Shuki Sasson took a shot at a quick Rule One analysis on Amazon (AMZN) and Apple (AAPL). There is a lot to like and a few things missing. Here is Shuki's view:
AMZN and AAPL analysis... AMZN has many MOATS Brand Moat, Toll Moat since it takes Billions to build the distribution centers and last and not least it has Price Moat since it can sell cheaper and there is no need to pay sales tax. AMZN has space to grow it is the 1/3 of the market capital of WMT it has more space to grow. Due to their substantial MOAT protection they will most likely be here for many years. It also has excellent management (Jeff Bezos). Unfortunately it is fully priced... AAPL has a huge Brand MOAT and also secret MOAT on top of that the AAPL echo system (iTunes and APP store) is starting to create a clear switch MOAT... AAPL is excellent company that is going to be around for many years to come. Tim Cook is an excellent manager and the economic prospects are excellent. Mr Market is concerned because Steve Jobs left the CEO post to Tim Cook and sell AAPL on the cheap... Tim Cook is a very good manager too and he makes sure the same innovative culture is kept. Lately the Analysts updated the forecast growth rate from 16% to 18%... With average PE of 25 I get: MOS $339 Sticker $678 Folks, AAPL is selling for 1/2 the price! This is a screaming buy for me...
One way to think of Moat is to ask this Warren Buffett question: If I spent the price of this business on building a new business from scratch, could I compete? For example, if you had the money it would cost to buy Norfolk Southern, could you build a thousand miles of railroad track and compete? No, you can't because you can't get the right-of-way. That's a Toll Bridge moat. Agreed Amazon has multiple moats including Brand (I think internet purchase, I think Amazon), Toll (distribution centers make it possible to get what I bought faster than any other way - that is a Toll Bridge Moat), and maybe Price. And Bezos is amazing. So great company? Sure. But at what price? If we assume a long-term 18% growth rate, here's what the TownToolbox sets the value at:
Its worth about $117 per share if the estimated growth rate is right and if I insist on a 15% compound rate of return. Its selling for almost $200 per share. Buying at that price works out for an investor if the company grows a lot faster than 18% per year for the next 10 years or if the investor doesn't mind an 8%-10% annual return. Fund managers hope for the former and settle for the latter and will continue to bid this up. Its not likely a Rule One investor is going to get a chance at Amazon.
Apple? Well, I love Apple products and think it could take over the world. Here's the Moat and Management numbers. All green. All awesome.
But I've worked with Steve Jobs. He is a one-of-a-kind genius about consumer products. I don't think I agree that Tim Cook can take Steve's place. I don't think anyone can take Steve's place. I just hope for his sake and Apple's that no one has to. I hope the guy lives for another 50 years and continues to steer the ship. If Steve keeps the business on track, I'm an Apple fan. If he isn't there, I'm not so excited about it. Never forget - this is a tech company. It has to innovate or die. It has huge moats but they are under constant attack. A great test of how solid an investment this is is to ask, "Is this a business I am willing to put ALL my money in if I know I can only make one investment the rest of my life?" That question will help you avoid making a mistake. But assuming you've answered Yes to Apple, here's what it looks like for value IF the growth rate the analysts estimate turns out to be right long-term:
Notice that today's price is quite good based on these assumptions. It has a nice MOS and will produce an 8 year Payback Time. So buy it? Well, there's one more issue I think is important to consider: How big is too big? The current market capitalization is $310 billion. It gets harder and harder to grow fast when you are already the 2nd most valuable business in the world. Can they really double their size in 4 years? And double it again in another 4. And again in another 4? In 12 years they'd be selling for $2.4 trillion. Ummmm. That's asking a lot. Which means that 18% growth rate is suspicious. Which means our Margin of Safety is not, perhaps, so large as 50%.
Another look at value with a more sustainable long term growth rate of 10% produces a very different answer about what Apple is worth today.
I don't know which of these two values is right. If I knew I'd either go long or go short. That's the problem with tech stocks, isn't it? It is so difficult to know. And if you take seriously the idea that you don't buy unless you do know, you will have trouble buying tech.
Here's another test: Imagine putting 25% of your net worth into Apple at $335. Now imagine that Steve retires and the price drops to $200. Are you thrilled and putting another 25% in or are you freaked out and trying to decide if you should sell it? If you aren't thrilled at the notion of the price of Apple dropping like a brick, you shouldn't be buying it. Not if you're going to be a Rule One type investor.
Now go play.
