Office Hours #Q&A #WWDC #transcript
Recording and transcript of the June 9, 2026 Asymco One Office Hours, recorded the day after Apple's WWDC 2026 keynote. Horace Dediu shares his impressions of the event and takes questions from Asymco One subscribers.
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Why the most common measure for valuation is inadequate in an age of AI
Software and services companies like Google, Microsoft, Amazon, Meta are spending on Capital Expenditures at the rate of heavy industry manufacturing. This defies their description as "asset light" business models which depend on services, distribution or platform economics.
The problem isn't just semantic. It is that for their entire existence, these companies were valued for their profitability and measured in terms of a P/E ratio and earnings growth. The situation has changed dramatically. Their revenues are up, the earnings are up and growth is up and share prices are way up. But not their P/E ratios. Why is this?
Consider the graph below showing the (forward) P/E ratios of the Dot Com market leaders vs. the market leaders today.
This even as share prices and value concentration have risen even faster than in the Dot Com era. Seen from the P/E basis, it does not look like we are in a bubble. Earning growth is way up so the share prices are not outrageous on that basis. That is contrary to 1999 when P/E ratios in the hundreds were considered normal. Expectations of an internet fueled boom were speculative. Expectation of an AI earnings boom seem well founded.
But these companies could still be over-valued. The P/E ratio is not the full picture. It is in fact a simplifying shortcut which ignores significant pockets and omissions of value.
For this analysis I'll use a sample including some of the largest market caps in the world with two exceptions. The exceptions are Lilly (LLY), Berkshire Hathaway (BRK-B) which are on the list but not in the top 10 (though in top 15) and Saudi Aramco and Broadcom which are in the top 10 but not on the list[1].
| Company | Market Cap |
| NVDA | $5,709,746,405,376 |
| AAPL | $4,379,916,369,920 |
| GOOG | $4,811,891,146,752 |
| MSFT | $3,041,424,048,128 |
| AMZN | $2,874,514,866,176 |
| TSM | $2,166,463,135,744 |
| TSLA | $1,664,912,326,656 |
| META | $1,569,837,154,304 |
| BRK-B | $1,044,046,610,432 |
| LLY | $897,716,060,160 |
The following diagram shows the P/E ratios of the sample relative to the top 100 US market caps[2]. Note that, with one exception, the companies are not in the dark red zone with above P/E of 60. The exception is, of course, Tesla, which, at P/E of 400+ is 14x the average multiple.
Moreover, compared with the S&P 500, these P/E ratios are in-line with the median. The following graph shows the sample set with P/E ratio vs. Market Cap.
Excluding the one anomaly the relationship seen is that higher market caps roughly correspond to higher P/Es. Nvidia has a market cap over $5.7 trillion with a P/E of 48 while Meta has a market cap of $1.5 trillion and a P/E of 22.5.
Higher P/Es should also correspond to higher growth rates. The graph below shows the relationship between P/E and growth, both in the most recent quarter (MRQ) and trailing twelve months (TTM).
There is a loose relationship between P/E and TTM growth but not with last quarter's growth. The one anomaly is even more prominent as it shows negative growth with exceptional valuation. Fundamentally however the relationship between P/E and growth is weak. Companies having widely divergent growth show similar P/E ratios. Alphabet for example has seen its P/E ratio in the 20s with growth in the 80s TTM and 50s MRQ.
This might sound familiar. From 2008 to 2020 Apple was trading at a P/E ratio in the teens and low 20s while growing as fast as 80%. The logic was captured by my analogy of the goose that lays the golden eggs. Apple was able to create extraordinary products but the market considered such hits fleeting. It valued consistency over heroism. Getting on base vs. home runs. And so the P/E began to rise only once Services became more prominent. Regardless of how foreseeable this pattern was, it took a decade and is still ongoing for the pricing to catch up.
But the situation with AI companies (that is, all the big tech companies but Apple) is that their earnings today are somewhat an illusion.
An old maxim that says "earnings are an opinion while cash flow is a fact.[3]"
This is because Net income can be manipulated by accounting abstractions, whereas cash flow is based on bank transactions.
To wit: Net income (earnings) is calculated using accrual accounting, which relies heavily on judgment calls rather than bank balances. Companies recognize revenues the moment a contract is signed, even if the cash won't be collected for months. Or they can dial in a delay as they desire.
Because of varying accounting policies, two identical companies with the exact same physical business can report vastly different earnings figures.
Cash flow is objective and simply tracks the actual movement of money in and out of the business. Real dollars either enter the bank account or they don't. A company can look highly profitable on an income statement but still go bankrupt if its cash is trapped in unpaid invoices or unsold inventory.
Finally, cash flow can be strongly negative while earnings are strongly positive. This is because investment in capital equipment does not appear in the income statement.
Therefore true economic value is determined by the cash a company can actually distribute or reinvest rather than how it declares profitability based on accounting abstractions.
AI companies are not necessarily hiding behind suspect earnings but their extraordinary capital expenditures are draining their cash and thus what investors have access to.
Earnings seem to be soaring so the ratio P/E suggests a modest valuation. This is based on opinion or at least incompleteness.
We should look at a better indicator. It's the EV/FCF ratio. We will look at this next.
Horace speaks carefully and with knowledge about opinions, facts and fantasies, and shares what he thinks John Ternus’s most important job is.
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Office Hours #2026FQ2 #presentation #transcript · 2 comments
A transcript of the May 1, 2026 Asymco One Office Hours, recorded one day after Apple's Fiscal Q2 2026 earnings call. Horace Dediu presents his analysis of the quarter and takes questions from Asymco One subscribers. Hosted by Horace Dediu and Farshad Nayeri.
Horace Dediu: So I'll do a short presentation, and then we're going to open it up for questions. We are speaking approximately one day after Fiscal Second Quarter 2026 earnings call. Let's dig into it and see if we can understand it even better.
First, I think that there was a comfortable beat from already a highly elevated expectation.
So we had a range of estimates— I collected those from Yahoo and TipRanks, each one had about 30 [analysts], probably a lot of overlap between them. So we had a range of about 105 to 115 in terms of revenues in billion, and then we had EPS in a range of about 1.6 to about 2.15.
And not only did it beat the consensus, but also you can see what happened a year earlier, which is the circle at the bottom of the graph. So the beat was from already a pretty high growth rate expected from the year before.
So we have a measure of how each of us, myself included, performed relative to the actual results.
I was about 1.8% under revenues delivered, and 1.6% on EPS. And then you can see red is Yahoo and blue is TipRanks.
So speaking for myself, I was perhaps a little bit too conservative on my revenues, and I was a little bit more accurate, relatively speaking, on EPS. Roughly speaking, again, I think these are not big errors, 1% to 2%. Worst case, 3% on the consensus basis.
Now, on the segments, these are the actual growth that we ended up with, iPhone almost 22%, 16% on services, 8% on the iPad, which is impressive. 5.7 on the Mac, we'll talk about that a little bit, and 5% on wearables and growth.
Segment level, again, the worst case, you're looking at an 8% overestimation on the Mac. The Mac— I think a lot of people, once they saw the Neo come out, once they heard about the Mac mini stockouts, when they heard about the Claude bots, you know, everybody buying up all these Macs, there was an expectation of a big boom in the Mac, but those all happened fairly late in the quarter. My expectation was a little bit over, but not as much. I was off about 3% on that estimate. So although we saw 5.7% growth, some people expected double digits. Also, the pros had the same fault there.
Overall, though, I think these are pretty impressive. I didn't break out the geographic segments. China grew extremely well. Rest of the world, that grew very well. Management also pointed out that they're doing very well in developing markets. So overall, regionally, there were some extraordinary performances. But as we see here, just the iPhone was incredible, 22%. Very similar to performance in the previous holiday quarter, where, again, unprecedented growth, or at least in the near history of the product.
And we'll get into some reasoning why that is. People talk about super cycles, people talk about the assumption that we have these giant surges once in a while. Well, here's how to look at it.
There are two graphs here. The bottom graph shows in green the net sales, but trailing 12 months, so it's smoothed out, so we don't see the spikes on the holidays. That's the green line. Above that, we have the EPS line. Now you'll see how they tracked very similarly for a while, and then they began to diverge. That occurred around COVID. It also occurred during the surge in services, especially subscriptions and services. But still, there's a similar pulse, if you will, a cyclicality to it.
I mean, part of that has to do with the introduction of a new form factor. This has been true all the way back since 2012. When a new iPhone comes, especially a new, distinctive-looking iPhone, people will go out, especially in China, buy it for showing off that they have the latest, which there's nothing wrong with that. But then the second year usually is not the same, the phone is not new, it's the same form factor. That has to do a lot with tooling. That's a long, old story, that the tooling is depreciated on a two-year schedule, so you're going to produce roughly the same look a couple of years in a row, and then by the next cycle, you'll see people upgrading or replacing their older phones. So you're going to have this— I guess what they used to call a super cycle.
And you see it also in the upper graph, where I try to separate out of sales just the phones. Now this is an estimate because we have no unit sales for the phones since 2018, so some of that is an estimate. But you'll see again, once you smooth out the cyclicality, you'll see these surges once in a while. Now, again, this is a valid observation, but I don't think it's the main driver. The oscillation isn't huge, it might be significant, but it's a blend of many things.
The bottom graph is particularly interesting. The gray areas are when the stock price fell. And the red line represents the derivative of EPS. And you'll see how, when that is about to dip, there's usually a stock price sale going on. I wouldn't say it's predictive, but it's an interesting pattern to go through.
So what's happening now? You'll see from the iPhone, there's a new surge happening. Now, when Tim has been asked this question, he says that, well, the iPhone 17's really nice, people really love it, and that's a good answer, but the fact is, it's a distinctive-looking product. Some say it's the orange color, but it's certainly attractive. So we're seeing this pattern, a nice surge.
We'll get into the guidance in a minute, and that actually demonstrates that we're in some kind of an acceleration. But here's the thing, underneath all that, services is just absolutely steady growth, compound growth, and as a result, it just lifts the whole story.
Here, services is at the bottom. Normally, in a graph like this, you want to put the oldest products at the bottom and the newer ones at the top, but I wanted to highlight the fact that services is foundational, in the sense of showing how it holds up everything else.
Most people put it the other way, they say the iPhone holds everything up, but services is looking more and more to be the thing that keeps people in the ecosystem. There's a lot of value there. There's a lot of things people depend on there, and I think it's one of the reasons people don't switch. So it's another one of these stories that people aren't appreciating enough. It's been years and years of pounding the table on services, but here you see it, just how important it is. It's the tide that lifts all the boats, and the boats being all the products.
So let's now talk a little bit about margins. Unbelievable, unbelievable margins. We just hit almost 50% on gross margins. Gross margin here is the blue line. And that's composed of two subcategories. We have services in red at the top, and we have products with the purple triangles.
And although products margins are exceptional— they're right around 40%— those services, again, are pulling the whole average up, and you can see that bend in the curve in the blue line, where we were very steady around 40%, but as services took more and more; it just pulled the whole curve up.
And we also see here operating and net margins, which also are going up, naturally. There is a little bit more operating expense. We'll get into that, which maybe decreases the slope of the bottom line. But this gross margin is absolutely incredible. We just haven't seen anything like this since 2010-11. We saw that surge back then, and then it sort of leveled out, and everybody was happy with 40%, and now we're flirting with 50. I just cannot believe it.
Just one more thing. I remember being an analyst decades ago, when I was looking at different companies in hardware and software, in phones and computers and so on, and everybody was really impressed by Microsoft, because Microsoft, had an 80% gross margin, because there was very little cost of sales. That's exceptional. An 80% margin business is a money printing machine. And everybody was impressed and jealous of Microsoft that they could pull that off. Of course, Microsoft, a software company, is going to have extraordinary margins, right?
And so for a phonemaker like Nokia, there was something to be jealous of. And here we are with Apple services, a significant component on the business, approaching also almost 80% right now. And it's still rising. I just can't get over how impressive this is.
A little bit about the difference between gross and net— you have to take out the operational expenses, and this is what we have here. It's interesting what's happened. Obviously, you see R&D overtaking on the absolute basis. So R&D overtook SG&A already in 2021. And now it's just [going] almost vertical.
By reading a little bit the guidance, I think it's going to taper a bit into the next quarter. But what we see is a significant R&D increase, also as a percent of sales, which you're seeing below in the graph below, but in a stacked fashion. In that sense, the two of them together are now approaching— haven't yet reached— a percentage of sales that was in evidence around 2007 and 8, when the iPhone was just emerging. But you'll see back then, R&D was tiny, SG&A was huge as a percent of sales. So much so that R&D—this is during Steve Jobs era, R&D was like 2% of sales. And now it's approaching 8%, which is extraordinary. Because that's an engineering company that's doing breakthrough work.
And that's something that Apple's not recognized for doing. There's a negative side of spending a lot on R&D. The positive, though, is that Apple is doing a lot of fundamental research now. This isn't fixing products, this isn't updating OS. This is engineering that is really driving what might be considered breakthrough. And that's something— and I've said this to the media when interviewed about Ternus and the succession— I said, the new CEO will need to be— this is before he was announced— I said [the CEO] would need to be someone who is acceptable to engineering, because Apple is an engineering company today. Fundamentally, culturally, operationally, it's an engineering company, and it is being now led by an engineer.
Steve Jobs was not an engineer. And none of the other CEOs were engineers. Tim Cook was an operations manager. He was excellent in a fundamental part of the business. And that is acceptable to engineers, culturally speaking. But the thing is that John is an engineer's engineer. He understands the culture of engineering and will understand how to motivate and retain talent, as well as to allocate capital effectively, not wasting it on pipe dreams. Engineers have a tendency to try to chase dreams, by the way, so you got to be harsh sometimes to shut things down. So, keep an eye on the R&D— it's a great story.
However overdoing it can be a problem. There are downsides to an engineering-led company where, again, it turns into kind of an engineering welfare state. Engineers tend to get projects and do a lot of navel-gazing, which needs to be managed carefully.
Now, let's just touch on ACTIVE. Active is the number of users, the fundamental measure of the value of the company. It's not counting iPhones. It's counting users, and these are the comments from management, just so we capture them. They come every quarter. Sometimes some products are mentioned, sometimes they're not.
So here's what we have exactly on the topic. Record upgraders and customers new to the Mac. They mentioned that Mac lifespans have been long, which is good and bad. They talk about the iPad, half the customers being— over half— new to the product. Same with the Apple Watch, this has been going on for a while.
So this is going to be important when we measure installed base, because if we see every quarter an estimate for the number of watches, or Macs, or iPads, you just take half of that and allocate it to the installed base, and the other half is growth of the installed base. So there's an interesting way to measure that, and I've been applying it. We're going to keep an eye on this.
And finally, there was a mention with respect to India during an answer to the question. The citation is that the iPhone, Mac, iPad, watch, all of these have a majority of customers that are new to the product in India. As you would expect, part of the developing market story. But this drum is still getting beaten. And that's a positive. Always want to look forward to that every quarter.
So let's jump in now to what I thought was the most unexpected comment during the call. I've pasted in here exact, verbatim the comments from the CFO. I need to point out a few things here, and I've highlighted these things in bold.
One is the dividend. The dividend number is 3.8. Last quarter was 3.9, so that's not a surprise. However, open market purchases were only $11 billion. Now, that is represented in the graph by the buyback, and that is this mustard color. And you'll notice it is extremely low. The previous quarter, we were over 25 on buyback, so we're less than half that. This is an anomaly. You'll see that it does not match the rest of the graph at all.
The blue area is dividends. The reddish area is net share repurchases, or settlements. And there's a pattern to both. Dividends has been growing in a predictable fashion, very steady. Buybacks have been somewhat steady, but up and down a little bit. During the last few periods, we've seen something unprecedented.
Now, you'll see that the 11 from last quarter was offset by a much higher number the previous quarter, but on balance, we're still down. And there's also these comments that say that they are abandoning the net cash neutral position. And I'm wondering if it's already started, because this $11 billion caught me by surprise.
I've highlighted that "our repurchase activity at any time can be affected by a number of factors that we take into account." So this was essentially explaining why sometimes there's a difference in the amount of purchases, right? And then in the middle of that commentary, he says, "as you're aware, we recently announced a CEO transition." Why does that comment fit in the middle of a paragraph, talking about the general theme?
I read this as it suggests that already the CEO choice is deciding how much to allocate to capital returns. And it appears— and again, I could be wrong— but it appears that John is probably against the idea of huge returns to shareholders in capital form. So keep an eye on this. This was, I found, very, very strange and out of character in a way. Very out of character of a Tim Cook presentation. I'm not judging it, I'm just pointing out that it isn't normal.
So here's the bottom line. This is the graph representing what's happening with the entire cash position and return of capital. The debt has decreased slightly, and it has been decreasing. And that's a good thing. As interest rates go up, you don't want to hold debt. A lot of that is fixed rate, but they're not taking on more. It seems like they're paying it down.
Net cash, which is the blue dotted line, has now been increasing two quarters in a row. Now, it's increased in the past, but never for long. It's had only one tick, during the holiday period. Here, where we're seeing two ticks— holiday and the quarter after.
Now, if you'll notice here, I'm going to try to zoom in. Those red lines represent what I would say were the trajectories to get to net cash zero. So that blue line, since they announced it, they kept missing the target. You would see that, another year goes by, and there's a notch up. Overall, the trend is down, but they haven't kept that path down all the way to zero. And that is now completely abandoned.
Again, we'll have to figure out why. The buyback, as I mentioned, halved— at least more than halved— to 11. Net cash zero abandoned, $100 billion net cash reduction. You'll see that this blue dot line has gone down by about half. It was down even further than that until it came back a bit. So that is going from about $160 billion net cash to the current $62 billion, which is why we get to 100 reduction. And $1 trillion overall return, which is, again, something they mentioned. In fact, they're at $1.085 trillion. And still $100 billion will be allocated further. Whether they actually spend it is another matter, but that's been approved.
So now— is this good news or bad news? I don't think it matters. I think at the end of the day, the value of the company doesn't change because of this. The value might be captured in the share price, or it might be captured as a percentage of the company that has been increasing.
In fact, let me just pop into the next slide. What does this mean? Are we never going to reach what I call the halving? Well, we were at the maximum 26.5 billion shares. And now we've reduced that to about 14.6. Half would be 13.2. So we're still going down. But there's 1.4 billion shares to go before it's half of what the max was. Now, this is an arbitrary figure. I just thought it was an interesting target to have. And as you can see, it's getting asymptotic as the price goes up. It should be harder and harder to get there. But we have $100 billion allocated. $260 billion at the current share price would need to be spent to get to half. But probably we're not going to get there. I really don't— if I were a betting man, I would say we're probably going to see this taper.
Let's look a little bit at guidance. This is based on what management already communicated. So if you put in the numbers they gave us, you will get revenue growth of 16%, coming at about— well, they guided 14 to 17, so I'm estimating 16 conservatively right now. That gets you to $108.7 billion. If you put in the other numbers— the margin, the OI&E and the tax— and do something about this share reduction. (We're still going to probably see a share reduction.) We're going to look at EPS 1.92. Which is another 22% growth. This is what we had last quarter as well.
I'm putting gross margin at the top of the guidance. [Last quarter] they went over. They guided high, and even so they went over, so I'm going to assume they're going to still hit towards the upper end of the range. I'm exactly at the upper end of that range.
If those things are true, the iPhone almost necessarily has to grow about 19%. Now, here, I'm dialing the Mac way up to 18% growth, because I do think they're going to get a lot more Mac Neos into customers' hands. Now, that's a lower price point, but it will drive sales. So yeah, I could be a little bit high on this. If I am, then iPhone needs to go a little bit higher because I still think they're going to get the revenue there.
They did warn that iPad is facing a tough comp, so I'm putting iPad down 3%. Wearables and home, 4%. It was 5% last time, so maybe consistency there. And Services, just the same as before, 16%, could come in a little bit less. But if it does, again, it's going to be put into something else like the iPhone.
So overall revenue growth, I think 16% is very much being telegraphed. And as I always say, they already have April on their books. They're communicating exactly at the end of April. They're not going to lie to us and withhold data from April. They know about a third [of the quarter] already, so that's why this guidance is so useful.
And, as you saw with my error analysis, nowadays, people's estimates are very close. There's a lot of consistency. We're not off more than a couple percentage from each other. That's just because they're so accurate on their guidance.
And speaking of analysts, one more graph. This is just some of the latest price targets. I'm just trying to bring everything together that came out today. This is all very brand new. A lot of targets moved up. Not that it's all that important, but people are getting more and more excited. Almost all the targets from anybody who has a positive— effectively a buy rating— is now above $310 as a target. There's two who are negative, that are at 270 and below. This is Barclays and Rosenblatt. And then there's a few which have no ratings. So they're typically neutral.
But overall, all these numbers are higher than they used to be. Now, again, I don't use that very much, but it's worth keeping an eye on things just to get a sense of how the sentiment is out there. And it looks like the stock is responding positively today. Not by much— 3% or so, last I checked. But that's the story today.
So given that, this is my first take on the quarter. Love to take questions.
-- End of Presentation --
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Below are Horace's live commentary during the release of Apple FQ2 2026 Earnings, lightly edited. For an in-depth look, and a discussion of what turned out to be a record-breaking quarter, join uss at Asymco Office Hours: Apple Live Q&A.
Transcript: Friday 30 April 2026, 4:30pm-6pm EST | asymco@mastodon
Apple will release earnings at 4:30PM ET and conference call begins half hour later and lasts for one hour. I will try to make some comments as I process the news. This might be the 75th Apple conference call I listen to.
My estimates: EPS $1.98 Rev. $109.2b iPhone Rev 55.716684 Mac Rev 8.640 iPad Rev 6.9552 Wearables & Home Rev 7.522 Services Rev 30.3753
iPhone revenue came in at $56.99 billion. My estimate was $55.71b.
Here is a graph of the expectations vs. actual Revenue results.
iPhone revenues grew 22%. Extraordinary. The growth barely slowed from 23% the previous quarter.
Mac revenue growth was 6%. Slightly less than I expected.
Revenues were up 17%, earnings per share were up 22%.
Best March quarter ever.
The board of directors has declared a cash dividend of $0.27 per share of the, an increase of 4 percent. Repurchase program authorized for up to $100 billion for the next 12 months. No surprises here.
Greater China growth was 28%.
Apple shares are down 0.6% after-hours. Normal drop when company beats on the top and bottom. The big drop comes when the CFO talks guidance.
John Ternus will join the call for a few remarks.
Gross margin came in at a record high of 49.3%. This is three months after the great memory panic of 2026 was declared.
Shares fall 0.81% after John Ternus remarks.
Apple reports double digit growth in every emerging market.
Mention of Mac Neo leads to more drops in the share price as the pain of share growth sinks in. Now down 1% after hours.
iPhones went to the moon, stock not mooning.
“Our strong business performance during the March quarter generated over $28 billion in operating cash flow and drove new March quarter records for both operating cash flow and EPS,” The fact that Apple did not turn over this cash flow t...
5% in Wearables and Home. Modest growth is shameful growth. Compounding shompounding.
Apple has 6 stores in India. So much more to do there.
Supply constraints mean that the growth could have been higher —CFO.
Active iPhone install base grew to all-time high. (No surprise). Customer satisfaction was 99% for iPhone 17 in the US.
Customer satisfaction for Mac was 97%.
Half of customers buying an iPad are new to the product. Most of these new customers are in emerging markets.
Customer sat for iPad at 98%.
Tap to pay (Apple Pay) now in 50 markets.
Net cash was $62 billion. No longer placing net cash neutral as a target!!!! OMG OMG.
June Q guidance: 14% to 17% growth. Shares recovered to +1.35%.
Margin guidance: 47.5% to 48.5%. Despite the great memory panic of 2026 being in full effect.
Shocked, shocked, shocked that CFO remarks did not crash the stock.
Several months to reach Mac supply demand balance. Neo and Studio constrained.
Net cash neutrality question and comments. Returned over $1 trillion so far. Another $100b allocated so they are still committed to that.
Shares now +4% in AH but not at record high.
Margins synopsis.
Tim says they did see higher memory costs. For the June quarter they expect significant higher memory costs and more beyond that. Still, margins are brilliant.
My estimates for unit shipments for Products.
Look at that R&D.
Any tariff refunds will be re-invested in US production or operations (beyond existing commitments.) —Tim the Enchanter.
India: low share is an opportunity; large middle class growing. I see no reason why it's not an equal opportunity to that of China.
That' a wrap. See you during the Office Hours tomorrow.
Asymco Bulletin is a digest of all the work we have published for the week ending Apr 12, 2026.
Much more was said of Jobs’ departure signaling the end of Apple than of Gates’ departure signaling the end of Microsoft. And much more was celebrated of Apple 50 than Microsoft 50. Why is that?
If you were to structure an experiment to determine the influence of processes and personalities on the outcomes of a company, you would be hard pressed to find a better pair to study. Apple and Microsoft were founded almost at the same time, due to the same enabling technologies (microprocessors) and led by two iconoclastic founders of the same age acting out of similar impulses.
The divergences were that one concentrated on software while the other on hardware. But rather than pairing up in a match made in heaven, both tried to outmaneuver the other in order to avoid dependency. →
Cash flow is a fact, earnings are an opinion and share price is a dream.
A company’s total worth is the number of outstanding shares multiplied by their value. This product is called the market capitalization or Market Cap.
That’s a simplification. If you want to be more accurate, you should take the Market Cap and net out cash and debt–these are not part of the future flows of cash that can benefit shareholders.
More precisely, there is another measure called the Enterprise Value (EV) which is the total price tag of a company, representing what it would cost to buy the entire business and pay off its debts. EV = Market Cap + Total Debt + Preferred Stock + Minority Interest – Cash and Cash Equivalents.
This is the precise and complete measure of the firm’s value but we use the shortcut of Market Cap since In most cases the Preferred stock and minority interest are negligible and if cash equals debt then the result is EV =~ Market Cap. it’s easier to calculate anyways as the shares outstanding and share price are easily available. Not so for EV. →
A tale of two Apples
What are the odds of it surviving another year, ten years, 50 years?
Companies don’t last long. A recent study that analyzed thousands of European firms yielded a corporate life expectancy figure of 12.5 years. The Boston Consulting Group analyzed the entry, growth, and exit dates of 35,000 publicly listed companies and determined that one in ten of all public companies fail each year, a fourfold increase since 1965.
As I illustrated many years ago in a talk titled “The Unfortunate 500” most companies die not long after adolescence. Of the Fortune 500 1955-1960 cohort, the 81 companies which joined the index in those years, only 7 remain there today. One third of the corporations on the 1970 Fortune 500 list were no longer in existence thirteen years later. Broadly speaking, as a population, large companies that make it to the Fortune 500 listing have life expectancy within that group of 17 years. →
Redundant or Post-PC?
Today marks the 16th anniversary of when Apple released the first-generation iPad.
To many, including Alan Kay, the tablet form factor makes much more sense than the PC form factor. It’s more approachable, more intuitive and certainly smaller and more portable. As the graph shows, quickly after launch, the iPad overtook sales of the Mac.
The problem arose that whereas the iPad was smaller, the iPhone what smaller still–so much so that users would take phones with them everywhere. At the same time, the “PC” shrank as well so that many notebook (laptop) computers became thin, light and had day-long battery life. The Mac at least became no bigger a burden to carry than an iPad.
So the iPad was stuck in the middle between an iPhone, that did more and more, and a Mac that was very portable. At this point many said that the iPad was a dead end form factor. →
ON September 3, 1821, 37 years after James Watt invented the concept of horsepower and started charging £5/horsepower/year for the use of his steam engine, the first demonstration of the production of a mechanical force by the interaction of an electric current and a magnetic field was given by Michael Faraday in the basement of the Royal Institution in London.
1820 is, in many chronicles, noted as beginning of the industrial revolution. It marked the end of 50 years of war, whose conclusion unleashed pent-up demand. That demand was served by relatively free trade, guaranteed by British naval power, coupled with property rights and financial instruments which allowed inventions of the previous century to finally be harnessed for commercial gain. The steam engine is the canonical invention of the era and its implementation as a source of power for factories, shipping, rail and machinery is legend.
Not usually noted as coincidental to this period is the electric motor. Yet not long after Faraday’s 1821 demonstration in London, the first DC electric motor capable of turning machinery was invented by William Sturgeon. In 1832 he built on Faraday’s electromagnet by incorporating a commutator which oscillated the direction of current to ensure continuous rotation.
The Motley Fool asks: Where Will Apple Stock Be in 5 Years? → Not reading this article is probably a wise decision. Shares could perform in line with the S&P 500’s long-term average Investors can follow a straightforward exercise to try and figure out where Apple’s stock price will be in late March 2031. It’s important to consider both the valuation and profit gains. We just released a […] →
Apple’s services continue to see increased engagement, spending → The survey of 3,500 smartphone users reveals a significant rise in average monthly spend on Apple services to $13, driven by increased adoption of premium offerings like AppleCare/One, Apple TV+, and Apple Music, with notable shifts towards AI features despite muted upgrade intent, though potential US bias may affect overall accuracy. →
KeyBanc maintains a lack of clarity of thought → The analyst's note on Apple is overly cryptic and lacks clarity, making it difficult to assess its validity or relevance. →
iPhone sales continue to surge into February – Bernstein → February saw robust iPhone sales driven by the iPhone 17 line, with global unit sales up 26% and ASP climbing 6.9%, yet January-February revenue estimates oddly lag behind projections, sparking confusion. →
Morgan Stanley has a stark message for investors in Apple → Morgan Stanley's survey indicates strong potential for Apple stock, highlighting record iPhone upgrade intentions, especially in China, improved switching rates, and significant interest in a future foldable iPhone. These factors support robust FY26 shipment forecasts and suggest a possible revenue boost from new products. Despite some concerns about declining willingness to pay for AI features, Morgan Stanley maintains an optimistic outlook with a $315 price target. The article criticizes TheStreet's editorial approach for misrepresenting the positive survey findings as negative news about Apple. →
Mac mini and Mac Studio orders booming → Apple's Mac sales are surging due to the M5 chips' enhanced AI capabilities, outpacing other platforms and driving demand despite current shipping delays. →
Gartner adds their Mac Q1 estimate to the pile → In Q1 2026, Apple's Mac sales surged impressively by 10.7% to 12.7% year-over-year, driven by the MacBook Neo's appeal, securing a 10.6% global market share and maintaining fourth place among PC vendors, amidst a 4% rise in overall PC shipments. →
Asymco Office Hours Live Q&A with Horace Dediu & Gene Munster took place on April 8, 2026 → Topic dicsussed: Apple Topics discussed:
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A lively discsussion of Apple topics such as:
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Cash flow is a fact, earnings are an opinion and share price is a dream.
A company's total worth is the number of outstanding shares multiplied by their value. This product is called the market capitalization or Market Cap.
That's a simplification. If you want to be more accurate, you should take the Market Cap and net out cash and debt--these are not part of the future flows of cash that can benefit shareholders.
More precisely, there is another measure called the Enterprise Value (EV) which is the total price tag of a company, representing what it would cost to buy the entire business and pay off its debts. EV = Market Cap + Total Debt + Preferred Stock + Minority Interest - Cash and Cash Equivalents.
This is the precise and complete measure of the firm's value but we use the shortcut of Market Cap since In most cases the Preferred stock and minority interest are negligible and if cash equals debt then the result is EV =~ Market Cap. it's easier to calculate anyways as the shares outstanding and share price are easily available. Not so for EV.
To get a sense of how much you're paying for the company it makes sense to divide the Market Cap by the company's Earnings so you get an idea of how many years it will take to get back your investment. When dividing both Market Cap and Earnings by the number of shares it becomes the famous P/E ratio or Price per share / Earnings per share.
But if you want to be fully precise, instead of using Market Cap you should use Enterprise Value. In that case the denominator should be Free Cash Flow or FCF[1]. The ratio becomes EV/FCF. Free Cash Flow is a better measure than earnings because it takes into consideration depreciation, change in working capital and capital expenditures. It measures the actual cash a company generates after paying for its operating and capital expenditures.
EV/FCF takes into consideration unusual situations such as huge amounts of cash or debt or capital expenditures which removes shareholder access to what the company "earns" on paper. This why the adage of "earnings are an opinion but cash flow is a fact" exists.
I used EV/FCF years ago to value Apple because at a time when it held huge amounts of cash. This was before it began aggressively reducing its cash through its capital return program. The P/E ratio at the time was very low but excluding the cash, it was even lower. It was a huge red flag indicating that the company was being priced for liquidation, or as some analyst put it, priced like a steel mill going out of business. If at that time you did not believe that its demise was imminent you would have surely been richly rewarded.
Today the anomaly that throws the P/E off is not Cash but CapEx. And it's not for Apple but for the other mega caps or AI "hyper scalers". Without worrying who is or isn't in the "Magnificent 7" I compiled the largest 10 market capitalization companies and looked at their P/E and EV/FCF ratios. At time of writing:
| Company | Market Cap | P/E Ratio | EV/FCF |
| NVDA | $4,014,456,963,072 | 33.6 | 44.4 |
| AAPL | $3,624,949,514,240 | 31.3 | 30.3 |
| GOOG | $3,304,174,911,488 | 25.2 | 44.3 |
| MSFT | $2,667,926,257,664 | 22.5 | 35.0 |
| AMZN | $2,157,182,320,640 | 28.0 | 297.0 |
| TSM | $1,641,528,688,640 | 30.6 | 50.0 |
| TSLA | $1,333,163,982,848 | 332.0 | 225.0 |
| META | $1,356,802,949,120 | 22.8 | 32.6 |
| BRK-B | $1,023,780,323,328 | 15.3 | 44.1 |
| LLY | $793,550,454,784 | 38.6 | 142.3 |
As recently as six months ago, there was a lot of talk about an AI bubble. Back then I looked at the data then and by looking at the P/E ratios convinced myself that the valuations were not "bubble" level. They were in the mid-thirties. These were not historical high especially when considering the growth these companies were experiencing (over 30%). Since then prices have come down significantly.
This is as the CapEx elephant in the room has been making itself known and there is renewed alarm at the scale of capital spending. This is reflected in the EV/FCF number but not in the P/E number.
The table above shows how much more elevated the EV/FCF ratio is relative to P/E for many of the companies. This "truer" measure of what you are paying as a share buyer is now reflecting in reduced share price and hence reduced P/E.
Of course, this is not true for Apple. Apple's P/E ratio and EV/FCF are nearly identical. To see this more clearly I put together these graphs.
The graph shows the P/E vs. EV/FCF for the companies in the table. The graphs are the same data but the one on the right is zoomed in on the lower left corner (note the red squares).
The reason for the zoom is that there are three outliers. Tesla, Amazon and Lilly. Tesla has absurd valuation on both P/E (300 to 400 range in last 6 months) and EV/FCF while Amazon has an outrageous EV/FCF value due to abnormal capital spending. Basically, Tesla has negligible earnings (and negative growth) while holding astronomical share price and Amazon is spending far above its median on CapEx. Amazon's 10-year EV/FCF is much lower, at approximately 55.
But let's ignore the outliers and concentrate on the other seven in the cluster. These are below 50 P/E and 50 EV/FCF thresholds.
Note that I drew a diagonal line representing the equation of P/E = EV/FCF. This should, under normal circumstances, hold for most stocks. Just like Market Cap should roughly equal Enterprise Value so Earnings should equal Free Cash Flow.
Most companies should not stray too far from this line. But what we are seeing, with the notable exception of Apple, is that most tech companies have cash flow far below earnings. This is again due to the CapEx elephant.
The argument goes that this is a temporary situation with that capital being wisely deployed for returns from AI. Presumably, these companies will swing to the other side of the line, where cash flows will exceed earnings, compensating for the capex that was denied to the shareholders.
This is where the old adage comes into play: Earnings are an opinion but cash flow is a fact. I added to that "and share price is a dream". Take the free cash flow and multiply it by a "dream" and you get the price the market sets. This dream is the multiple.
What makes the AI "bubble" interesting is how it's not fueled by debt[2] but by cash flow. Companies are turning over large portions (almost all and sometimes more) of their cash flows to investing in the dream of AI profits. All but one, of course.
There is something obviously contrarian in Apple's strategy. Perhaps it's not Apple that is odd but rather there is groupthink on behalf of the others. The question of who's right will rest on whether it turns out that AI is going to commoditize quickly or perhaps never, whether AI turns out to be modular or integrated, whether AI exhibits disruptive or sustaining competitive responses, whether it's an infrastructure subject to regulatory corrosion or whether it will migrate to the edge and iterate freely, whether it's a new experience or simply better existing experiences, whether it creates new markets or just makes existing ones more efficient.
These are not new questions. They have been applied to all software and hardware innovations of the last 40 years. We have a lot of history to inform us.
Join me as we learn.
Shameful.
"I sold it too soon. But, I bought it even sooner, so," Buffett told CNBC's Becky Quick in an interview Tuesday on "Squawk Box" .
Apple remains Berkshire Hathaway's largest holding even after the conglomerate trimmed its stake to $61.96 billion at the end of last year, according to InsiderScore.
However, Buffett said Tuesday that he would continue to add to the position if it gets cheaper. He said the iPhone maker is not yet attractive even after falling more than 14% off its recent high, and dropping more than 6% this month. That's amid turmoil in the broader market, with both the Dow Jones Industrial Average and the Nasdaq Composite in a correction.
"I'm very happy to have it be our largest holding," Buffett said. "I was not happy to have it be as large as almost everything else combined."
"It's not impossible that Apple would get to a price, we would buy a lot of it," he added. "But not in this market."
Buffett said the firm has made more than $100 billion in the stock pretax, and was favorable in his comments regarding Tim Cook's leadership of the firm over Steve Jobs.
"Tim Cook has done better with the hand. Steve Jobs — he couldn't have done what Steve Jobs did — but Steve Jobs handed him a hand that Steve would not have done as well," Buffett said.
"Tim was a fantastic manager, and he's a good guy, and somehow he gets along with everybody in the world," he added. "That's a technique I wouldn't have, for example, certainly my partner, Charlie Munger, wouldn't have had it."
Source: CNBC
NB: Warren Buffett said he sold Apple stock too soon but clarified he has no actual regrets. Buffett said it is better than any business Berkshire owns outright including its railroad, which is worth more in dollar terms but earns nowhere near the return on capital that Apple does. He also said his railroad might last longer than Apple.
He said if Apple ever got cheap enough, he would buy a lot more of it. He owned a lot more of it priced a lot lower than what he would have to buy it back at. Complete nonsense.
Also Warren Buffett:
Quote: "Our favorite holding period is forever". Action: Trade Apple to realize gain.
Quote: "Price is what you pay, value is what you get". Action: Trade Apple to make $100 billion pretax, mention that price determines decision.
Quote: "At a healthy business, cash is sometimes thought of as something to be minimized as an unproductive asset that acts as a drag on such markers as return on equity" Action: Sell Apple and other equities and move $300 billion into unproductive cash.
Quote: "Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to ‘time’ market movements..." Action: time decision to trade Apple for cash on the basis of price, tax and market conditions.
Quote: Apple is "probably the best business I know in the world," "we like to own businesses not stocks". Action: Convert Apple ownership into cash.
Quote: "I'd love to own 100 percent" of Apple. Action: Sell 60% of Apple holdings.
Quote: "I don't think of Apple as a stock. I think of it as our third business" Action: Sell Apple, move into unproductive asset cash.
Quote: "I sold Apple too soon". Action: Also say that you don't regret it.
Actions speak louder than words. The results will be felt by his shareholders.
An allergy to centralized computing
Based on Tweets by MilkRoadAI
The 3rd? most valuable company on Earth watched as its rivals lit $650 billion on fire and did nothing. The biggest cash bonfire in history, by far, eagerly fed by all the usual suspects but one.
It's either the dumbest or the most brilliant move in corporate history.
Apple used to be the biggest capex spender, mainly because it paid for most of the property plant and equipment in the factories that made its phones and computers. The so-called tooling or equipment spending plus its leased store renovations and some data centers were costs no other tech giants had and so Apple was an outlier. It was, as I wrote at the time, equivalent to buying a few aircraft carriers every year.
But that all changed with AI. Amazon is spending $200 billion this year on AI data centers. Google, $185 billion. Microsoft, $114 billion. Meta, $135 billion. Combined: $650 billion. [Not including OpenAI, Anthropic and SpaceX/XAI.] That is like buying the US Navy every year. And yet Apple's capital budget is still a modest $14 billion, oscillating with new hardware tooling cycles.
Apple is refusing to transfer its cash flow to Nvidia. Curiously, it believes that its cash flow belongs to its shareholders, not to Nvidia's.
The hyperscalers are now spending 94% of their operating cash flows on AI infrastructure. Amazon is projected to go negative free cash flow this year with as much as $28 billion in the red. Alphabet's free cash flow is expected to collapse 90% from $73 billion to $8 billion. These companies used to be the greatest cash machines ever built. Now they're borrowing money to keep the data center lights on.
The Big Five raised $121 billion in bonds in 2025 alone. Morgan Stanley projects $1.5 trillion in tech debt over the coming years. For the first time in history, hyperscalers hold more debt than cash. Perhaps this is why their P/E ratios slumped from mid thirties to mid twenties.
And what are they getting for that $650 billion? AI services generate roughly $35 billion in total revenue or 5% of what's being spent on infrastructure. There are dreams of more of course, but the business models of AI have yet to resonate, especially for consumers.
Now here is where Apple's bet becomes genius. AI models are commoditizing faster than anyone predicted. Software and hardware both have tendencies to commodify. Protections exist but they have to do with integration and distribution. DeepSeek built a model for $6 million that matches systems costing $100 million. Open source models now power 80% of startups seeking VC funding. The moat these companies are spending hundreds of billions to build is evaporating.
Apple understood this before anyone else. It didn't build its own AI model, it licensed Google's Gemini for about $1 billion a year. Why spend $100 billion building a factory when outsourcing costs a billion? And if a better model appears next year, Apple just switches vendors.
But Apple is not sitting still. It just dropped the M5 chip with a 16 core Neural Engine and Neural Accelerators built into every GPU core. It runs 70 billion parameter AI models locally, eventually even on your phone. The M5 delivers 4x the AI performance of the M4 and Apple doesn't need $200 billion in data centers.
Because Apple turned 2 billion devices into the data center. Every iPhone, Mac, iPad gets distributed AI at a scale no server farm can match. While its rivals burn cash, Apple is doing the opposite. $90.7 billion in stock buybacks last fiscal year. Its competitors? Combined buybacks collapsed 74% from their peak.
Apple didn't miss the AI revolution. It just bet that the winners won't be the ones who build the infrastructure. They'll be the ones who own the customer and no one else on Earth owns the best customers.
While preparing for the 2023 Apple Investor Event, I looked at my presentations from the last such event. This was called the Apple Summit NYC and took place in August 2018, about 5 years ago.
We will review these graphs at the next event but I would like to post them here to get the conversation started. Keep in mind that the conversation at the time was very much oriented around whether Apple's growth could continue.
The cash and cash equivalents showing generated cash had just topped $400 billion.
Apple was still providing guidance and their accuracy with those estimates was reviewed. Also, the growth and cyclicality due product launches and major upgrades.
Share price and EPS multiples.
Can you, off the top of your head, visualize these graphs today?
Join us at the Boston event to look back so we can look forward.
| Start | End | Activity |
|---|---|---|
| 9:00 | 10:00 | Welcome, Coffee, Donuts |
| 10:00 | 11:00 | Product & Services Review |
| 11:00 | 12:00 | Valuation Review (State of the Golden Goose) |
| 12:00 | 12:30 | Lunch (on-site) |
| 12:30 | 13:00 | Growth Potential (new products, services and business models) |
| 13:00 | 14:00 | Limitations (Saying No) |
| 14:00 | 15:00 | Externalities (Audience Participation) |
| 15:00 | 16:00 | How to Analyze Apple |
| 16:00 | 20:00 | Networking and Field Trip |
| 20:00 | 22:00 | Dinner |
