Apple

ARM vs x86

Wed, 16 Dec 2020 05:41:32 -0500

Yesterday Mozilla released Firefox 84 with native support for Apple's new M1 chip. The result? Firefox launches over 2.5 times faster and web applications are twice as responsive. Impressive!

These performance improvements are the result of Apple's M1 being an ARM-based processor, rather than the traditional x86-based processors sold by Intel and AMD.

One of my first jobs out of college was to write a Just-In-Time (JIT) compiler for both the ARM and x86 architecture. I experienced first-hand how much more elegant the ARM architecture is. Twenty years later, ARM continues to impress me.

In a different corner of the technology world, Amazon is working on the 3rd generation of its Graviton chip. Graviton processors are custom built by and for Amazon Web Services, and also use an ARM-based core. The Graviton 3 is likely to offer an extreme performance/price benefit compared to any x86 alternative. The Graviton 2 is already 20% faster than x86 instances, so it wouldn't surprise me if the Graviton 3 is 40-80% faster. For many, that justifies the switching cost.

ARM started outclassing the x86 on the desktop and in the server room. End users are starting to notice. None of this bodes well for Intel or AMD. While the x86 still dominates the market, I just don't see how Intel can stop this trend. A few weeks ago, I sold all my Intel stock. Only time will tell if that was the right call, but I'd rather be safe than sorry.

The ebbs and flows of software organizations

Sat, 08 Dec 2018 13:09:38 -0500

This week I was in New York for a day. At lunch, Sir Martin Sorrell pointed out that Microsoft overtook Apple as the most valuable software company as measured by market capitalization. It's a close call but Microsoft is now worth $805 billion while Apple is worth $800 billion.

What is interesting to me are the radical "ebbs and flows" of each organization.

In the 80's, Apple's market cap was twice that of Microsoft. Microsoft overtook Apple in the early 90's, and by the late 90's, Microsoft's valuation was a whopping thirty-five times Apple's. With a 35x difference in valuation, no one would have guessed Apple to ever regain the number-one position. However, Apple did the unthinkable and regained its crown in market capitalization. By 2015, Apple was, once again, valued two times more than Microsoft.

And now, eighteen years after Apple took the lead, Microsoft has taken the lead again. Everything old is new again.

As you'd expect, the change in market capitalization corresponds with the evolution and commercial success of their product portfolios. In the 90s, Microsoft took the lead based on the success of the Windows operating system. Apple regained the crown in the 2000s based on the success of the iPhone. Today, Microsoft benefits from the rise of cloud computing, Software-as-a-Service and Open Source, while Apple is trying to navigate the saturation of the smartphone market.

It's unclear if Microsoft will maintain and extend its lead. On one hand, the market trends are certainly in Microsoft's favor. On the other hand, Apple still makes a lot more money than Microsoft. I believe Apple to be slightly undervalued, and Microsoft is to be overvalued. The current valuation difference is not justified.

At the end of the day, what I find to be most interesting is how both organizations have continued to reinvent themselves. This reinvention has happened roughly every ten years. During these periods of reinvention, organizations can fall out out favor for long stretches of time. However, as both organizations prove, it pays off to reinvent yourself, and to be patient product and market builders.

I'm not selling my Apple stock

Mon, 03 Dec 2018 21:00:32 -0500

Apple had a rough year; its stock price has fallen 25% since the beginning of the year. Apple also reported a weaker than expected outlook and shared that it will no longer report individual unit sales, which many consider a bearish signal within a saturated smartphone market.

It's no surprise that this has introduced some skepticism with current Apple shareholders. A friend recently asked me if she should hold or sell her Apple stock. Her financial advisor suggested she should consider selling. Knowing that Apple is the largest position in my own portfolio, she asked what I'm planning to do in light of the recent troubles.

Every time I make an investment decision, I construct a simple narrative based on my own analysis and research of the stock in question. I wrote down my narrative so I could share it with her. I decided to share it on my blog as well to give you a sense of how I develop these narratives. I've shared a few others in the past – documenting my "investment narratives" is useful as it helps me learn from my mistakes and institutes accountability.

As a brief disclaimer, this post should be considered general information, and not a formal investment recommendation. Before making any investment decisions, you should do your own proper due diligence.

Over the last five years, Apple grew earnings per share at 16% annually. This is a combination of about 10% growth in net profit, combined with almost 6% growth as the result of share buybacks.

Management has consistently used cash to buy back five to six percent of the company's outstanding shares every year. At the current valuation and with the current strength of Apple's balance sheet, buybacks are a good use of a portion of their cash. Apple will likely see similar levels of cash generation in the coming years so I expect Apple will continue to buy back five to six percent of its outstanding shares annually. By reducing the number of shares on the market, buybacks lift a company's earnings per share by the same amount.

Next, I predict that Apple will grow net profits by six to seven percent a year. Apple can achieve six to seven percent growth in profits by growing sales and improving its margins. Margins are likely to grow due to the shift in revenue from hardware to software services. This is a multi-year shift so I expect margins to slowly improve over time. I believe that six to seven percent growth in net profits is both reasonable and feasible. It's well below the average 10% growth in net profits that we've seen in recent years.

Add 5-6% growth as the result of share buybacks to 6-7% growth in profit as a result of sales growth and margin expansion, and you have a company growing earnings per share by 12% a year.

If Apple sustains that 12% percent earnings per share growth for five years, earnings per share will grow from $11.88 today to $20.94 by the end of 2023. At the current P/E ratio of 15, one share of Apple would be worth $314 by then. Add about $20 in dividends that you'd collect along the way, and you are likely looking at market beating returns.

The returns could be better as there is an opportunity for P/E expansion. I see at least two drivers for that; (a) the potential for margin improvement as a result of Apple shifting its revenue mix, and (b) Apple's growing cash position (e.g. if you subtract the cash per share from the share price, the P/E increases).

Let's assume that the P/E expands from the current 15 to 18. Now, all of a sudden, you're looking at a per share price of $397 by the end 2023, and an average annual return of 18%. If that plays out, every dollar invested in Apple today, would double in five years – and that excludes the dividend you'd collect along the way!

Needless to say, this isn't an advanced forecasting model. Regardless, my narrative shows that if we make a few very reasonable assumptions, Apple could have a great return the next five years.

While Apple's day of disruption might be behind it, it remains one of the greatest cash machines of all time. Modest growth combined with a large buyback program and a relatively low valuation, can make for a great investment.

I'm not selling my Apple stock and I'd be tempted to buy more if the share price were to drop below $155 a share.

Disclaimer: I'm long AAPL. Before making any investment decisions, you should do your own proper due diligence. Any material in this article should be considered general information, and not a formal investment recommendation.

When the Macintosh was Apple's financial lifeline

Fri, 11 May 2018 08:11:10 -0400

© Asymco

I love this graph. It shows that for some time, Apple's primary source of revenue was the sale of the Macintosh computer. The Macintosh provided Apple with a bridge between the desktop era and the mobile era, represented by the two clusters on the graph. That bridge was a financial lifeline. Without it, Apple might not have survived.

Trading fashion for function

Thu, 10 May 2018 15:39:42 -0400

I've been using my new Apple Watch 3 for several months, and recently I've been in the market for a new band. Previously, I was using a standard synthetic rubber band. I'd come home from work, and the first thing I wanted to do was take my Apple Watch off. I didn't like the clammy feel of the band, and the fit was either too loose or too tight. This week, I decided to try the new Sport Loop.

I'm currently in Chicago visiting our Acquia office, and it's pretty warm out. The Sport Loop has proven to been a great alternative. It is made out of woven nylon, it's breathable and it has a little bit of stretch. It's not going to win fashion awards, but it is comfortable enough to wear all day and I no longer feel the urge to take off my watch in the evening.