Why Professional Analysts Are Massively Underestimating Apple Watch

Apple is the most covered stock across the world for good reason. With a market capitalization of more than $600 Billion, the stock has material weight on the performance of benchmark indices, pension funds, and retirement accounts. Because of its importance, Apple has been written about extensively all over the internet. However, we feel that with the enormous buzz surrounding the launch of the larger screened iPhone 6 and 6+, analysts have failed to accurately represent the impact of the Apple Watch on sentiment surrounding the shares and on Apple's revenue growth capacity. Our mission with this article is to highlight the mechanisms behind how the Apple Watch will significantly enhance shareholder value.

Central to the bear thesis is the assertion that Apple cannot innovate meaningfully without Steve Jobs. Bears claim that without Jobs, Apple can only deliver incremental upgrades to its smartphone platform and will never change a redefine a future product category in the way that iPods, iPhones, and iPads have. We believe that the Apple Watch is the dagger to the bear case thesis: we believe that Apple created this device without any input from Jobs, and we believe the device is still incredibly revolutionary. In an interview on The Charlie Rose Show, CEO Tim Cook revealed that work on the newly unveiled Apple Watch didn't start until after the 2011 death of Steve Jobs. Released documents on Apple's corporate strategy written by Jobs himself in 2010 also make no mention of any wearable device. For these reasons and based on chatter from rumor mills, we do not think any significant work begun on the wearable until after Jobs passed away.

Proving the Apple Watch is a revolutionary device before it has even been released may seem like an impossible task, but we feel that there are several clues from Apple's September 9th presentation that would indicate that the device will be a game changer. First, we believe Apple's user interface on its smartwatch far exceeds what is available on the Android platform. In Android devices, users typically utilize the pinch-to-zoom gesture to magnify content on the watch. Tim Cook mocked this, suggesting that merely adopting the phone interface and bringing it to the watch results in a poor experience. Apple has utilized a digital crown that translates rotary movement into digital data, which allows for easy and effective zooming. Next, we believe Apple's display technology represents a remarkable breakthrough in the industry. Up until now, screens have been capable of detecting touch, but Apple Watch's display can actually detect force. This means that a tap and a press can each result in different controls popping up on the screen. Finally, we believe that Apple's method of using pulse vibrations to deliver notifications is a key differentiating feature from competitors. For example, when using Maps, a user will receive one type of notification when (s)he is supposed to turn left, but (s)he will receive a different kind of vibration when a right turn is needed. Or when a user receives a text message on his or her iPhone, the Apple Watch will deliver a pulse in such a way that the user will feel the vibration, but those around him or her will not hear anything. We think consumers will truly appreciate these groundbreaking features, and we feel that competitors are significantly behind Apple in smartwatch technology. We anticipate that as the market begins to appreciate the sheer amount of innovation in this device, there will be significant multiple expansion. Apple currently trades at 16.6 times trailing earnings. As the Apple Watch takes hold, Apple could easily trade 20 times trailing earnings, which is similar to the multiple given to Coca Cola or Procter and Gamble.

We believe Wall Street is also underestimating the financial impact this device will have on Apple's top and bottom lines. In an article written by leading Apple follower Philip Elmer-DeWitt of Fortune, analysts have offered the following estimates of first year Apple Watch sales:(click to enlarge)

Source: Apple 2.0

Contrary to the street consensus, we think if the Apple Watch sells at the midpoint of these expectations (roughly 25 million), this device will provide significant revenue growth for Apple. Apple announced that the starting price for their smartwatch will be $350, but we think the ASP (average selling price) will be closer to $450 as some consumers may opt for the gold Apple Watch Edition. 25 million devices at an ASP for $450 is an additional 11.25 billion in revenue. Seeking Alpha writer Bill Maurer has also provided input on this subject, but we feel his 40 million estimate is too optimistic. Nevertheless, most professionals (such as Peter Thiel) have suggested that this device cannot move the revenue dial for Apple. We respectfully disagree as $11.25 billion in additional revenue next year represents a roughly 6% increase from 2014's $180 billion in revenue. As time goes on, we think additional iPhone users will see the appeal of this device and purchase it down the road, which will provide revenue growth in future years. Additionally, it will lock in users further into the Apple ecosystem, which many have previously addressed. It is also important to remember that Apple's iPhone 6/6+ are selling at unprecedented levels, and a new iPad will likely be revealed next month. All things considered we think Apple's revenues can easily grow by double digits in 2015.

Analyzing the financial impact and influence on investor sentiment of an unreleased device is a difficult task, but we hope we have made a convincing case as to why we feel the street is under appreciating Apple. Apple is one of our favorite investing ideas of all time, and we think Tim Cook is doing a fantastic job at the helm. We strongly recommend investors who are considering a position in Apple to purchase shares and hold them as Apple continues to dominate the tech landscape.

Why We're Staying Clear Of McDonalds Shares

McDonalds (NYSE:MCD) shares have certainly had a tough past three years, failing to advance with the rest of the surging equity markets. Given that McDonalds is one of the most valuable brand names in the world, boasts a 3.6% dividend yield, and is expanding throughout the developing world, we initially thought that this could be an opportunity to generate significant alpha. However, when we dug deeper, we quickly realized that the days of McDonalds outperforming the market are long over. We believe that investors who invest in the company today will likely generate subpar investment returns for the foreseeable future.

At Main Street Wins, we pay significant attention to long term trends, especially those which are investable. One of the trends that is currently gaining significant traction is an increasing importance to healthy living. Shares of companies like Under Armor (NYSE:UA) and Nike (NYSE:NKE), which specialize in active wear, continue to hit new highs seemingly weekly. Apple (NASDAQ:AAPL) has released its revolutionary health device, the Apple Watch, which we think will further drive consumer interest in health monitoring. Consumers are frequently flocking to their nearest Whole Foods Market (NASDAQ:WFM) or Trader Joe's, stocking up on health foods like Quinoa and Greek yogurt. Unfortunately, McDonalds is increasingly associated with low quality fried food and obesity. A poor reputation, in our view, is a difficult thing to shake. While McDonalds has taken some steps to appease health oriented customers, it still lags significantly beyond its competitors. According to Fox business, salads only make up 2 to 3 percent of sales at McDonalds. We know why. Salads at competitors such as Panera Bread (NASDAQ:PNRA) can includes exotic ingredients such as Gorgonzola cheese, apple chips, pecans (found in the Fuji Apple Chicken Salad) or Thai cashews, edamame, red peppers, and cilantro (found in the Thai Chicken Salad). Salads at McDonalds are essentially all romaine lettuce, chicken, cheddar cheese, and one or two grape tomatoes. In order to improve salad ingredient variety, McDonalds would have to raise prices.

The issue is that McDonalds does not have the ability to charge 6 or 7 dollars for a premium menu items. Rather than paying a high price for a quality sandwich at McDonalds, customers would much rather pony up an extra two dollars and eat at Panera or Chipotle (NYSE:CMG), where they can dine at a place that isn't associated with a dollar menu or an obesity epidemic. We think McDonalds is in an impossible predicament: consumers are seeking healthier alternatives, yet the core McDonalds customer is extremely price sensitive and cannot afford to pay more for these options. In the past, McDonalds has tried to implement higher quality items. For the most part its efforts have been unsuccessful for the reason we outlined: the majority of customers McDonalds is currently targeting cannot afford such steep prices even if they were interested in the items. Fox Business reported that McDonalds introduced premium Angus burgers and Fruit and Walnut salads, but it had to pull these menu items for the above reasons.

McDonalds is clearly undergoing a rough period. But has the market discounted these problems into the stock price? We don't think so. As of September 23, 2014, the stock still trades for 16.98 times trailing earnings. We think this is quite expensive for a company that is becoming increasingly linked to obesity in America through documentaries such as Super Size Me. Indeed other financial metrics can be used to support our bearish thesis on McDonalds. As one can see from the chart below from the Chicago Tribune, same store sales at McDonalds are currently abysmal.(click to enlarge)In our view, there is no reason why an investor should initiate a position in a company that trades at near a market multiple but has -4% growth in same store sales worldwide. We think McDonalds should trade closer to 14 times earnings or roughly 77 dollars a share. Given the significant dividend yield, we don't think shares will ever fall that low though. However, we would warn potential longs that they may be in for a few years of underperformance as McDonalds works out its structural issues.

We hope we have provided unique and accurate insight into why we're staying away from McDonalds shares. To be clear, we're not suggesting the shares will collapse or the stock will never reach new highs again. We just think boosting comparative store sales, improving perception of the brand, and revamping the menu are significant challenges. At Main Street Wins, we would rather stay on the sidelines until we see some of these changes being implemented or the stock trading at a decent discount to the broader markets.

On Google: Why the World’s Leading Internet Company Remains a Buy Despite its Run-up

Google (GOOGL) has been one of the most discussed, debated, and controversial technology stocks since going public in 2004. Once a mere search engine alternative to AltaVista, this company has evolved tremendously under the helm of Larry Paige and Sergey Brin. Today Google is the world’s preeminent internet company, and it is seemingly impossible to imagine the world without its incredible products. The market certainly understands Google’s dominance, awarding it a market capitalization of roughly 400 billion dollars as of this writing. Only a handful of companies in history can boast such an accomplishment. So are Google’s best days as a stock behind it? We don’t think so. As the world continues to become increasingly reliant on internet technologies, we think Google will be one of the prime beneficiaries of this long-term trend, delivering ample gains for shareholders. 

While many investors may be skeptical of the idea that a 400 billion dollar juggernaut can continue to outperform the market, we would remind investors to consider the many factors that are working in Google’s favor. For starters, this company is lead by Larry Paige, Sergey Brin, and Eric Schmidt. This trio has a remarkable track record of execution and has managed Google for the long term. They have seamlessly managed the transition from desktop to mobile advertising despite what critics say. Critics have pointed to declining cost-per-click (CPC) metrics and have lamented that mobile advertising is less valuable than desktop advertising. We wound remind them of comments made by Nikesh Arora, when he was chief business officer at Google, that suggested “in the medium to long term, mobile pricing has to be better than desktop pricing. And I think the reason- the way to think about it is that in mobile you have location and you have context of individuals which you don’t have on the desktop. And the more you known about the user and their context, the more effective advertising you can provide to them.” We have no reason to doubt Google’s claims. Their executional track record is nearly flawless, and they are one of just a few companies that have delivered double-digit EPS growth over the past decade every single quarter without exception. We would also add that mobile is a much larger platform than desktop. Cellular phones, especially those on the Android operating platform, are much cheaper than laptops or desktops. Already, Android has more than 1 billion active users, and it shows no signs of slowing down. We believe Google will earn materially more from advertising in the future than it does today as its mobile ads become more expensive and its Android user base continues to grow larger. This year analysts expect Google to report annual revenues of 67 billion. Assuming the company can continue to grow its revenues 15% for the next 5 years (a conservative estimate), Google would more than double its revenues over the next 5 years to more than 130 billion. For a company that operates such a sustainable business model, we think the shares are still a steal today. 

With such positive long term catalysts, one might suggest that all future growth is already priced into the stock. We don’t believe this is the case. 

Company	Market Capitalization (Billions)	PE Ratio (TTM)	PE Ratio (2015 EPS)	Expected Revenue Growth
Google	398	30.9	18.6	18.3%
Facebook	202	82.6	37.7	34.4%
Twitter	32	N/A	137.4	66.9%
Apple	609	16.3	14.12	10.5%

Source: Yahoo and Google Finance. Data from September 16, 2014. 

As compared to other names in the internet space, Google remains a tremendous bargain. Google is still growing very robustly for a company of its size, and when priced by its forward earnings expectations, appears to be a steal. While Facebook has higher expected rates of earnings and revenue growth, investors are paying nearly 40 times 2015 earnings for the stock! Although we have tremendous respect for Mark Zuckerberg and his company, we believe that Google currently offers investors a better value for their money. Apple, while not a true internet company, is included for comparison. Clearly the most mature of the businesses, Apple offers the least amount of growth. However, given the margin of safety investors have with its low valuation and its impressive product pipeline, we believe investors should also own Apple (the subject of another article). 

We clearly believe very strongly in Google’s future. The incredible projects the company are undertaking at Google X are nothing short of incredible. Robotics, driverless cars, and Calico are just three of their many potential future sources of revenue. With the exception of Apple, no other technology company currently has the financial firepower and innovative leadership to fund and oversee such groundbreaking products. While many of these projects may pan out to be unprofitable, we know that some of these bets will pay off. The combination of this company’s immense cash hoard, diversification of revenue into so many areas (Search, YouTube, Android/Google Play, and forward looking initiatives leave us feeling very confident that Google will be a stock that investor’s can comfortably hold for the long term.

Welcome to Main Street Wins

Welcome to Main Street Wins!

Here at Main Street Wins, we believe the equity markets offer an unbelievable opportunity for wealth creation for those who are willing to take the long term view. We are unconcerned with how our stocks perform day-to-day, quarter-to-quarter, or even year-to-year. If our convictions underperform the market in the near term, so be it. The most successful investors in history are all those who are in it for the long haul. While technical indicators are of use to us, we strongly believe that trading stocks is unpredictable and risky. Our feelings regarding capital is that it is very hard earned, so it should not be invested without obsessively studying a company. 

The strategy: Invest in well-run companies that participate in and benefit from long term trends. For example, in the fall of 2012 and throughout 2013, Apple (AAPL) cratered some 40% from its peak. It was painful to watch such a wonderful company suffer such a rapid and substantial decrease in market value. However, we believed unwaveringly in the long term potential of the company. As of May 10th, shares are rebounding nicely and we believe that shares will eventually return to their all time highs. Like some other publications, we do not claim to predict when in time this will happen. We are just very confident in Tim Cook's ability to execute his long term vision for the world's largest company, rewarding those who are patient with him.