I drew much criticism on my article entitled “Why Apple (AAPL) Is Not a Good Value,” although I have to thank several people for their comments, some of which insinuated I might not be a monkey/moron/really odd fellow/ass/the dumbest jerk on Wall Street. In particular, I need to thank Dereck for his deep (and kind) thoughts and Stock Master Ted Gottsegen for getting the real point of my article - at these prices, AAPL is speculation, so recognize it for what it is.

Because there were somewhere in the neighborhood of 100 comments on this article between CollegeAnalysts.com, Seeking Alpha, and emails, I thought I would address a few of the more pertinent ones:

-Anonymous: Please SELL all your Apple stock immediately and buy some Microsoft; it sounds like they are more your style.

-Cullen: Is there anything wrong with preferring a good bet (i.e., a bet one has a good probability of winning) to a coin flip, or worse? Imagine if someone offered to bet you $170 whether or not your friend could do something. Wouldn’t you want to know what it is your friend has to do? No matter how talented your friend, or how much confidence you have in him, you’d still (probably, hopefully) want to know. I have a fairly good idea about the kind of performance Apple needs to put up, and I don’t feel that is a proposition worth taking.

Phrased another way, I have two companies, each with its own exceptionally popular brand. Both management teams are dedicated and professional, and have turned their businesses around after struggles in the not-too-distant past. Earnings at both of these cash-rich companies have grown at better than a 50% annualized clip in each of the last five years; each firm’s ROE hovers around 30%. Both are expanding product lines with offerings that leverage their current customer base and offer great opportunities in new, untapped markets. And yet one stock has risen 100% this year and trades at 50x trailing earnings, while the other is down more than 20% and trades at 13x trailing earnings.

There is a valuation component to everything, and this is why I don’t like AAPL as an investment, but I do like retail stocks like American Eagle (AEO).

-Thompson: Don’t you get it? Everything ELSE is the digression! It is OK to begin with premises and assumptions, but they should be based on the profit drivers (have you heard of the Macintosh?) as opposed to being pulled out of some dark smelly place.

-Cullen: I am going to write-up an even more detailed breakdown showing how I arrived at the “conservative” growth figures I used, and while pulling numbers from an unspecified place might not suit you, enough people didn’t read the abridged version of my article to make me doubt that anyone is going to care about my estimate for iPhone sequential unit growth in 2014. When that information gets disseminated, you’ll see that the front-year growth estimates are higher, but the growth toward the end of the modeled years is lower than before. The net difference in out-year revenues between the long version I did and the shortened version I posted? $13 million, on $112 billion. But don’t worry, you’ll get your fully delineated explanation of the growth model on Friday the 19th, so check back for it then. I’ll discuss - in even greater detail - how AAPL’s valuation sensitivity relates to things like Mac share growth, iPhone unit volumes, and wireless carrier licensing fees. I might even touch on Apple’s pipeline, like the iPhone Shuffle.

-Anonymous: I for one actually think its opex growth will slow down in the next five years to low double digits, mostly because of the law of large numbers.

-Cullen: To apply the “law of large numbers” to operating expense growth while completely ignoring the same when it comes to revenue growth demonstrates either an ignorance of the principle, or scarily selective application of it. I just looked at the multi-year trend in operating margins for several big tech companies, and they almost exclusively tend/trend down.
Perhaps for a more clear explanation, consider the following: toward the end of my growth forecast model where I have Apple tacking on an additional $8-9 billion annually in revenue, that equates to a growth rate of about 9%. If AAPL adds that amount now, it constitutes 40% growth. Simple fact is, it gets harder to find that marginal revenue when you already have tens of billions in sales.

-Eat_it: Nowhere in your statements have you mentioned anything the iMac or the Leopard OS. Proves how narrow-minded you are… Why don’t you apply your textbook theories onto BIDU (Baidu.com)? I bought it at 190 and I added more shares even at $305 yesterday. Trading at 200x earnings and 80x next year, how’s that to your model?

-Cullen: I’ll admit, it is very easy to determine how narrow-minded I am thanks to the words I used in that article. A short time ago, people were called narrow-minded for not respecting other races, religions, etc. Now, people can be narrow-minded for not explicitly mentioning other… operating systems. The Founding Fathers fought for freedom from tyranny, the Union fought for a unified country rid of slavery, the Allies fought for freedom from fascism, and now Maczealots can defend their right to have their OS mentioned where they want.

I know what you want me to say about BIDU; it’s overvalued. More than uncertainty; there is significant risk in shares of BIDU unless you have a very clear vision of the future of internet search in China, and Baidu’s role in that. I don’t pretend to have such foresight, but good luck.

-Inthemoney: James, I’m 65 and I suggest to you what no one ever told me to do, but I guarantee that if you could put $10,000 into apple today and forget about it, when you are 40 you will be a millionaire with that stock.

-Cullen: For this to happen, AAPL would need to go up in value 100x. The current valuation is $150 billion, so that would translate to AAPL being worth $15 trillion twenty years from now; a growth rate of 26% annually for the next two decades. US GDP in 2006 was about $13 trillion. So, uh, this whole guarantee thing… are you good for making up the difference?

-Arbitrage Corner: I don’t know why people, instead of using a discount rate, discount the cash flows to arrive at a current implied discount rate (just like a yield to maturity in a bond). Have you did that in your model to check how much return you get by buying aapl at 170?

-Cullen: As I said, I really like this idea. Of course, then we are back to the whole question of appropriate growth rate, but I’ll try my best. Working off the assumption that AAPL grows 40% in the next year, followed by 25% in each of the next four years, and 12% in each of the five years following that results in a 6x increase overall, or a 10-year annualized growth rate of 19.7%. A quick-and-dirty revenue estimate for the out-year is $136 billion; and that yields an annual discount rate of 11.5% - which gets you to within 1% of the most recent close.

An 11.5% return? Now, 11.5% annually isn’t bad, but most people have been telling me AAPL will climb another 20% by Christmas. Take it for what you will, and thanks to Arbitrage Corner for suggesting this insightful method.

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