Member Q&As – LED Industry and AAPL Valuation
Q) I have been watching Cree (CREE) in the LED industry and also a smaller company Nexxus Lighting (NEXS). Is there any comparison between the two companies? Where do you see the LED industry going over the next year or so?
There are MANY companies that package LEDs and even more that take packaged LEDs and use them in fixtures and such. NEXS fits into the latter category. While the company is operating at a substantial loss and faces many competitors, there will be some winners in this category. Unfortunately, I’m more of a pick and shovel guy here and it’s CREE that leads there.
One thing to watch out for is there will be a ton of companies that try to capitalize on the hype of LED lighting and use it to raise money. The message here is to understand the model and to be very careful about claims regarding differentiation. A quick way to gauge the latter is to evaluate the gross profit margin. If it is relatively low, judge whether it is due to the fact that fixed costs need to be absorbed or if the variable costs are simply too high (variable costs don’t scale nearly as well as fixed costs). If it is just a low margin business, there is probably not much differentiation.
Q) Apple (AAPL) recently passed Microsoft (MSFT) in terms of market cap, based on that should it still be considered as a growth company? Is a PE ratio higher than 20 still justified? Right its price implies 17 forward looking PE.
The news that iPhone commands about 70% smartphone market in Japan is a major reason I’m asking. If iPhone can capture 70% in Japan, it may as well in China. And some high end consumers, as I know, could easily switch phone devices every couple months (or even weeks) as they are not bound by any contracts.
A) That is a tough call – the PE will stay high so long as the market sees growth potential, but with each leg up in growth, the forward percentage becomes more difficult. I’ve not formally adjusted my earnings forecast yet (it was $13 ahead of earnings versus the $12 consensus). The consensus has since moved up to my $13 estimate. My thinking today is somewhere between $13 and $14. For a multiple, I’m using a range of 16 to 18 plus what I see as balance sheet value.
For the balance sheet I’m starting with net current assets of $15.85, plus deferred revenue of $3.77 plus long-term investments of $20.10 (total $39.72). So, if we take a range of $13 to $14 times a valuation multiple range of 16 to 18, the spread comes out to $208 to $252. If we add the balance sheet to this, the estimated fair value range is $248 to $292 with a midpoint of $270, which is about where AAPL is trading today.
For China, I think we should model the iPhone as doing well, but not near the smartphone share it gets in Japan – pricing preferences are considerably lower in China and I think the big smartphone market share winners there will be the phones made locally and powered by Marvell (MRVL) applications processors.
In 2009, the Next Inning portfolio was up 74% vs. 44% for the Nasdaq.
Disclosure: At the time of this publication, out of the companies discussed herein, Paul McWilliams had long positions in CREE, AAPL, and MRVL. He also had short positions in CREE June $60 and January 2011 $95 calls.
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