Product or the company Behind it

Lynch is famous for saying, “If you like the product, chances are you will like owning the stock of company selling it”.

Sometimes it makes sense to buy the company behind the product too, but often it does not.

  1. Company could be losing market share
  2. Company could be expensive, valuations
  3. Company could be too big relative to economy/market opportunity
  4. Company may be slowing down
  5. etc.

Lets look at Apple. The products are great, loyal customer base, I personally like the pixel depth (retina display) in the iPhone 7 plus. But the valuation of the company behind it is a different story.

Fingerprint recognition is one of the strongest forms of match, face match not so. Know this from professional consulting with Immigration and Police departments and looking at bio-metric engines. I believe Apple got it wrong and hit snags and could not make Fingerprint in time for iPhone X, fingerprint will be back next year, likely IMO.

 

Will I buy the stock?

The current market cap of Apple is 800 Billion USD.

If you wanted to earn 10% CAGR post tax in the US at marginal tax rate, then you need to compound at 15%

The company itself will be much bigger and slow down, meaning the market will give it 10 PE multiple.

So, in 2027, 10 years from now, in order to earn 10% CAGR the MCAP must be 3.3 Trillion USD, at current 18 PE multiple, if the multiples are to compress, then the company must grow even faster. i.e. @ 22% CAGR from current annual profits of 45 Billion to 330 Billion.

You know how ridiculous 3.3 Trillion Dollars is in terms of market cap? Current size of the US economy is 18 Trillion Dollar.  So, we are talking about more than 15% of US GDP for Apple, it better pull out rabbits like a magician.

Apple depends more than 55% on iPhone and its hasn’t grown in the past two years.

In the new iPhones released in 2017, iPhone 8, iPhone 8 Plus and iPhone X, there are not really any new features that aren’t already there in Android phones like facial recognition or wireless charging. They can continue to be priced as Veblen goods, and I think that is where it will play out in favour of iPhone

http://www.investopedia.com/terms/v/veblen-good.asp

 

Iphone_dependence

You’ve got to give points to Apple for putting nothing but a distinctive logo on the back side, I was surprised when an 18 month who cannot frame sentences old said to me looking at the phone “its Apple”, sure as hell toddlers don’t recognise Samsung or Nokia’s.

So, will you buy Apple the phone or Apple the stock? Did Warren Buffett make a mistake?

We’ll find out. Size of the company does gravitate returns. Its easier to make calls on the companies that are smaller, and we don’t have Buffett’s problem of spare 50 Billion dollars lying idle in cash needing to earn 4% CAGR desperately.

Why should we not instead bet on the companies or countries that have Mortgage/GDP ratio of 2% ? (Turkey 6%, Romania 8%,  India 10%,  US 70%)

This being a topical point. When I read housing finance companies reports in India (myself invested in HFCs) they keep citing Mortgage / GDP ratio and juxtaposing it with the US, without the context of per capita income, citing how far it can go.

Turkey and Romania have 14000 USD and 11,000 USD per capita income, that is more than seven and five times respectively that India’s per capital of 1800 USD. Still the mortgage penetration is lower for the former two.

Enough waffling, you get the idea. Look for value, look for size, in relation to what’s available, i.e. opportunity cost. And you can increase your opportunity cost by increasing the ideas you understand or increasing the companies you can invest in.

Electric Cars

Going by the Veblen goods logic, I believe that another 10-15 years are given to the car companies during the transition to electric and then post Autonomous shift (the barriers are not technical, but regulatory), nearly all car companies will die. Only a handful may be left, and I would personally not bet, but if I were to, my money will be only on the car companies making majority of cars above 100,000 USD because it will be a status symbol than utility to drive car post Autonomous shift.