The Hyperion Effect

Posts Tagged ‘Apple’

We love Apple here at The Hyperion Effect so it was with some amusement that we both wrote and read about the trials and tribulations of Facebook’s first full week as a listed company. The key numbers for Facebook were an initial valuation of $100 billion on a profit of around $1 billion and so we thought we should share this infographic from a few weeks back so you could get some perspective of how they might relate to Apple.

(including a small dig at our friends across the ditch!)

Although it wasn’t missed in the tumult of markets last week, news services reporting on the listing on Facebook last Friday in the main missed the really interesting part, the graphic for which we can see below courtesy of the New York Times.

The first chartgives you some historical perspective on previous listings with the highlights of Apple back in the early 80′s and Google just a few years ago. You can see the tech boom in the late 90′s/early 2000′s with a concentration of bubbles around that period.

We know that Google was highly profitable when it listed and the story of Apple is now very well known and today it generates a profit every month equal to Facebook’s annual profit (i.e. it makes 12 times the profit of Facebook). So where does the Facebook listing fit on the chart above?

Did someone say irrational exuberance?

The I.P.O. price was equivalent to more than 100 times historical earnings, compared with Apple’s 14 times and Google’s 19 times…….is it just me or does this look like the I.P.O trap all over again?

I stumbled over this chart whilst I was working on my tan these past two weeks (for those of you who know me you will appreciate the irony of that statement!) and I thought it captured a great sense of where we are today. As I wrote a few weeks back, diversification has never been more important than today, and with the Australian market struggling compared to overseas, holding some of your assets in far away lands has been a boon for the balanced investor.

Still, I regularly hear the refrain of those who say that the big crash is still to come and that the U.S. is still yet to face its day of reckoning. Now this may very well turn out to be true (we don’t predict the future remember) however the chart below I thought bought some perspective to where we are today, particularly when you focus on the tech side of things compared to the heady days of the dot com boom.

You can see that the big players have mainly stayed where they were, all be it reschuffled a little, while new players such as Amazon and Google have moved in. The big difference though is in the details on the right. P/E ratios are much more realistic and sensible at 23 times compared to 78. Many now pay dividends, Apple being the most recent to join the club, with a Yield of 1% compared to 0.1% and the number of companies with dot com in their name is just 18.

Of course who is to say that Google won’t be the next Yahoo or that Microsoft wont be the next Kodak, for that we recommend you buy broad baskets of index funds to reduce risk, but maybe this time around the companies that occupy the top and those below them are on a more realistic and stable long term trajectory.

Talk about optimistic!. Facebook announced last week that it was moving to an Initial Public Offering with a valuation of $100bn U.S. dollars. But how did they come up with the price and therefore the valuation? Well it appears at face value that they have used some very optimistic numbers. Have a look at the chart below and consider the comparison to Apple where if you applied the same methodology Apple would be valued at $3 trillion dollars.

Apple closed on Saturday morning with a market cap of $430bn………….and they wonder why most I.P.O’s end up underwater!

The sad passing, at just 56, of Steve Jobs has seen countless articles, T.V. shows and tributes that lauded him for being a visionary and for changing the world that we live in. He changed multiple industries including computers, movies, music and phones and when I read and watched some of the tributes from people that knew him I kept thinking about the famous Robert Kennedy quote  

‘Some men see things as they are and say why?…..I dream things that never were and say why not?’.

 It was this attitude that gave us so many of the things we use in our everyday lives.

I also had the opportunity to listen to the 114th commencnement speech at Stamford University he gave back in 2005 and while I was listening I was struck by how some of the things he said had equal application in the finance world. You see finance, investments, financial planning or whatever you like to call it is not just about an investment or a product or a strategy, its about choices. Choices about what you want to do with your life, what you want to focus on, what’s important to you.

The investments or strategy that you adopt is just the means to achieving that outcome for the reasons that are important to you.

I recently did some presentations on investment and strategy matters and had a question about whether someone should sell their investment property and buy a family home or invest into a second investment property. I asked what the objective of buying the second property was and the answer was so that it would increase in value to allow them to buy another property to which i again asked “for what purpose”…..so that it would increase in value etc….there was no outcome that this person was trying to achieve, just a cycle of investing for investing sake.

So what are the lessons that we can learn from Steve?

1. Follow your heart

The iPod was launched in 2001 and many of the experts of the day were unimpressed. Tim Deal, a Technology Business Research analyst said that “I question the company’s ability to sell into a tight consumer market right now at the iPod’s current price”. Stephen Baker from NPD Intellect predicted that the device would have trouble carving out a niche in the market. Whilst tech website MacSlash said “The iPod sells for an absolutely hideously outrageous $399 and will be available to the two people who buy them at that price”. Steve thought otherwise.

Apple has sold over 275 million iPods worldwide……..Don’t listen to the experts

2. An investment strategy is of no value if you don’t have a reason for it.

Looking in the mirror every morning Jobs would ask himself ‘If today were the last day of my life would i want to do what i am about to do today’ and if the answer was no for too many days in a row he knew it was time for a change.

Not all of us have the flexability in our lives to be able to make a change if we do answer no to many times, but we do have the power to change our focus. Why do you do what you do every day?, what are you doing it for?, whats the purpose of your life? Having an investment strategy is important, having a reason to have a strategy is even more important

3. We will all be dead soon

Steve credited the prospect of his imminent demise from cancer in 2005 for sharpening his focus and the most important tool he ever encountered in making the big choices in life. “Almost everything else melts away in the face of death leaving only whats truly important” he said.

If you were faced with this terrible situation, what would truly be important to you?

 If you don’t have a reason for an investment strategy this might help you find one.

Steve Jobs legacy will be forever etched in the technology world but his legacy to me will be that he lived his life doing the things that were important to him.

Article first published as Steve Jobs Legacy Will Be In More Than Just Technology on Technorati.

‘Is it just me or does anybody see, the new improved tomorrow isn’t what it used to be, yesterday keeps comin’ round, it’s just reality, it’s the same damn song with a different melody’.

I happened to be listening to this relatively new Bon Jovi track last week and I found these words quite prophetic with the circus that surrounded on one day the announcement that Steve Jobs was taking indefinite medical leave, followed by the spectacular results they released a few days later. Before we get to what the song has to do with Apple lets look at some facts first:

• Apple is the second largest company in the world, behind Exon Mobil;
• Its balance sheet is larger than the GDP of 2/3rds of countires around the world;
• They sold 14.8 million iPads in 2010;
• Their revenue in the December quarter was $27 billion; and
• Their profit for the quarter was $6 billion

Steve Jobs is clearly the icon and cultural leader of Apple, but the announcement of his leave saw the value of Apple fall by as much as 6% presumably on the fear that perhaps Steve may not return and the uncertainty that this may create for the company and its longer term development pipeline. These are probably not unreasonable views to hold and given the efficiency of markets we saw how quickly these were priced into the stock.

However the puzzling part is that two days later, when the company announced results that clearly exceeded market expectations, the stock rebounded and moved to record highs again. So in the space of 48 hours the concerns that people had for the future of the company seemed to have evaporated and were no longer an issue? Mind you the people that sold the stock and then presumably bought it again after the results (read Active Managers/Brokers) were the same group that estimated iPad sales that ranged from 1.1 million at their most conservative to 7 million at their most bullish, and averaged out at 3.3 million……Did i mentioned above they sold 14.8m…..oh wait I did.

So maybe Apple won’t be so bad if Steve doesent come back, although we are all hoping he will and not just for the sake of the company. But the point is with or without Steve, Apple is clearly a very well run company that relies on more than one man, has a solid product line and balance sheet and has a COO who has run the company before in the absense of the CEO.

For long term passive investors these events should not be a cause for concern (other than for Steve’s health) . However in this microcosm of days we can see the benefits of staying in the market rather than acting on short term news. For investors who ignored the news and continued to hold the stock, they ended up making all of the gain when it moved to its new high with no costs incurred. For those who panicked and sold, then rejoiced and bought, they lost something in the middle depending on their timing, plus the transactions costs (including tax).

This again shows us the perils inherent with active management and the futility of trying to pick the right stock at the right time. We see this type of behaviour repeated every day in the market as those trying to pick the market bounce in and out of stocks based on the slightest good or bad news. Of course the costs of this movement is always borne by the investor with the fees and brokerage flowing back to the ‘adviser’.  Which brings us back to the line from Bon Jovi, be wary of advice to sell good companies on short term news as after all………Its the same damn song with a different melody.