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There's No Reason Apple (AAPL) Can't Be a Trillion Dollar Company - David Einhorn

May 30, 2012 11:31 AM EDT Send to a Friend
Hedge fund titan David Einhorn commented on market concerns about Apple Inc. (Nasdaq: AAPL) in a recent letter to clients dated March 29, 2012

In the letter, Mr. Einhorn addresses four common concerns about the stock:
  1. Too many hedge funds own AAPL.
  2. If AAPL's share price doubles, it will have a $1 trillion market capitalization, and everyone knows there can be no such thing as a $1 trillion company.
  3. Motorola, Research in Motion and Nokia were all market leaders that proved unable to hold onto their dominant positions and healthy margins; this too will be AAPL's fate.
  4. AAPL can't possibly maintain its current hyper-growth trajectory.
Addressing these concerns one at a time, Einhorn comments:

  • On the concern that too many hedge funds own the stock, he said while there is not a clear objection, he supposes the worry is that it is related to fear of a heard mentality among hedge funds: if one sells it could create a cascading effect. Compacting this he said, "collectively, hedge funds currently hold less than 5%2 of AAPL's outstanding shares, and no hedge fund ranks among the top 40 holders of the stock. The average hedge fund has less than 2%2 of its equity assets in AAPL versus AAPL's 4% weighting in the S&P 500, which means hedge funds are actually underweight AAPL."

  • On the question of a trillion dollar market cap he jokingly quips, we scoured the rules and "We can’t find any prohibition on trillion dollar market capitalizations."

  • Addressing the worry that all great empires eventually fall, he comments, "This concern, while not as arbitrary as the first two, reinforces our belief that the skeptics have a fundamental misunderstanding of AAPL. Their view suggests that AAPL is a hardware company. We disagree." Einhorn said Apple is a software company, with value coming from iOS, the App store, iTunes and iCloud. "A consumer with one AAPL product tends to want more AAPL products. Once the user has a second device, AAPL has captured the customer. At that point, a future competitor has to make a product that isn't just a little better, but a lot better to get people to switch. The high switching cost makes AAPL's business much more defensible than that of its predecessors." Also, the company's ability to innovative encourages users to upgrade every couple of years.

  • On the growth question, Einhorn simply states that Apple shares are not currently priced for growth. "Its current valuation is justified without it," he said.
Einhorn said his fund continues to hold Apple and that shares remain "cheap" with shares trading at a lower multiple than the average company in the S&P 500. This below-market multiple implies a below-average company, he said, which Apple is not.




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