Apple (APPL)

Intrinsic Value (IV): 168$, Current price (CP): $113

I was for long time an Apple skeptic, mostly because I perceived Apple gadgets as expensive and vulnerable to low-cost competitors. I also am not a fan of walled gardens. But my thinking on Apple’s competitive advantage was greatly influenced by stratechery.com articles and observations made based on them.

Apple is cheap relative to both earnings and cash flow and has enormous amount of cash. I think market believes (as I used to) that iPhone’s high margins are not sustainable, but now I disagree. Seeing to what extent many people value their phones, I expect growing number of them willing to pay a premium for the best, hassle-free experience on a device they spend hours and hours every day. Brand and ‘cool’ factors are also durable competitive advantages, especially after Samsung’s recent failures with Note 7 and I don’t think any Chinese brand will be perceived as ‘premium’ in the West or in Japan for a long time.

Last but not least, I think Apple’s vertical integration and scale will enable it to come up with the next personal computer after smartphone, no matter if it will be a watch, smart glasses, other wearable or chip under our skin. I believe once the time is right, Apple will rollout out a gadget that everyone wants and it will perform better than the ones from competitors.

I bought a small position for $128 in 2015. I did not think it is very cheap, but I wanted to keep track of the company as I finally appreciated the competitive advantage. After poorly-received earnings, I added a lot in April and May 2016, dollar-averaging my cost basis to $97, as I did not see anything alarming in the results. I must say it was comforting to see Berkshire also buy a stake when they filed their 13F.

I expect the iPhone 7 results to be very strong and positively surprise the market. The iPhone 7 Plus has still 2-3 week shipping dates. And I think Apple manages their supply chain and predicts demand much better than Google.