Apple passed Nvidia on 4 November to become the most valuable company, with $9 billion in capex versus $104 billion to $215 billion at the cloud giants. Since fiscal 2015, its year-end earnings multiple has tripled.
This is the part that sticks with me. Apple is spending $9 billion on capex while the cloud giants are spending $100 billion plus, and the market is still paying it 39 times earnings. That only works if you believe the AI spend by the others does not pay off as fast as they hope, or that Apple can rent the capability later without building it. The 2.7 percent free cash flow yield against a 4.95 percent Treasury is the hard bit for me. I am not shorting it, the buybacks and the cash flow are real, but I would rather own the names doing the spending at a cheaper multiple than pay a safe haven price for a company that is sitting this buildout out.
Fair view, but the spenders only look cheaper on earnings. On cash, it's a different picture. Over the past 12 months, Alphabet produced $19.7bn of free cash flow, Amazon burned $42.4bn, and Apple made about $136bn. So swapping Apple for the spenders trades a thin 2.7% cash yield for a bet that today's capex pays off later. Both are AI bets, just from opposite sides.
Fair point, and the cash numbers do change the picture. Alphabet at $19.7bn of free cash flow while spending heavily is a different story from Amazon burning $42.4bn, so I should not have lumped the spenders together. My worry is still the price. Apple makes about $136bn of free cash flow, but at 39 times earnings I am paying a safe haven price for a company sitting out the buildout. If the capex pays off, the spenders were the cheap ones. If it does not, Apple was right to wait. That is the bet either way, and I would rather take it at a cheaper multiple.
Fair way to frame it, though there's a third case worth pricing. The buildout works, but computing power becomes a commodity. The builders then earn thin returns on all that capex, while Apple rents what it needs at falling prices. That's the outcome Apple's 39 times seems to price, and a cheaper multiple won't protect you from it.
The third case is the one I keep coming back to now. If the buildout works and compute still gets cheap, the builders did the spending and Apple does the renting, and that is a better deal for Apple than for the spenders. My hesitation is only about what I pay for that outcome today. At 39 times earnings I am paying for the good version of your third case already, with no room for Apple to be slow on the product side as well. I would rather own the renting story at a lower multiple, or own a builder whose cash flow already covers the spend. That is where I land for now.
This is the part that sticks with me. Apple is spending $9 billion on capex while the cloud giants are spending $100 billion plus, and the market is still paying it 39 times earnings. That only works if you believe the AI spend by the others does not pay off as fast as they hope, or that Apple can rent the capability later without building it. The 2.7 percent free cash flow yield against a 4.95 percent Treasury is the hard bit for me. I am not shorting it, the buybacks and the cash flow are real, but I would rather own the names doing the spending at a cheaper multiple than pay a safe haven price for a company that is sitting this buildout out.
Fair view, but the spenders only look cheaper on earnings. On cash, it's a different picture. Over the past 12 months, Alphabet produced $19.7bn of free cash flow, Amazon burned $42.4bn, and Apple made about $136bn. So swapping Apple for the spenders trades a thin 2.7% cash yield for a bet that today's capex pays off later. Both are AI bets, just from opposite sides.
Fair point, and the cash numbers do change the picture. Alphabet at $19.7bn of free cash flow while spending heavily is a different story from Amazon burning $42.4bn, so I should not have lumped the spenders together. My worry is still the price. Apple makes about $136bn of free cash flow, but at 39 times earnings I am paying a safe haven price for a company sitting out the buildout. If the capex pays off, the spenders were the cheap ones. If it does not, Apple was right to wait. That is the bet either way, and I would rather take it at a cheaper multiple.
Fair way to frame it, though there's a third case worth pricing. The buildout works, but computing power becomes a commodity. The builders then earn thin returns on all that capex, while Apple rents what it needs at falling prices. That's the outcome Apple's 39 times seems to price, and a cheaper multiple won't protect you from it.
The third case is the one I keep coming back to now. If the buildout works and compute still gets cheap, the builders did the spending and Apple does the renting, and that is a better deal for Apple than for the spenders. My hesitation is only about what I pay for that outcome today. At 39 times earnings I am paying for the good version of your third case already, with no room for Apple to be slow on the product side as well. I would rather own the renting story at a lower multiple, or own a builder whose cash flow already covers the spend. That is where I land for now.