Ken Kam's Best Ideas Blog

Apple’s stock has doubled over the last year. Now, after the launch of the iPhone, one of the most talked about consumer product launches in history, Is it time to sell, or can Apple double again?

That’s the question we, and a lot of other investors are asking. At Marketocracy, we track the trading of over 100,000 people around the world and have assembled a team of the top 100, which we call the m100. They have made Apple, Inc. (nasdaq: AAPL) one of the biggest positions in the m100 Index. If you’ve been following the Strategy Lab Open, you’ll know that Apple is the most widely held stock: 150 of the 550 portfolio managers competing to be selected for the next MSN Strategy Lab have added Apple to their portfolios.

I think it is safe to say that as a group, we collectively know more about this company than any individual. If we each share our pieces of the puzzle, perhaps we can construct a more complete picture of Apple as an investment than any of us could on our own.

To begin this discussion I'd like to start with something Wildmap posted on 9/14/07;

"Pretty much all news, barring the odd surprise, is known by investors at all times and already priced into a stock..."

I agree with Wildmap that any stock analysis should start with a healthy respect for the market's ability to price stocks right eventually. But in the short term stock prices mostly reflect the opinions of the people who have the most money, not necessarily the people who are the most knowledgeable.

As a portfolio manager, I am looking for stocks where the people who have the most money (and are therefore setting the price) are wrong. It happens more often than you might think, but it usually doesn't last long, so people who are willing to research a stock occassionally have an opportunity to make a lot of money.

To understand what the people who have the most money think about a stock it is useful to take to look at it from Wall Street's perspective. Ahknaten's post of 9/14/07 does a great job of putting Apple through a typical Wall Street discounted cash flow analysis. I agree with the reservations about discounted cash flow analysis that were posted by gedanken on 9/18/07. My take away from their discussion is that Wall Street will be able to justify both a lower or a higher price for Apple by tweaking a few variables within a reasonable range. Therefore, Apple does not appear wildly over or under valued at the moment.

The person who authored the highest rated post is Jeff Kalnitz which explained why he believes Steve Jobs is "crazy like a fox."

Opinions about Apple seem to differ depending on whether you see the iPhone as either:

1) A cell phone that is also an iPod or
2) An iPod that is also a cell phone.

If you think of the iPhone as a cell phone, you tend to compare it to smart-phones made by strong competitors like Palm, Nokia, Motorola, Samsung, LG, and Sony-Ericsson. As a smart-phone, the iPhone's main appeal seems to be its user interface. A lot of competing phones already offer many of the same  features at much lower prices and they can connect to the internet at faster speeds through Verizon or Sprint than through the slow AT&T network that the iPhone is hobbled with. From this perspective, the iPhone's unique user interface is what makes it a hot phone right now, but it's questionable whether it will be a lasting advantage against such strong competitors.

In stark contrast, if you think of the iPhone as a top-of-the-line iPod, there are no significant competitors. Apple dominates this market. The iPod in combination with the iTunes store is an important distribution channel for video and music content. Apple has already sold more than 1 billion songs through the iTunes store. More than any other firm, Apple has struck a good balance between the rights of content creators, and ease-of-use for customers. From this perspective, the iPhone is an iPod that can connect to the iTunes store at anytime, from anywhere, and without a computer -- and you can use it to make calls too!

I have not yet seen any posts that definitely tip the scales in one direction or the other -- at least for me. But the discussion has identified the right questions to be asking to guide our investment decision. The questions I have that would make the most difference are:

1) How is Apple's agreement with AT&T different than the typical arrangement between a wireless network operator and a smart-phone manufacturer? If Apple's deal is significantly different, it would tell me that the wireless operators don't view the iPhone as just another smart-phone. I would particularly like to hear from people who have some firsthand experience with this kind of deal even if it was for a different phone. If you work for one of the major smart-phone makers, tell us what it takes to get your phone into a major wireless network such as Verizon, Sprint, or AT&T.

2) Are a lot of kids buying iPhones? If so the prospects for Apple to sell lots of songs through the iTunes store seem bright. If the people buying iPhones are people who used to be addicted to their Blackberries, the prospects for Apple to sell a lot of songs to them don't seem as bright. If you are a high school or middle school teacher, how many iPhones do you see among your students? For one parent of a teenager's view take a look at this post by EileenTeska.

Click here to go to my research blog to see other posts about Apple, vote on the ones you think are valuable, and join the discussion. By sharing our "pieces of the puzzle" hopefully we can make better decisions than we each would have made on our own. I will be updating this article as new posts add insights that affect my view.