Two Sides of the Coin


This post focuses on the recent release of the new Apple iPhone as well as Alibaba’s IPO, the largest U.S. IPO in history.

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Each month for Oregon Business, we assess two market movers that are shaping current activity – and what they mean to investors. This post focuses on the recent release of the new Apple iPhone as well as Alibaba’s IPO, the largest U.S. IPO in history.

The seduction of Apple

The highly-anticipated iPhone 6 and 6+ were released in September amid much fanfare. Lines wrapped around city blocks as anxious customers eagerly awaited Apple’s new release, with the new main feature being … a larger screen. Apple also added a wireless payment feature, ApplePay, to allow consumers and vendors to conduct transactions without cash or card. This technology is provided by NXP Semiconductor. While this may not be an immediate game changer in the overall payments ecosystem, it is a significant move toward a transition away from plastic and paper. 

Initial sales of the new phone have been ahead of expectations, with the first weekend resulting in over 10 million units sold. This bodes well since Apple has not yet released the product in China. Even Microsoft participated in the hype when they advertised that their apps will be “essential” on the new iPhones. Looking at those lines at Apple stores across the country, many of those buyers may not be using the phones for their own consumption. No matter who is using the phone, the forecasted units sales for the month of September should total close to 60 million. This product cycle should be strong, but what we are watching is the gross margin. Even with a price increase on the 6+, additional components and large screen size may eat into their profitability. The iPhone gross margin has trended lower from the mid-to-high 50s to the mid-40s. If Apple is able to keep margins in that area for the 6/6+, that should be positive for the company.

Alibaba: From 1001 Nights to IPO

Earlier this month, Alibaba Group went public on the NYSE with a value of over $200 billion. This resulted in the founder and current chairman, Jack Ma, to be elevated to China’s richest man status. For those not familiar with this Chinese company, it can be described as a mix of Amazon, eBay, PayPal with other businesses extending into marketing, logistics and mapping. Being a dominant play in all aspect of ecommerce in China (C2C, B2C and B2B), Alibaba has been able to grow revenues over 30 percent consistently. This is 50 percent faster than Amazon, and twice that of eBay. Unlike Amazon, Alibaba is extremely profitable. Amazon’s operating margins are low-single-digits, while Alibaba’s are close to 50 percent.

There is a lot to consider when investing in hyper-growth companies like Alibaba, Amazon, Facebook, Twitter, etc. The key is balancing valuation with potential growth. How much do you want to spend for a future earnings stream? There can be periods when investors do not care if they are paying a P/E multiple of 15x future earnings or 150x. This can be frustrating for value-based investors, as we saw in the technology bubble of the late 1990s. There is an adage on Wall Street stating that valuation doesn’t matter until it does. Meaning, investors can focus more on the growth than the value, but eventually, when the markets want to reduce risk, valuation will ultimately become very important. The higher the P/E, the more downside for the stock price. We believe that it is prudent to consider a balance between value and growth when evaluating opportunities for long-term investors.

The Coin Flip

From the global economy to what’s happening here in Oregon

Below our offices on the ground floor is the glass temple of Apple. For as long as we can remember, construction was underway to transform the north side our building into a flagship store. Last week was the first product release that we could witness firsthand and it was … interesting, to say the least.

A line comprising more than 200 individuals started to form on September 18 and we certainly noticed the “urban campers” who were holding spots for a fee. By 9:00 a.m. the next day, the new iPhones were sold out.

One of our portfolio managers secured the coveted phone online and noticed that he received an additional “gift” — the most recent copy U2’s album, Songs of the Innocent. It goes without saying that not all iTunes subscribers are fans of the U2 genre, but there was a surprising amount of pushback for this. Apparently U2 garnered $100 million from Apple, reminding us that this relationship first came to “fruition” with the initial iPod commercial. To those who were vocal about the U2 invasion — use can now simply use your new delete button. But please refrain from placing your iPhone 6 or 6+ in your back pocket. To paraphrase an English proverb regarding cake, You can’t have your larger screen and sit on it too. 

Jason Norris, CFA, is executive vice president of research at Ferguson Wellman Capital Management


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