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      12-05-2018, 08:23 PM   #1
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Inverted yield curve

Background:
https://www.thebalance.com/inverted-yield-curve-3305856

So where is the bubble this time? Unemployment is about 3.7%. Are there a lot of zombie companies out there hiring people just for the heck of it? Is 3.7% historically un-normal? It's like you're forcing companies to hire that they naturally would not.

I still think stocks are still a bit too expensive.
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      12-05-2018, 08:52 PM   #2
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I watched a few things recently-

1) Interest rates are rising and steadily will continue to rise.
2) Housing costs are getting very very expensive.
3) Auto loans are effectively maxed, Ford and GM know that and along with changes in tech (electric cars) are in a lot of trouble if they don't adapt. They will soon close factories and layoff a lot of people.
4) Tech is at this point absurd, these valuations that AAPL, AMZN and MSFT are putting down are based on what really? Is it consistent revenue growth or is it trickery with EPS? My understanding is those companies are close to max market penetration.
5)Stock in 2.5 years have gone up 10K points, when was the last time this happened?
6)Wage growth at this point is terrible and companies are not passing on the profits to average people.

I think something will happen very very soon. Not one industry but across the board. I would slowly start to turn liquid and be ready when things take a dump because there will be deals to had.
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      12-05-2018, 09:01 PM   #3
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The fed is also liquidating its (QE) balance sheet, which is raising short-term yields and thereby creating some of the inversion. Add to that the Fed wanting to raise rates (again it’s tool is short term rates) so it has room to cut when the next recession arrives, and the concerns about possible recession or lack of sustained growth (new House fails to make tax cuts permanent, can’t agree with a Senate on infrastructure, etc) and housing seems to have run up too quickly - and you have a recipe for inversion.

So many factors that it isn’t “classic” market inversion and thus may not be a solid indicator of recession, but certainly a warning sign.

Last edited by 2000cs; 12-05-2018 at 09:58 PM..
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      12-05-2018, 09:05 PM   #4
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Quote:
Originally Posted by ASAP View Post
I watched a few things recently-

1) Interest rates are rising and steadily will continue to rise.
2) Housing costs are getting very very expensive.
3) Auto loans are effectively maxed, Ford and GM know that and along with changes in tech (electric cars) are in a lot of trouble if they don't adapt. They will soon close factories and layoff a lot of people.
4) Tech is at this point absurd, these valuations that AAPL, AMZN and MSFT are putting down are based on what really? Is it consistent revenue growth or is it trickery with EPS? My understanding is those companies are close to max market penetration.
5)Stock in 2.5 years have gone up 10K points, when was the last time this happened?
6)Wage growth at this point is terrible and companies are not passing on the profits to average people.

I think something will happen very very soon. Not one industry but across the board. I would slowly start to turn liquid and be ready when things take a dump because there will be deals to had.
Do you actually know AAPL’s valuation? It trades at 13X earnings and just got finished putting up 20% revenue and 40% eps growth. The average S&P500 stock is over 22X earnings.

Comparing it to AMZN’s valuation is laughable and MSFT trades at a still high 40x earnings.

AAPL is one of the stocks that actually has the earnings, cash, and buyback to justify a much HIGHER valuation than today.
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      12-05-2018, 09:18 PM   #5
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Quote:
Originally Posted by ASAP View Post
I watched a few things recently-

1) Interest rates are rising and steadily will continue to rise.
2) Housing costs are getting very very expensive.
3) Auto loans are effectively maxed, Ford and GM know that and along with changes in tech (electric cars) are in a lot of trouble if they don't adapt. They will soon close factories and layoff a lot of people.
4) Tech is at this point absurd, these valuations that AAPL, AMZN and MSFT are putting down are based on what really? Is it consistent revenue growth or is it trickery with EPS? My understanding is those companies are close to max market penetration.
5)Stock in 2.5 years have gone up 10K points, when was the last time this happened?
6)Wage growth at this point is terrible and companies are not passing on the profits to average people.

I think something will happen very very soon. Not one industry but across the board. I would slowly start to turn liquid and be ready when things take a dump because there will be deals to had.
I agree with what you said. All market downturns are caused by over-leveraging (another word for bubble) but the trick is to know where the bubble is coming from. I remember during the 2008 crash, even two weeks before that nobody was saying anything until two weeks after when Lehman Brothers went bankruptcy.

When an economy is overly-leveraged, it does not take that much to crash because you're already right on the edge (although this time I don't think it will be nearly as bad as 2008 since the FED has printed too much money and willing to do just the same).

Also as you said, housing is way too expensive and pretty much at the same level as 2008 (not taking into account inflation), which means a lot of people who own homes will have a large portion of their income going to pay for the
mortgage and if they loose their jobs, their chance of defaulting is pretty high. For example, I cannot afford to buy my own home today since I would not have the capital for down payment. So now the defaulted home is on the market but few people can afford given the interest rates are a lot higher now. So the bank have to sell the house for a lot less. Sounds a bit like 2008 when things are cascading downward that is very difficult to predict, but as I said personally I don't think it will be as bad as 2008.

A lot of the crashes or mini crashes happen because people don't see it coming like the inverted yield curve on 12/4/2018 or two weeks before Lehman. You listed a few good signs of an overly leveraged condition, but the real one is hidden somewhere behind the smoke and mirrors.
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      12-05-2018, 09:32 PM   #6
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Quote:
Originally Posted by BayMoWe335 View Post
Do you actually know AAPL’s valuation? It trades at 13X earnings and just got finished putting up 20% revenue and 40% eps growth.
Although you're right that AAPL is very cheap compared to other FAANG stocks, but PE ratio is more like a static indicator that does not really predict future performance. There are a lot of stocks that have low PE ratio but not very attractive. Historically AAPL tends to have lower PE ratio vs. other stuffs like Facebook, Google...

I think people are concerned that AAPL future growth potential given consumers are starting to resist the pricier Iphones which AAPL relies for a lot of their growth. There are a lot of talks that AAPL is now making a transition into more of a software service company and while their hardware products may be tapering, their new source of growth will be in their software service sector. But that's risky since we don't know how it's going to look like.

But the real reason for stocks being too expensive is that the FED has printed too much money for so cheaply at 0% for too long, the people have to PARK their money somewhere. I intentionally used the word "PARK", since it's not investing anymore, it's merely an acting of saving your own money. That's the only reasons why these stocks are so overly bought.

They said QE was never tried before, well I think we are going to find out.
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      12-05-2018, 11:21 PM   #7
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Quote:
Originally Posted by WestRace View Post
Although you're right that AAPL is very cheap compared to other FAANG stocks, but PE ratio is more like a static indicator that does not really predict future performance. There are a lot of stocks that have low PE ratio but not very attractive. Historically AAPL tends to have lower PE ratio vs. other stuffs like Facebook, Google...

I think people are concerned that AAPL future growth potential given consumers are starting to resist the pricier Iphones which AAPL relies for a lot of their growth. There are a lot of talks that AAPL is now making a transition into more of a software service company and while their hardware products may be tapering, their new source of growth will be in their software service sector. But that's risky since we don't know how it's going to look like.

But the real reason for stocks being too expensive is that the FED has printed too much money for so cheaply at 0% for too long, the people have to PARK their money somewhere. I intentionally used the word "PARK", since it's not investing anymore, it's merely an acting of saving your own money. That's the only reasons why these stocks are so overly bought.

They said QE was never tried before, well I think we are going to find out.
It’s trading at that multiple based on 2019 estimates, so it is a look forward. Apple makes 3X the profit of Microsoft and Google and has a similar market cap. Apple is dirt cheap by any measure and the discounted multiple is based on it being a “hardware” company, but that is changing with a $40B services business growing at 25%.

There is no real data showing consumers are “resisting” higher priced iPhones. Every article on that is speculation. The quarter Apple just put up shows people are buying iPhones for much higher ASPs than before, with no loss in unit sales.

Apple sold 218M iPhones in 2018 at $760 each and 217M in 2017 at $650 each. Pricing power in real numbers.

If Apple puts up a disappointing quarter in Christmas and the real data shows a revenue drop, ill start changing my thought process. Fake stores around iPhone demand are normal during this year, designed to manipulate the stock and are always proven false in the real data. Same thing was said about iPhone X last year and iPhone 7 prior to that. Apple always delivers the earnings, period.
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      12-05-2018, 11:44 PM   #8
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Quote:
Originally Posted by ASAP View Post
I think something will happen very very soon. Not one industry but across the board. I would slowly start to turn liquid and be ready when things take a dump because there will be deals to had.
Or you know, don't liquidate, hold strong and take your 8% CAGR and call it a day?

Timing the market is never recommended.
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      12-05-2018, 11:47 PM   #9
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Quote:
Originally Posted by BayMoWe335 View Post
It’s trading at that multiple based on 2019 estimates, so it is a look forward. Apple makes 3X the profit of Microsoft and Google and has a similar market cap. Apple is dirt cheap by any measure and the discounted multiple is based on it being a “hardware” company, but that is changing with a $40B services business growing at 25%.

There is no real data showing consumers are “resisting” higher priced iPhones. Every article on that is speculation. The quarter Apple just put up shows people are buying iPhones for much higher ASPs than before, with no loss in unit sales.

Apple sold 218M iPhones in 2018 at $760 each and 217M in 2017 at $650 each. Pricing power in real numbers.

If Apple puts up a disappointing quarter in Christmas and the real data shows a revenue drop, ill start changing my thought process. Fake stores around iPhone demand are normal during this year, designed to manipulate the stock and are always proven false in the real data. Same thing was said about iPhone X last year and iPhone 7 prior to that. Apple always delivers the earnings, period.
Looks like you've been following the stock more than I do. One thing that bothers people is AAPL will stop reporting quarterly unit sales and only reporting the revenue data. People interpret this as there could be an issue with the growth of iphone sales.

Also, 218M vs. 217M unit year over year (I assume since the data came from you) does not seem like an impressive growth number for me although the higher per unit cost does offset the small gain in total unit sales. One can interpret this data as in order for AAPL to growth in iphone revenue, since the unit sales growth won't be there, AAPL has to charge more per unit but this can be only so much since consumers will not be willing to pay a higher cost for a smart phone.
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      12-05-2018, 11:49 PM   #10
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Timing the market is never recommended.
That is true in principle, but you can time the market in a longer term. Periodically buying the dip is like a form of cost averaging.
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      12-06-2018, 12:21 AM   #11
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The fed is also liquidating its (QE) balance sheet, which is raising short-term yields and thereby creating some of the inversion.
I thought they already been doing that since beginning of this year (or last year) on a regular basis?


Quote:
Originally Posted by 2000cs View Post
Add to that the Fed wanting to raise rates (again it’s tool is short term rates) so it has room to cut when the next recession arrives,
But I think it's the bond market that creates the inversion? That is they are betting that the FED will have to lower the rate because the recession coming?

Quote:
Originally Posted by 2000cs View Post
new House fails to make tax cuts permanent, can’t agree with a Senate on infrastructure, etc
I actually think this is a good thing.

Quote:
Originally Posted by 2000cs View Post
and housing seems to have run up too quickly
I think a lot of the bank profits coming from housing loans and housing cost is just too expensive compared to real income. With housing slowing down, the banks profit will take a hit (which what's been happening with their stocks) With 3.7% unemployment but some of it has to be in thin ice, once the recession comes, a lot of those people will loose their jobs and their house, and once the housing market takes a hit, it will be a domino affect that is very hard to predict.

Quote:
Originally Posted by 2000cs View Post
So many factors that it isn’t “classic” market inversion and thus may not be a solid indicator of recession, but certainly a warning sign.c
I think if we have a sustain inverted yield curve then the odd for a recession is more likely. If it's a temporary one then maybe not.

But regardless, everything seems to be max out. Stock price, housing, QE is already max out (I can't imagine we try QE again), interesting rate although going up is still at historic low and I can't imagine going to 0% again.
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      12-06-2018, 12:23 AM   #12
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Quote:
Originally Posted by WestRace View Post
Quote:
Originally Posted by r0wr View Post

Timing the market is never recommended.
That is true in principle, but you can time the market in a longer term. Periodically buying the dip is like a form of cost averaging.
So then why not just dollar cost average? In the end, it'll most likely be similar returns with less risk.
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      12-06-2018, 11:41 AM   #13
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Quote:
Originally Posted by WestRace View Post
Looks like you've been following the stock more than I do. One thing that bothers people is AAPL will stop reporting quarterly unit sales and only reporting the revenue data. People interpret this as there could be an issue with the growth of iphone sales.

Also, 218M vs. 217M unit year over year (I assume since the data came from you) does not seem like an impressive growth number for me although the higher per unit cost does offset the small gain in total unit sales. One can interpret this data as in order for AAPL to growth in iphone revenue, since the unit sales growth won't be there, AAPL has to charge more per unit but this can be only so much since consumers will not be willing to pay a higher cost for a smart phone.
Again, all AAPL investors know unit sales growth has been in low single digits for 3 years. This isn't a surprise.

Apple is correct in not reporting these numbers as they were a distraction to the larger services story and overall success of the business.

Apple continually put up top and bottom line beats, but analysts would spin the quarter as "poor" because they sold 51.5M iPhones versus 52M the analysts modeled. Apple never provided unit sales guidance.

So it started being this "never good enough" problem. Even if Apple beat their own guidance, analysts would "expect" more units than reported.

Apple just said, forget it...no more unit sales. Longer term, this is good for investors. I own well into the 4 digits of AAPL shares, so I have to follow the company closely due to my position.
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      12-06-2018, 12:40 PM   #14
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Quote:
Originally Posted by BayMoWe335 View Post
It’s trading at that multiple based on 2019 estimates, so it is a look forward. Apple makes 3X the profit of Microsoft and Google and has a similar market cap. Apple is dirt cheap by any measure and the discounted multiple is based on it being a “hardware” company, but that is changing with a $40B services business growing at 25%.

There is no real data showing consumers are “resisting” higher priced iPhones. Every article on that is speculation. The quarter Apple just put up shows people are buying iPhones for much higher ASPs than before, with no loss in unit sales.

Apple sold 218M iPhones in 2018 at $760 each and 217M in 2017 at $650 each. Pricing power in real numbers.

If Apple puts up a disappointing quarter in Christmas and the real data shows a revenue drop, ill start changing my thought process. Fake stores around iPhone demand are normal during this year, designed to manipulate the stock and are always proven false in the real data. Same thing was said about iPhone X last year and iPhone 7 prior to that. Apple always delivers the earnings, period.
You do have a blind spot on AAPL versus others. Your fundamental analysis of AAPL isn't wrong, but the immediate need to be dismissive of the trading levels of MSFT or AMZN to justify your point of view is.

MSFT and AMZN are exceptionally well positioned from a forward looking perspective. They are the largest two cloud services providers and they are enjoying huge growth in the sector. While in the consumer AI space, MSFT clearly runs behind AMZN/Google, in the underlying tech space it is very advanced and well positioned in both AI and IoT. AMZN is not only the world's largest cloud services provider, they are also the world's largest advertising platform. Neither AMZN nor MSFT are inappropriately valued at their current trading levels with a forward outlook. 2018 projected revenues for MSFT are $124 billion and $137 billion for 2019. AMZN's are $236 billion and $280 billion respectively. The trading value respects this growth.

I am not arguing that AAPL is overvalued. I'm in the minority, Tim Cook is the best thing to happen to AAPL in decades. While he lacks the marketing sleight of hand of Steve Jobs, he's a substantially better businessman (not to mention a better human being). He is as profoundly important to AAPL as Satya Nadella has been to MSFT.

As to general gist of the thread, there is significant reason to worry about the US economy and market. The decision to stimulate a healthily growing economy will have significant negative repercussions. Further, the decision by so many companies to use the stimulus for non-stimulating purposes (eg. stock buybacks) as opposed to allowing overdue wage growth (for example) results in just more wealth concentration which does nothing to improve fiscal or economic fundamentals. I don't know what the outcome will be ... just that it won't be good.
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      12-06-2018, 01:03 PM   #15
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Quote:
Originally Posted by WestRace View Post
Background:
https://www.thebalance.com/inverted-yield-curve-3305856

So where is the bubble this time? Unemployment is about 3.7%. Are there a lot of zombie companies out there hiring people just for the heck of it? Is 3.7% historically un-normal? It's like you're forcing companies to hire that they naturally would not.

I still think stocks are still a bit too expensive.
I don't think we can judge the economy by unemployment anymore. There are too many part time jobs where in reality you don't count as an employee but you do for the unemployment formula. Uber, amazon drivers, you-tubers, etc... There are for sure a lot of people making a living out of these, but there are also a good amount that are below minimum wage. If you are driving for Uber while trying to find employment, should that count as employed?
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      12-06-2018, 01:25 PM   #16
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This is pasted from a service I get at work. Attributed by them to Bloomberg but I’m not sure if it is a quote or paraphrase.

Tuesday’s decline was mostly blamed on the curve inversion between the 3-year and 5-year Treasury yields. This is at the shorter-end or ‘belly’ of the curve and is not the classic recession omen that includes the 2-year vs the 10-year. Bond yields reflect the markets’ perception of future rates of inflation. Higher bond yields in the future imply higher inflation in the future. Inflation is a byproduct of growth, so lower yields in the future imply slower growth. So, an inverted yield curve is a sign of future recession and/or a Fed policy mistake. Notwithstanding QE dynamics, the Fed has more control over the short-end of the yield curve than the long-end. Two-year Treasury yields are heavily influenced by expectations of Fed policy. Most recessions over the past 40-years have been arguably tied to a Fed policy mistake as higher interest rates choke demand. This occurs because policy takes time to work through the economy. Milton Friedman had a way of reducing thoughts into everyday metaphors, explaining the Fed policy mistake as the ‘fool in the shower’…the fool recognizes the shower water is too cold, so turns it higher until it ultimately scalds their skin. Bloomberg 12/6/18
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      12-06-2018, 02:18 PM   #17
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You do have a blind spot on AAPL versus others. Your fundamental analysis of AAPL isn't wrong, but the immediate need to be dismissive of the trading levels of MSFT or AMZN to justify your point of view is.

MSFT and AMZN are exceptionally well positioned from a forward looking perspective. They are the largest two cloud services providers and they are enjoying huge growth in the sector. While in the consumer AI space, MSFT clearly runs behind AMZN/Google, in the underlying tech space it is very advanced and well positioned in both AI and IoT. AMZN is not only the world's largest cloud services provider, they are also the world's largest advertising platform. Neither AMZN nor MSFT are inappropriately valued at their current trading levels with a forward outlook. 2018 projected revenues for MSFT are $124 billion and $137 billion for 2019. AMZN's are $236 billion and $280 billion respectively. The trading value respects this growth.

I am not arguing that AAPL is overvalued. I'm in the minority, Tim Cook is the best thing to happen to AAPL in decades. While he lacks the marketing sleight of hand of Steve Jobs, he's a substantially better businessman (not to mention a better human being). He is as profoundly important to AAPL as Satya Nadella has been to MSFT.

As to general gist of the thread, there is significant reason to worry about the US economy and market. The decision to stimulate a healthily growing economy will have significant negative repercussions. Further, the decision by so many companies to use the stimulus for non-stimulating purposes (eg. stock buybacks) as opposed to allowing overdue wage growth (for example) results in just more wealth concentration which does nothing to improve fiscal or economic fundamentals. I don't know what the outcome will be ... just that it won't be good.
Apple services are bigger than AWS, just FYI and are growing at 25%.

You're also paying 3X more MSFT and 10X more for AMZN's earnings. AMZN is a essentially a low margin retailer with a fantastic Web Services business, but still smaller than Apple services alone.

Apple made $60B in profit in 2018, the next most profit was Google with $22B, has an additional $100B (over 10% of their shares) buyback, $250B in cash, and trades at 12X earnings today.

I like MSFT, but it's already fully valued. Apple is being valued as a hardware company while services are growing at 25% and are already a $40B/yr business.

Apple has 300M paying subscribers, over 1.3B active devices to monetize, and are the clear leader in luxury mobile, tablet, and wearables. The numbers said people are willing to pay more for these devices while unit volume has not suffered in their most important business, iPhone. They sold more iPhones in 2018 at higher prices than 2017.

I own MSFT too, but the web services business is going to be competitive as hell between AWS, Azure, Google, and IBM. Margins will come down too.

Most recent 12 months Net Income:

Apple:$60B
Google: $22B
Amazon: $8B
Berkshire Hathaway: $27B
Microsoft $17B
Facebook: $19B
Samsung Mobile: $8B

In the end, companies have to produce earnings, so that top line growth eventually has to be turned into EPS. Apple's earnings and buyback will grow EPS at 10-12% without even growing the top lines. BTW, Apple just posted 18% revenue growth for the year...which is more than your forecasted growth for MSFT. Can they do it again? We'll see, but again, the EPS are going to grow simply because of the buyback and even modest revenue growth.

Show me a company that's going to take Apple's business over the next 5 years.

Last edited by BayMoWe335; 12-06-2018 at 02:25 PM..
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      12-06-2018, 02:27 PM   #18
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What's worrisome to me about Apple services compared to others, is that it's tied directly to the hardware. If someone switches from an iPhone or MacBook to something else they leave all those services behind as well.

Microsoft, Google and Amazon services are not tied to their hardware in the same sense.

Last edited by dsad1; 12-06-2018 at 02:39 PM..
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      12-06-2018, 02:27 PM   #19
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Quote:
Originally Posted by BayMoWe335 View Post

Show me a company that's going to take Apple's business over the next 5 years.
Facebook :-)
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      12-06-2018, 02:34 PM   #20
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Is this thread is turning into AAPL vs. the world?
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      12-06-2018, 02:41 PM   #21
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Quote:
Originally Posted by djsaad1 View Post
What's worrisome to me about Apple services compared to others, is that it's tied directly to the hardware. If someone switches from an iPhone or MacBook to something else they leave all those services behind as well.

Microsoft, Google and Amazon services are not tied to their hardware in the same sense.

Apple also charges more for their services, where others like Google make more of their money through advertising, and provide the service for "free".
Not quite true with respect to Amazon and MS revenues. AWS and Azure are significant enterprise services that generate revenue as directly from sales. Apple is simply not a player in this market. As you point out, their cloud revenue is tied to their ecosystem. While both MS and Amazon have ecosystem based offerings, the positive outlook for MSFT is not because of OneDrive, but because of enterprise.
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      12-06-2018, 02:45 PM   #22
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Costco PE is 33. Could someone explain that?
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