AAPL":"苹果"},"translate_title":"苹果：一生的投资","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AAPL":0.9},"content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":348670316,"gmtCreate":1617928806035,"gmtModify":1704704886542,"author":{"id":"3570656625926041","authorId":"3570656625926041","name":"Alfred1007","avatar":"https://static.tigerbbs.com/81d8406380cbc0525927f00a9510f2fa","vip":1,"hat":"https://static.tigerbbs.com/4c5ceab71416b120bab4604c0754b52a","crmLevel":2,"crmLevelSwitch":0,"idStr":"3570656625926041","authorIdStr":"3570656625926041"},"htmlText":"A very detail report","listText":"A very detail report","text":"A very detail report","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/348670316","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":348634580,"gmtCreate":1617925272240,"gmtModify":1704704803324,"author":{"id":"3566821013640470","authorId":"3566821013640470","name":"Jazling","avatar":"https://static.tigerbbs.com/85e0a83573d9307f57fca9b2baed72af","vip":1,"crmLevel":5,"crmLevelSwitch":1,"idStr":"3566821013640470","authorIdStr":"3566821013640470"},"htmlText":"Wow","listText":"Wow","text":"Wow","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/348634580","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":3990835,"gmtCreate":1617925280060,"gmtModify":1680783362185,"authorId":3566821013640470,"author":{"id":3566821013640470,"idStr":"3566821013640470","authorId":3566821013640470,"name":"Jazling","avatar":"https://static.tigerbbs.com/85e0a83573d9307f57fca9b2baed72af","vip":1,"currentWearingBadge":{"badgeId":"1026c425416b44e0aac28c11a0848493-2","templateUuid":"1026c425416b44e0aac28c11a0848493","name":"Senior Tiger","description":"Join the tiger community for 1000 days","bigImgUrl":"https://static.tigerbbs.com/0063fb68ea29c9ae6858c58630e182d5","smallImgUrl":"https://static.tigerbbs.com/96c699a93be4214d4b49aea6a5a5d1a4","grayImgUrl":"https://static.tigerbbs.com/35b0e542a9ff77046ed69ef602bc105d","redirectLinkEnabled":0,"hasAllocated":1,"isWearing":1,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2023.07.25","individualDisplayEnabled":0,"individualDisplaySort":0,"categoryType":1001},"crmLevel":5,"crmLevelSwitch":1,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":348634580,"type":1,"supId":0,"prevId":0,"content":"Ok","text":"Ok","html":"Ok"}],"langContent":"EN"},{"id":348631892,"gmtCreate":1617924964316,"gmtModify":1704704796224,"author":{"id":"3554270654692944","authorId":"3554270654692944","name":"James3128","avatar":"https://static.tigerbbs.com/5ace08c09b102c90559617c6182a8216","vip":1,"crmLevel":9,"crmLevelSwitch":1,"idStr":"3554270654692944","authorIdStr":"3554270654692944"},"htmlText":"Test","listText":"Test","text":"Test","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/348631892","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":348690565,"gmtCreate":1617924032857,"gmtModify":1704704778198,"author":{"id":"3580120666305176","authorId":"3580120666305176","name":"JAMKKT","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"hat":"https://static.tigerbbs.com/b0a2963eb37c60c5d6d4a8dbcd266952","crmLevel":5,"crmLevelSwitch":0,"idStr":"3580120666305176","authorIdStr":"3580120666305176"},"htmlText":"Good buy","listText":"Good buy","text":"Good buy","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/348690565","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":348874831,"gmtCreate":1617923296923,"gmtModify":1704704761768,"author":{"id":"3568262728204718","authorId":"3568262728204718","name":"ICEsh00ter","avatar":"https://static.tigerbbs.com/e8d9d76c266e1d33abd00a525a8a445c","vip":1,"crmLevel":6,"crmLevelSwitch":1,"idStr":"3568262728204718","authorIdStr":"3568262728204718"},"htmlText":"yeah ...","listText":"yeah ...","text":"yeah ...","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/348874831","repostId":1114647502,"repostType":2,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":348144122,"gmtCreate":1617897233166,"gmtModify":1704704613220,"author":{"id":"3576460820058972","authorId":"3576460820058972","name":"AndyChiew","avatar":"https://static.tigerbbs.com/2f7d32f50519aed00c3e108e6869090b","vip":1,"crmLevel":4,"crmLevelSwitch":0,"idStr":"3576460820058972","authorIdStr":"3576460820058972"},"htmlText":"apple time","listText":"apple time","text":"apple time","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/348144122","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":348186650,"gmtCreate":1617893925470,"gmtModify":1704704555932,"author":{"id":"3578567927092479","authorId":"3578567927092479","name":"Tazjonz","avatar":"https://static.tigerbbs.com/f84e5692e6809277d605d8442cdc7efa","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3578567927092479","authorIdStr":"3578567927092479"},"htmlText":"It’s better to chip more when Low &amp;&nbsp;keep long term&nbsp;","listText":"It’s better to chip more when Low &amp;&nbsp;keep long term&nbsp;","text":"It’s better to chip more when Low & keep long term","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/348186650","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":348186971,"gmtCreate":1617893905493,"gmtModify":1704704555119,"author":{"id":"3558571642509864","authorId":"3558571642509864","name":"Weilonglek","avatar":"https://static.tigerbbs.com/582a828478fa487580669c34bce8961c","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3558571642509864","authorIdStr":"3558571642509864"},"htmlText":"Agree","listText":"Agree","text":"Agree","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/348186971","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":348118926,"gmtCreate":1617893222365,"gmtModify":1704704540120,"author":{"id":"3573211284448483","authorId":"3573211284448483","name":"sayseng","avatar":"https://static.tigerbbs.com/fabcad9e067a8f135e171baf6de7fb58","vip":1,"crmLevel":5,"crmLevelSwitch":0,"idStr":"3573211284448483","authorIdStr":"3573211284448483"},"htmlText":"Like and comment please, thanks!","listText":"Like and comment please, thanks!","text":"Like and comment please, thanks!","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/348118926","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":3990841,"gmtCreate":1617925297713,"gmtModify":1680783361397,"authorId":3566821013640470,"author":{"id":3566821013640470,"idStr":"3566821013640470","authorId":3566821013640470,"name":"Jazling","avatar":"https://static.tigerbbs.com/85e0a83573d9307f57fca9b2baed72af","vip":1,"currentWearingBadge":{"badgeId":"1026c425416b44e0aac28c11a0848493-2","templateUuid":"1026c425416b44e0aac28c11a0848493","name":"Senior Tiger","description":"Join the tiger community for 1000 days","bigImgUrl":"https://static.tigerbbs.com/0063fb68ea29c9ae6858c58630e182d5","smallImgUrl":"https://static.tigerbbs.com/96c699a93be4214d4b49aea6a5a5d1a4","grayImgUrl":"https://static.tigerbbs.com/35b0e542a9ff77046ed69ef602bc105d","redirectLinkEnabled":0,"hasAllocated":1,"isWearing":1,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2023.07.25","individualDisplayEnabled":0,"individualDisplaySort":0,"categoryType":1001},"crmLevel":5,"crmLevelSwitch":1,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":348118926,"type":1,"supId":0,"prevId":0,"content":"ReSponD pLs","text":"ReSponD pLs","html":"ReSponD pLs"}],"langContent":"EN"},{"id":348134814,"gmtCreate":1617892945938,"gmtModify":1704704531927,"author":{"id":"3571959390768435","authorId":"3571959390768435","name":"stormlee","avatar":"https://static.tigerbbs.com/80629ef9648273c0d6465aee66dbd98a","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3571959390768435","authorIdStr":"3571959390768435"},"htmlText":"Like &amp; comment. TQ","listText":"Like &amp; comment. TQ","text":"Like & comment. TQ","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":5,"repostSize":0,"link":"https://ttm.financial/post/348134814","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":3997284,"gmtCreate":1617980637325,"gmtModify":1680783472363,"authorId":3571959390768435,"author":{"id":3571959390768435,"idStr":"3571959390768435","authorId":3571959390768435,"name":"stormlee","avatar":"https://static.tigerbbs.com/80629ef9648273c0d6465aee66dbd98a","vip":1,"currentWearingBadge":{"badgeId":"1026c425416b44e0aac28c11a0848493-2","templateUuid":"1026c425416b44e0aac28c11a0848493","name":"Senior Tiger","description":"Join the tiger community for 1000 days","bigImgUrl":"https://static.tigerbbs.com/0063fb68ea29c9ae6858c58630e182d5","smallImgUrl":"https://static.tigerbbs.com/96c699a93be4214d4b49aea6a5a5d1a4","grayImgUrl":"https://static.tigerbbs.com/35b0e542a9ff77046ed69ef602bc105d","redirectLinkEnabled":0,"hasAllocated":1,"isWearing":1,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2023.10.07","individualDisplayEnabled":0,"individualDisplaySort":0,"categoryType":1001},"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":348134814,"type":1,"supId":3989513,"prevId":0,"content":"Tq","text":"Tq","html":"Tq"},{"id":3997280,"gmtCreate":1617980624935,"gmtModify":1680783470840,"authorId":3571959390768435,"author":{"id":3571959390768435,"idStr":"3571959390768435","authorId":3571959390768435,"name":"stormlee","avatar":"https://static.tigerbbs.com/80629ef9648273c0d6465aee66dbd98a","vip":1,"currentWearingBadge":{"badgeId":"1026c425416b44e0aac28c11a0848493-2","templateUuid":"1026c425416b44e0aac28c11a0848493","name":"Senior 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pls"},{"id":3989513,"gmtCreate":1617899757304,"gmtModify":1680783353174,"authorId":3567027336968594,"author":{"id":3567027336968594,"idStr":"3567027336968594","authorId":3567027336968594,"name":"大白兔女生","avatar":"https://static.tigerbbs.com/9164215640a1bec6913d46610a230edf","vip":1,"currentWearingBadge":{"badgeId":"44212b71d0be4ec88898348dbe882e03-3","templateUuid":"44212b71d0be4ec88898348dbe882e03","name":"President Tiger","description":"The transaction amount of the securities account reaches $1,000,000","bigImgUrl":"https://static.tigerbbs.com/fbeac6bb240db7da8b972e5183d050ba","smallImgUrl":"https://static.tigerbbs.com/436cdf80292b99f0a992e78750ac4e3a","grayImgUrl":"https://static.tigerbbs.com/506a259a7b456f037592c3b23c779599","redirectLinkEnabled":0,"hasAllocated":1,"isWearing":1,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2022.05.26","exceedPercentage":"93.47%","individualDisplayEnabled":0,"individualDisplaySort":0,"categoryType":1101},"crmLevel":5,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":348134814,"type":1,"supId":0,"prevId":0,"content":"Waiting for next split lol","text":"Waiting for next split lol","html":"Waiting for next split lol"},{"id":3988708,"gmtCreate":1617893214827,"gmtModify":1680783331952,"authorId":3573211284448483,"author":{"id":3573211284448483,"idStr":"3573211284448483","authorId":3573211284448483,"name":"sayseng","avatar":"https://static.tigerbbs.com/fabcad9e067a8f135e171baf6de7fb58","vip":1,"crmLevel":5,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":348134814,"type":1,"supId":0,"prevId":0,"content":"Okay","text":"Okay","html":"Okay"}],"langContent":"EN"},{"id":348132874,"gmtCreate":1617892843298,"gmtModify":1704704529474,"author":{"id":"3565146699964497","authorId":"3565146699964497","name":"ycwoo","avatar":"https://community-static.tradeup.com/news/2f48b4bbc66c0bf509f7199142c1a2f2","vip":1,"hat":"https://static.tigerbbs.com/b073a07f77dbe6b3bec6b12311fde6bd","crmLevel":2,"crmLevelSwitch":1,"idStr":"3565146699964497","authorIdStr":"3565146699964497"},"htmlText":"I.like apple","listText":"I.like apple","text":"I.like apple","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":2,"repostSize":0,"link":"https://ttm.financial/post/348132874","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":3988665,"gmtCreate":1617892972991,"gmtModify":1680783336426,"authorId":3571959390768435,"author":{"id":3571959390768435,"idStr":"3571959390768435","authorId":3571959390768435,"name":"stormlee","avatar":"https://static.tigerbbs.com/80629ef9648273c0d6465aee66dbd98a","vip":1,"currentWearingBadge":{"badgeId":"1026c425416b44e0aac28c11a0848493-2","templateUuid":"1026c425416b44e0aac28c11a0848493","name":"Senior Tiger","description":"Join the tiger community for 1000 days","bigImgUrl":"https://static.tigerbbs.com/0063fb68ea29c9ae6858c58630e182d5","smallImgUrl":"https://static.tigerbbs.com/96c699a93be4214d4b49aea6a5a5d1a4","grayImgUrl":"https://static.tigerbbs.com/35b0e542a9ff77046ed69ef602bc105d","redirectLinkEnabled":0,"hasAllocated":1,"isWearing":1,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2023.10.07","individualDisplayEnabled":0,"individualDisplaySort":0,"categoryType":1001},"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":348132874,"type":1,"supId":0,"prevId":0,"content":"?","text":"?","html":"?"},{"id":3988677,"gmtCreate":1617893057389,"gmtModify":1680783332941,"authorId":3567411499210880,"author":{"id":3567411499210880,"idStr":"3567411499210880","authorId":3567411499210880,"name":"Nebhol","avatar":"https://static.tigerbbs.com/b0bfc2a45b91e41a283614268857b3a5","vip":1,"currentWearingBadge":{"badgeId":"972123088c9646f7b6091ae0662215be-1","templateUuid":"972123088c9646f7b6091ae0662215be","name":"Elite Trader","description":"Total number of securities or futures transactions reached 30","bigImgUrl":"https://static.tigerbbs.com/ab0f87127c854ce3191a752d57b46edc","smallImgUrl":"https://static.tigerbbs.com/c9835ce48b8c8743566d344ac7a7ba8c","grayImgUrl":"https://static.tigerbbs.com/76754b53ce7a90019f132c1d2fbc698f","redirectLinkEnabled":0,"hasAllocated":1,"isWearing":1,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2021.12.21","exceedPercentage":"60.68%","individualDisplayEnabled":0,"individualDisplaySort":0,"categoryType":1100},"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":348132874,"type":1,"supId":0,"prevId":0,"content":"Buy","text":"Buy","html":"Buy"}],"langContent":"EN"},{"id":348132068,"gmtCreate":1617892821154,"gmtModify":1704704528665,"author":{"id":"3579758808989513","authorId":"3579758808989513","name":"ACCY","avatar":"https://static.tigerbbs.com/a44626552831eb06aa01cf85dcaf7422","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"3579758808989513","authorIdStr":"3579758808989513"},"htmlText":"Wow","listText":"Wow","text":"Wow","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/348132068","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":3988666,"gmtCreate":1617892980336,"gmtModify":1680783337407,"authorId":3571959390768435,"author":{"id":3571959390768435,"idStr":"3571959390768435","authorId":3571959390768435,"name":"stormlee","avatar":"https://static.tigerbbs.com/80629ef9648273c0d6465aee66dbd98a","vip":1,"currentWearingBadge":{"badgeId":"1026c425416b44e0aac28c11a0848493-2","templateUuid":"1026c425416b44e0aac28c11a0848493","name":"Senior Tiger","description":"Join the tiger community for 1000 days","bigImgUrl":"https://static.tigerbbs.com/0063fb68ea29c9ae6858c58630e182d5","smallImgUrl":"https://static.tigerbbs.com/96c699a93be4214d4b49aea6a5a5d1a4","grayImgUrl":"https://static.tigerbbs.com/35b0e542a9ff77046ed69ef602bc105d","redirectLinkEnabled":0,"hasAllocated":1,"isWearing":1,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2023.10.07","individualDisplayEnabled":0,"individualDisplaySort":0,"categoryType":1001},"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":348132068,"type":1,"supId":0,"prevId":0,"content":"?","text":"?","html":"?"}],"langContent":"EN"},{"id":348136506,"gmtCreate":1617892817305,"gmtModify":1704704528020,"author":{"id":"3572176137415007","authorId":"3572176137415007","name":"Abundance Thankful","avatar":"https://community-static.tradeup.com/news/3596d672dc89783cd009721d4bab5ddb","vip":1,"crmLevel":4,"crmLevelSwitch":1,"idStr":"3572176137415007","authorIdStr":"3572176137415007"},"htmlText":"Great!","listText":"Great!","text":"Great!","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/348136506","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":3988622,"gmtCreate":1617892826060,"gmtModify":1680783331039,"authorId":3573299881996779,"author":{"id":3573299881996779,"idStr":"3573299881996779","authorId":3573299881996779,"name":"CocoPosh","avatar":"https://community-static.tradeup.com/news/818138cfd3c48ea6aad706cbda48c1d6","vip":1,"crmLevel":4,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":348136506,"type":1,"supId":0,"prevId":0,"content":"[财迷]","text":"[财迷]","html":"[财迷]"}],"langContent":"EN"},{"id":348138104,"gmtCreate":1617892735308,"gmtModify":1704704526081,"author":{"id":"3577585651785890","authorId":"3577585651785890","name":"Kt18","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":5,"crmLevelSwitch":0,"idStr":"3577585651785890","authorIdStr":"3577585651785890"},"htmlText":"Agreed, people who like Apple will stay long","listText":"Agreed, people who like Apple will stay long","text":"Agreed, people who like Apple will stay long","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/348138104","repostId":1114647502,"repostType":4,"repost":{"id":"1114647502","pubTimestamp":1617892630,"share":"https://ttm.financial/m/news/1114647502?lang=&edition=fundamental","pubTime":"2021-04-08 22:37","market":"us","language":"en","title":"Apple: The Investment Of A Lifetime","url":"https://stock-news.laohu8.com/highlight/detail?id=1114647502","media":"seekingalpha","summary":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadersh","content":"Summary\n<ul>\n <li>Apple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.</li>\n <li>AAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.</li>\n <li>The company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/64934a1983fce9df267d4976fcee4776\" tg-width=\"1536\" tg-height=\"1097\">Photo by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent&nbsp;Q1 2021 results&nbsp;and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n<blockquote>\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n</blockquote>\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and&nbsp;Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\n<img src=\"https://static.tigerbbs.com/e4b5e774f14bd26cc31f2d2abe039b4a\" tg-width=\"751\" tg-height=\"430\">Source: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal &amp; business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A&nbsp;2020 survey by MBLM&nbsp;ranked American customer satisfaction with Apple’s products at 82 out of 100.\n<blockquote>\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n</blockquote>\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a&nbsp;97% for iWatch in 2015&nbsp;only three months after its release.\nApple leverages customer satisfaction surveys&nbsp;to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a&nbsp;2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the&nbsp;opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the&nbsp;best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\n<img src=\"https://static.tigerbbs.com/3ba8103e6ef56a0d6cb4ea4d8d5418a2\" tg-width=\"640\" tg-height=\"360\">Source: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\n<img src=\"https://static.tigerbbs.com/433a32dab0396013470a709ae37daf0d\" tg-width=\"640\" tg-height=\"433\">Source: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led&nbsp;Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter &amp; Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in&nbsp;the “Masters” category.\n<blockquote>\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&amp;G, McDonald’s, and Unilever - qualified for the category this year.\n</blockquote>\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the&nbsp;incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&amp;D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research &amp; Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&amp;D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&amp;D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&amp;D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&amp;D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\n<img src=\"https://static.tigerbbs.com/eefadccfeabf2bdcbb9100200fa108f3\" tg-width=\"560\" tg-height=\"181\">Source: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\n<img src=\"https://static.tigerbbs.com/4270d2f6c3bc33509b51a00e819bbd8f\" tg-width=\"640\" tg-height=\"333\">Source: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\n<img src=\"https://static.tigerbbs.com/1bd17929216ca6cfb040b602ef7c9988\" tg-width=\"640\" tg-height=\"296\">Source: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\n<img src=\"https://static.tigerbbs.com/212390b64cfad5087c82b2814154dade\" tg-width=\"640\" tg-height=\"280\">Source: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\n<img src=\"https://static.tigerbbs.com/477a5da60b294737dfc054803a593d98\" tg-width=\"640\" tg-height=\"387\">Source: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&amp;D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\n<img src=\"https://static.tigerbbs.com/24c60dd0019b7e2e2d60aba84f04b345\" tg-width=\"640\" tg-height=\"244\">Source: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\n<img src=\"https://static.tigerbbs.com/7235b57c5e86f57dd027c55c82ec4851\" tg-width=\"640\" tg-height=\"253\">Source: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a&nbsp;CAGR of 21% over last 5 years&nbsp;with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&amp;D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&amp;D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car&nbsp;bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\n<img src=\"https://static.tigerbbs.com/4cfbc52970fc1a7df02af449f76ceef7\" tg-width=\"640\" tg-height=\"174\">Source: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&amp;D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n<blockquote>\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n</blockquote>\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just&nbsp;under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS &amp; DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple: The Investment Of A Lifetime</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple: The Investment Of A Lifetime\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-08 22:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4418124-apple-investment-of-lifetime>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS ...\n\n<a href=\"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4418124-apple-investment-of-lifetime","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1114647502","content_text":"Summary\n\nApple has 8+ exceptional and strong competitive advantages that justify its market leadership position and 34.4 TTM P/E.\nAAPL is undervalued based on traditional and reverse discounted EPS and DCF Valuation Models and will continue growing for the 10-year foreseeable future.\nThe company will not be manufacturing cars. The actual strategy is much more impressive and may lead to margin expansion.\n\nPhoto by Christopher Jue/Getty Images Entertainment via Getty Images\nIntroduction\nApple (AAPL) is an outstanding company that has created a remarkable and highly profitable global business – $294 billion in TTM revenue and $80.2 billion in TTM free cash flow. The company is a market leader in the luxury smartphone segment, and enjoys numerous (8+) strong and sustained competitive advantages.\nApple’s P/E ratio is warranted and merited when compared to appropriate peers. Furthermore, given the strength of recent Q1 2021 results and guidance, AAPL is undervalued based on discounted EPS and DCF Valuation Models. The application of reverse EPS and DCF valuation models clearly demonstrates the company’s continued undervaluation, especially taking into account the growth strategy for the next 10-year period.\nMainstream analysts and Seeking Alpha contributors are erroneously interpreting or referencing rumors of Apple’s potential entry into the car manufacturing business, which Apple is highly unlikely to do, and which is but one of the extreme examples of market misalignment on the investment value and wealth building opportunity presented through long-term ownership of Apple shares.\nCompetitive Advantages\nIt is amazing how many analysts fail to assess or to discuss Apple’s competitive advantages. Given that AAPL more closely resembles a value-oriented stock and investing style – it is no longer a high-flying growth company – a close and meticulous understanding of the company’s “moat” is crucial to a successful investment in AAPL.\nUnderstanding Apple’s competitive advantages can be a complex and elucidating activity and should help you generate wealth as an investor, both by understanding when to accumulate shares and by becoming apt at watching for fundamental deterioration in the strength of these competitive advantages over the next decade. Early warning symptoms may be monitored during quarterly earnings calls and based on factual news announcements both from the company itself and from interested parties, and will help with the timing of an exit strategy if needed.\nFor the sake of simplicity, the below ranking system includes an assessment of Apple’s competitive advantages as weak, moderate, or strong. A weak competitive advantage presents little benefit to the company against competitors, while a strong competitive advantage presents a substantial moat and barrier to entry for competitors. The below order represents the relative strength of one competitive advantage over another; for example, I consider Apple’s ecosystem to provide a more significant competitive advantage than its network effect.\n1.Ecosystem (Strong Moat)\nApple’s ecosystem is the core reason consumers buy the products. Apple’s mission statement is “to bring the best user experience to its customers through its innovative hardware, software, and services.\" Apple achieves this in such a rudimentary and commonsense way that is absurdly elegant: they make the products as simple to use as possible.\nWhen you purchase an iPhone, iPad, Mac or any other Apple product, you enter an ecosystem of interconnected hardware, well maintained software, and use-case specific services that become increasingly sticky. Simply put, the further you explore Apple’s ecosystem, and the more money and time you invest in it, the less likely you are to leave.\nAs of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand.\n\n 79% of iPhone users are happy with their brand of phone, see no reason to switch to a different brand or prefer to stick with what they know. 21% of iPhone users might be tempted to switch if they weren’t too tied into the Apple Ecosystem or it wasn’t so much hassle changing operating system from iOS to Android.\n\nThe devilish beauty of this competitive advantage cannot be understated: so long as Apple maintains the expected quality of seamless user experience, the costs of switching are too high for most rational consumers to contemplate alternative standalone products (this in part explains Apple’s success with the iWatch). Competitors (Xiaomi(OTC:XIACF), Huawei, Samsung(OTC:SSNLF)) would need to continue investing aggressively to replicate Apple’s secure, closed ecosystem and to appeal to existing Apple consumers.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints, confirmed reputable surveys ofrisingiPhone user intention to switch\n2.Network Effect (Strong Moat)\nInvestors in Mastercard (MA) and Visa (V) are familiar with the concept of this competitive advantage: the more individual consumers and merchants utilize the “network,” the more attractive and valuable it becomes. In AAPL’s case, the network effect manifests itself in the following areas: iOS Operating System, business partnerships, and amusingly, that most human of traits – peer pressure.\nThe more consumers use iOS, the more developers are attracted. The more applications and software services are provided via iOS, the more consumers are intrigued. Consumer delight with the breadth and quality of successful iOS applications can be very financially rewarding both for Apple and for the developers; Apple generated an approximate $64B in 2020 App Store revenue and Apple has paid developers up to $200B since 2008, up $45B since that figured was announced in January 2020.\nSource: CNBC\nThe more businesses sign contracts with Apple on a specific project, product, or initiative, the more competitor businesses feel obligated to do the same. The more consumers utilize Apple’s products for everyday activities – navigation, payment, internet browsing, phone/video calls, personal & business email, alarms and alerts, photography, health and fitness tracking, creativity, gaming, recreation – the more advantageous it becomes for businesses to partner with Apple and to share in the revenue streams. This provides the added benefit of negotiating leverage for Apple during the finalization of MSAs or SOWs with partners or merchants.\nPeer pressure plays an ironically striking role in Apple’s popularity. Once a family member, friend, or respected peer begins using Apple products, they may very well influence and convert additional individuals to purchase Apple products and to begin using Apple’s ecosystem. The more the merrier is an applicable slogan in such situations – if a person is using Apple’s products and knows them to be effective and secure for the desired use-case, they are likely to encourage others to do the same.\nThe interplay between these network effects becomes stupendously powerful: Apple’s 2021 net promoter score is a whopping 47 (scores above 50 are considered excellent).\nEarly Warning(s) to watch:decreasing YoY net promoter score, increased regulatory sanctions of App Store\n3. Customer Loyalty (Strong Moat)\nConsumers are delighted with the company’s products. A 2020 survey by MBLM ranked American customer satisfaction with Apple’s products at 82 out of 100.\n\n Almost 40% of Apple users said their emotional connection to the brand increased during COVID, and 55% of customers said they used Apple more during the pandemic.\n\nHistorically, Apple has routinely high satisfaction ratings;ACSI of 75%+ for iPhones,80%+ for personal computers, and a 97% for iWatch in 2015 only three months after its release.\nApple leverages customer satisfaction surveys to maintain its market leadership position, and will likely continue doing so. Apple consumers are very unlikely to switch away from iOS and the Apple ecosystem (as of a 2019 brand loyalty survey, less than 10% [9.5%] intended to switch to a different phone brand). In fact, the opposite is happening, with iPhone 12 spurring the largest number of upgraders and switchers the company has ever seen.\nRespectfully, the statistics in support of this competitive advantage alone should dissuade anyone from seriously considering shorting Apple stock in the current low-inflation macro environment.\nEarly Warning(s) to watch:decreasing YoY customer satisfaction ratings [preferably from numerous survey sources]\n4. Brand and Vision (Strong Moat)\nApple is heralded as a world-renowned luxury brand and is undoubtedly one of the best known brands of the 21stcentury.Apple’s advocacy of privacy, equality, justice, education, and environmental friendliness are just some examples of how the company is leading from a social perspective. While skeptics or detractors may argue that Apple is all talk and may refer to Apple’s third party vendor scandals, it merits noting that Apple frequently donates to social causes and many (many!) companies worldwide do not even match Apple’s rhetoric, let alone social contributions to equality, privacy and education.\nAAPL’s brand allows it to maintain pricing power and respectable gross [~38%], operating [~25%], and net [~21%] margins. Cross-selling becomes an important opportunity for the company as further marketing efforts need to be concentrated on consumer education with regard to its suite of product, software, and service offerings. Apple is well positioned to continue taking advantage of its brand and vision globally as it expands to key future growth markets such as India and Africa.\nEarly Warning(s) to watch:factually accurate negative news announcements about Apple’s socialmisconduct, lower pricing of future iterations of hardware products provided the revenue is not being intentionally targeted and generated elsewhere, deteriorating margins\n5. Dedicated Management and Employees (Strong Moat)\nTo many Apple employees, the company offers more than just a job. It is a home, a purpose, a culture. You will be hard pressed to find successful companies and investments that do not also enjoy a savvy management team, a terrific work culture, and exceptionally hard-working devoted employees. Thankfully, Apple boasts all of these (I strongly encourage you to read Apple’s employee Glassdoor reviews for yourself and to compare those to the reviews of the company you work at). Even when Tim Cook eventually retires, the high-quality culture ingrained at Apple at every level of the organization will ensure a continued competitive advantage.\nSource: Glassdoor\nEarly Warning(s) to watch:deterioratingYoY Glassdoor employee reviews, increasing YoY senior management turnover rates\n6.Differentiator Products (Strong Moat)\nAt first look, many may mistakenly conclude that Apple’s hardware products are commodities; a phone, a watch, a computer, a tablet, a headset, a TV. However, Apple’s hardware products come with a “bundle” of implied or explicit software and service offerings that many competitors seem to miss or to botch during the follow-up execution of providing these add-on benefits.\nApple’s hardware included in products routinely matches or exceeds the specifications of competitors. In fact, Apple sets its own standards for product quality – it has not participated at CES since 1992, instead opting to offer a keynote at the annual Macworld Expo.\nYou will of course find instances where this is untrue: a niche start-up or an established player (Microsoft(NASDAQ:MSFT), Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Samsung, etc.) may occasionally offer products with features not yet available or desired on Apple’s hardware. However, the value proposition of Apple’s hardware products must always be considered within the context of the broader ecosystem.\nApple provides a subscription payment option (as opposed to lump sum) for hardware, bundled and regularly maintained iOS software inclusive of major annual updates, exceptional customer service via the retail store presence, inter-connectivity between devices, access to quality-checked applications from over 23 million developers, features in support of over two-dozen daily use-cases, and so much more.\nApple is a lifestyle.\nIt provides intangible benefits that competitors do not or cannot: privacy and peace of mind, educational opportunities, work opportunities, secure communication with loved ones, reliability, status, leadership on social issues [within reason] with a response rate often swifter than that of governments, health and fitness incentives and safeguards, and factual news and information on ongoing developments locally and globally.\nWhen a consumer purchases an Apple product, they are not buying“a phone, a watch, a computer, a tablet, a headset, a TV,”they are buying a connection to the world through the eyes of intelligent, caring, well-informed human beings.\nEarly Warning(s) to watch:persistent and unresolved product quality complaints,the rapid rise of popular technologies or movements that may challenge the Apple lifestyle\n7. Filing of Patents (StrongMoat)\nApple is the largest recipient of patents in Silicon Valley in 2020 with 1,996 patents assigned between July 1, 2019, and June 1, 2020. Starting in 2007, on average, Apple filed and gainedin forcestatus for 1,000 patents annually. Most importantly, the company has the legal counsel and funds to defend its intellectual property vigorously on a global scale and to pursue litigation against competition seen as infringing on Apple’s intellectual property.\nSource: Statistica\nEarly Warning(s) to watch:decreasing three year average of in force and pending patents,negativeoutcomes [inclusive of financial impact] of ongoinglitigation\n8.Integrated Supply Chain(Strong Moat)\nApple’s supply chain is rarely mentioned unless as a way to trigger the rumor mill regarding iPhone shipment quantities in advance of quarterly earnings calls. In truth – it is exceptional.\nSince 2013 through 2018, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list.In 2018, its peers were Amazon(NASDAQ:AMZN), Procter & Gamble(NYSE:PG), and McDonald’s(NYSE:MCD). As of 2020, Apple falls in the “Masters” category.\n\n To recognize sustained supply chain excellence, Gartner introduced the “Masters” category in 2015. To be considered Masters, companies must have attained top-five composite scores for at least seven out of the last 10 years. All of last years’ Masters - Amazon, Apple, P&G, McDonald’s, and Unilever - qualified for the category this year.\n\nIf it’s not clear to you already (and for some, it never may be):Tim Cook is an inventory management wizard.\nEarly Warning(s) to watch:announcements regardingpotential of bankruptcies of key suppliers, loss of ranking on Gartner’s Supply Chain Top 25 List\n9.Balance Sheet (Moderate Moat)\nAs of Q1 2021, Apple’s TTM FCF sat at $80.2 billion and TTM Cash, Cash Equivalents and Marketable Securities sat at $76.8 billion. Apple’s war chest gives it considerable advantage over new entrants to the markets it competes in – after all, if a start-up is successful enough Apple can simply purchase it!\nApple’s balance sheet and reputation is so impressive that there is now a quantifiable effect on the stock prices of many other publicly traded companies: announcements of Apple’s potential entry into a market or of product releases may see the incumbents’ stock prices fall, while the announcement of a business partnership with Apple can make the stock price of a company rise.\nThe reason this competitive advantage only offers a moderate moat is because many of Apple’s entrenched competitors are large multinational corporations, which, if they so chose, could compete aggressively in key and growing addressable markets.\nEarly Warning(s) to watch:multi-yearYoY reduction in FCF [keep in mind the company is trying to achieve a cash-neutral state], YoY reductions in Cash, Cash Equivalents and Marketable Securities, YoY increases in Long Term Debt\n10.Focusedand SecretiveResearch and Development (Moderate Moat)\nA key source of contention by many investors is Apple’s “lack of innovation.” Respectfully, Apple does not need to innovate the way a start-up would: a start-up needs to aggressively introduce novel products to quickly grow and to achieve break-even. Apple does not. Its R&D efforts span decades and are shrouded in secrecy – most analysts claiming to know of Apple’s “lack of innovation” should simply be ignored. In fact, as it will be discussed later in this article, many analysts or reporters intentionally engage in misinformed sensationalism when it comes to Apple.\nWhat is publicly available is Research & Development spend. By referencing the Income Statement via GuruFocus, YCharts, or any other number of publicly available websites, you can access and review this information for yourself. In fiscal 2017, Apple’s R&D spend was $11.6 billion, or 5% of revenue. In fiscal 2020, Apple’s R&D spend was $18.8 billion, or 6.8% of revenue.\nThis is a respectable amount, and excessive increases in R&D spend would be a net negative for the company and for investors, not a net positive, as they would indicate operational inefficiencies and financial mismanagement. For example, Apple's largest competitor in the smartphone market, Samsung, spent around $14.4 billion on research and development during its fiscal 2017 - nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.\nPerhaps some would like to see Apple invent and release a revolutionary life-changing technology every year. This is an unrealistic expectation for any large publicly traded company and will continue being so for the foreseeable future. In the meantime investors should gently remind themselves of what truly matters for a successful investment: a reasonable entry point into a stock from a valuation perspective, profitability and cash, as evidenced by growing EPS and growing FCF over a multi-year period, and an investor-friendly leadership team. All of the most beautiful, intricately designed products in the world won’t save you from financial ruin if the company you invest in fails to successfully monetize the revenue streams and to return the excess profits to shareholders.\nEarly Warning(s) to watch:~2 to 4% YoY jumps in R&D spend in either direction\nThe above list of Apple’s competitive advantages is not exhaustive. There are probably more, especially in the “weak moat” category. The competitive advantages offer much needed nimbleness to a company of Apple’s size. They explain at a fundamental level what should matter to prospective Apple investors, inclusive of early warning metrics to watch for signs of deterioration at the company – years in advance – that can provide an early exit trigger before the bulk of the market recognizes what is occurring.\nIdeally, Apple will continue its exceptional business performance over the next decade and will only strengthen its competitive advantages, however predicting the future is a murky affair, so we can only proceed based on the evaluation of currently known facts: Apple has 8+ exceptional and strong competitive advantages.\nP/E Comparison to Peers and Justification\nP/E comparisons are effective across an industry or sector or as a bench-marking exercise to assess how a company stacks up against competition. It is a quick and dirty estimation technique. Like most quick and dirty estimation techniques, TTM P/E alone does not provide useful visibility into the valuation of a company (undervalued, fairly valued, overvalued) at a given moment in time. A sector or industry can be undervalued or overvalued relative to their growth and earnings potential and P/E comparisons across the sector or industry do not readily reveal such undervaluation or overvaluation. What’s more, cyclical businesses have contrarian P/E indicators that it is necessary to follow to maximize profitability; you should buy when the P/E is high and sell when the P/E is low.\nNor does comparing a company’s growing P/E to historical ranges make much sense without an accompanying qualitative analysis to determine the root causes of P/E contraction or expansion. A company that is struggling may show unreasonably low P/E and act as a “value trap” – it does not mean the company is undervalued – and a company that is doing well, growing quickly, or is an industry leader may show a high P/E – it does not mean the company is overvalued.\nFor Apple, one can consider a number of competitive industry P/E comparisons. If an investor evaluates Apple by comparing to traditional PC manufacturers such as HP, Lenovo, or Dell, Apple P/E is high. If an investor evaluates Apple by comparing to Smartphone / Tablet manufacturers such as Xiaomi, Samsung, and Microsoft (MSFT’s smartphone business isn’t doing too well), Apple P/E is on the high end.\nHowever, if an investor correctly assesses and understands the myriad of strong competitive advantages that makes Apple a unique and “one in a lifestyle” type investment, it is only natural to compare Apple to industry leaders such as AMZN,ADBE, MSFT, and GOOGL. Yes – the growth profiles vary. Yes – these behemoths do not always compete directly in every single industry, sector, or product category. And yes, all of these companies are undeniably unique, industry leaders deserving of a P/E premium to peers.\nWhen comparing AAPL justly to industry leading peers, its P/E is low, and justified. The current low-inflation macro environment – despite the potential tax headwinds – is still conducive to these industry leading peers, inclusive of Apple, and by their very definition these companies will continue to lead despite the macro environment. They will adapt even in a recessionary environment and they will most likely succeed.\nSource: Author’s Own Tabulation\nApple Valuation(Discounted and Reverse EPS/DCF Models)\nTo determine Apple’s intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF is applied to clearly demonstrate Apple’s undervaluation.\nFor the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 13% for the first five years and 12% for the last five years. A P/E ratio of 35 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value.\nSource: Author’s Own Calculations\nFor the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 16% for the first five years and 15% for the last five years. 2021 FCF is assumed at $72 billion. A discount rate of 9.0% is applied given Apple’s balance sheet strength and enterprise value, and a perpetuity rate of 3% is assumed. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.\nSource: Author’s Own Calculations\nIn order to improve upon the above approach and to account for human error in growth assumptions, reverse EPS and DCF models are applied. In essence, the following questions are asked: how quickly do AAPL earnings need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does AAPL’s FCF need to grow over the next ten-year period for AAPL to be fairly valued today? Is the growth rate returned by the model achievable?\nSource: Author’s Calculations\nFor the Reverse EPS Model, Apple needs to grow earnings by ~12.4% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew earnings per share by 16.2% per year. During the past 3 years, Apple grew earnings per share by 12.5% per year, with EPS growth accelerating to 16.6% during the last twelve months.\nBased on such comparisons, if you believe the company can sustain a growth rate of ~12.4% for the next 10-year period, the business is currently mildly undervalued and provides an attractive entry point.\nSource: Author’s Own Calculations\nThe Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. Apple needs to grow FCF by ~11.5% for the next 10-year period to be fairly valued today. During the past 10 years, Apple grew FCF by 16.2% per year. During the past 3 years, Apple grew FCF by 19.3% per year, with FCF growth accelerating to 31.4% during the last twelve months. The company continues to retire shares via the buyback program, making each share you own more valuable.\nBased on the above rationale, one may conclude that AAPL is currently undervalued as it should have no difficulty in growing FCF by 11.5% over the next 10-year period in light of accelerating FCF growth (to 19.3% per year over past 3 years) and in light of a historical growth rate of 16.2% over a 10-year period.\nIt is worth reiterating that based on P/E, discounted and reverse EPS, and discounted and reverse DCF models, Apple shares are not currently overvalued. Given the amazing Q1 2021 quarterly results and currently known facts about the business, in a risk-averse scenario and with a margin of safety in mind, an investor can claim that Apple shares are fairly valued.\nIt is financially rewarding to own shares in an outstanding business when provided with an entry point at a fair valuation.\nApple’s Growth Strategy –Next 10 Years\nUnderstanding Apple’s competitive advantages and EPS/DCF valuation assumptions are essential building blocks to appreciating Apple’s long-term growth strategy. Claims of “the business is too large to grow” show a predilection for the lazy System I as opposed to the thoughtful use of System II any rational investor should pursue. Such claims seem to purport that the secretive Apple management and R&D teams are renting giant empty warehouses in the midst of COVID and busily popping pink prototype balloons while dancing and drinking sangria instead of focusing on the long-term welfare of the company.\nApple’s growth will come from the following areas for the next 10-year period:\n1.Hardware Product Upgrades and Cross-Selling(iPhone, iWatch, Mac, iPad, Apple TV, HomePod, Accessories). To drive the point across: the number of Smartphone users is expected to rise to 3.8 billion in 2021, the world population is 7.8 billion as of March 2020.\nSource: Wikipedia\nApple owns about 10% to 20% of the global smartphone market depending on the quarter and year.\nSource: IDC – Smartphone Market Share by Company\nTherefore, Apple has ample opportunity for continued iPhone sales growth and market share expansion over the next 10-year period in spite of competition, especially in emerging market opportunities such as India and Africa. Rising incomes globally and the expansion of the middle class will only aid in this regard.\n2.Recurring and Growing Software Revenues(600 million paying subscribers and growing). Apple’s software business has a CAGR of 21% over last 5 years with 63% gross margins.\n3.Corporate Penetration, Partnerships, and Service Offerings.Some potential areas include: healthcare, home and vehicular automation, virtual and augmented reality. All innovation efforts are of course supported by the secretive sangria-drinking R&D department.\nApple management is highly cognizant of the need to maintain and grow its competitive advantages and to be prudent with diversification of businesses, revenue streams and with R&D spend. The strategy of under-promising and over-delivering is a recipe for success and long-term shareholder value creation.\nAppleCar Sensationalism and an Alternative Interpretation\nRecently,misleading articles about Apple Car bordered on sensationalism and an outright misinterpretation of Tim Cook’s statements. The company is vigorously pursuing diversification of revenue streams with a preference for higher margin businesses (software services). To enter the saturated car manufacturing industry as an OEM even at Tesla’s Q3 27.7% margin profile is a risky over-diversification of revenue streams. For reference, AAPL’s margins are usually at 38% for gross, 25% for operating, and 21% for net.\nSource: Google\nManufacturing a car would require substantial investments on behalf of Apple, inclusive of personnel, factories, R&D, and supply chain. Apple could certainly do it and autonomous electric cars would put Apple in direct competition with Tesla(NASDAQ:TSLA), GM(NYSE:GM), and an entire host of established and start-up companies and open the company to any number of costly litigation risks. Unless someone obtains direct confirmation of what could pass for an undercover self-driving Apple car being tested in the coming years, it seems unlikely that manufacturing a car is a strategy Apple will employ.\nInstead, the same article hints at the probable alternative: Apple will pursue the “integration of hardware, software, and services” within the car industry byautomatingfeatures within the car and leaving the low-margin manufacturing to the established OEMs. In essence, this may mean that Apple will create hardware products to be installed within the car and bundled with iOS and inter-connected with existing Apple devices. Imagine an IoT offering for cars instead of houses.\n\n Apple has recently patented some vehicle features, including ways to send alerts to drivers, reduce motion sickness, and create new climate controls, Insider's Kevin Shalvey reported.\n\nDeveloping successful software and services to assist the drivers of both electric and autonomous vehicles would be a high-margin (52%+ estimated gross margin) activity, would shield Apple from some of the risk of costly litigation in association with autonomous vehicle accidents, and would allow Apple to sell its platform and features to the entirety of car industry OEMs, or only to those OEMs that meet Apple’s stringent quality and environmental requirements. Alternatively, if Apple succeeds in convincing OEMs to accommodate its add-on hardware by redesigning the interior of the car and changing their manufacturing process, Apple may enable itself to sell such products direct to customers whereby the OEM might split the installation costs.\nIt is projected that the global automotive industry will grow to just under nine trillion U.S. dollars by 2030.It is anticipated that new vehicle sales will account for about 38 percent of this value. If Apple manages to seize a portion of this revenue via high-margin software and service offerings, this would be a tremendous net positive for Apple investors and the company’s continued growth aspirations.\nShould the above interpretation prove incorrect, and Apple indeed begins acting as an OEM in the car industry, a careful scrutiny and a fundamental reassessment of Apple is warranted by the investment community. It is rarely a prudent decision for a business to deviate drastically from its areas of competency and strength.\nRisks to Investment Thesis\nOne should always assess potential risks to any investment thesis. With Apple, three major risks are on the horizon for the next 10-year period.\n1.Increased Regulation by Government Agencies\nIncreased regulations and laws introduced by governments globally may seriously hinder Apple’s growth and profitability. The Apple Store, for example, continues to be a target both for competitors and EU regulatory agencies. Claims of anti-competitive behavior by Apple in charging Apple Store fees are becoming ludicrous.\nThe App Store and iOS are a private and well-maintained ecosystem where Apple is the clear beneficiary from an intellectual property perspective. If users or developers of the App Store find the fees unreasonable, they can either choose not to use the service or to create their own ecosystem. However, in many cases the companies have opted for regulatory and legal escalation because they hope to profit from Apple’s diligent and hard work by skirting contractual obligations or by wrangling the support of governments hungry for any additional sources of funding.\nFurthermore, as Apple continues to grow in size as a global conglomerate, it may find itself increasingly targeted by governments, frivolous lawsuits, and regulations aimed at curbing the influence of “big tech.” The silver lining is that in the extreme case of Apple being forced to “break apart” into numerous standalone businesses by new regulations – whether due to perceived anti-competitive practices or claims of “stifling innovation” – investors may likely achieve above-market returns from the spin-off dynamics created by such an event.\n2. Augmented and Virtual Reality\nWhile the company has boasted regarding the promising future of augmented and virtual reality, this technology poses a significant threat to Apple if the company does not move swiftly with its own product offerings. Should an entrenched competitor or start-up come out with a functional augmented or virtual reality offering that gains massive appeal, it could transform modern life as we know it and eliminate the dependence on smartphones.\nA headset that successfully integrates existing smartphone functionality and use-cases into a set of glasses, whereby eye motion tracking is used to quickly access information and choose the desired application or option may present a compelling alternative offering to smartphones. Push notifications based on geographic location could be issued in various environments. For example, when traveling push notifications could appear for hotels, restaurants, and recreation options. You could even use the headset as a pair of sunglasses to block out the sunlight!\nDisruptive technological leaps by competitors may obsolete Apple’s product offerings much more quickly than investors realize. This risk in particular merits careful monitoring of early warning deterioration of Apple’s competitive advantages, as they would be the primary line of defense in the occurrence of such an event.\n3. An Unsuccessful Transition of Apple’s CEO\nWhen Tim Cook retires within the next 10-year period, if the chosen successor is not well-groomed and competent enough to lead the company, Apple may run into numerous challenges. Importantly, even if an able CEO is chosen who is not accepted by senior management or is in conflict with the company culture, mismanagement at the top-most leadership level may occur and result in the erosion of Apple’s competitive advantages.\nThe silver lining with this risk is that the erosion of the competitive advantages will not be as swift as in the situation of risk #2. Investors will have ample time to assess the chosen successor, the implications, and Apple’s quarterly results to determine if there is a fundamental downtrend in the business. Furthermore, the initial sell-off that will undoubtedly occur when Tim Cook announces his retirement as CEO may provide an excellent buying opportunity.\nConclusion\nApple is an amazingly run business with 8+ strong competitive advantages. It is fairly valued or undervalued - depending on one's interpretation and risk appetite - based on TTM P/E, discounted EPS & DCF, and reverse EPS and DCF valuation models.\nGrowth will most certainly continue over the next 10-year period for the company, and while major risks do exist, they can be effectively monitored by investors via early warnings and an assessment of the fundamental status of the competitive \"moat.\"\nThe Apple Car rumors suggesting that Apple will be an OEM are likely false. Instead, the company may pursue a higher margin strategy of introducing a bundled hardware-software-services offering focused on automation within the body of the car.\nBarring the realization or numerous early warning signs of mentioned or unexpected major risks, investors should accumulate shares of Apple on any market corrections (starting now) until Tim Cook's retirement from the position of CEO. At that time, investors should carefully scrutinize the fundamentals of the company.\nInvestors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any investment vehicle, AAPL included.\nMy sincere thank you to all readers and investors. I welcome comments, especially of a contrarian nature, and will plan to respond in the evenings. Humorous quips are always appreciated!","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":16,"commentSize":14,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false}}