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Dan Niles: What investors don’t know about Facebook and Apple

Talking Numbers

Dan Niles, Chief Investment Officer at AlphaOne Capital Partners, discusses both Facebook and Apple.

Two tech giants get the once-over from a giant among tech investors.

Dan Niles, Chief Investment Officer at AlphaOne Capital Partners, is considered by many to be one of the best tech investors around. On Talking Numbers, Niles discusses both Facebook and Apple.

(Watch: Icahn: I pushed for a $150 billion buyback from Apple CEO Tim Cook)

Niles was negative on Facebook just before it went public. However, his opinion changed when it launched its sponsored news feed. The stock is up nearly 80% so far in 2013 and has nearly doubled in the last two months.

Now long the stock, Niles says there are three upcoming events that he believes will further boost Facebook’s share price.

As well, Niles gives his take on comments made by Bill Miller, chairman of Legg Mason Capital Management, on CNBC’s “Squawk Box” yesterday regarding Apple:

“It’s the biggest no-brainer in the history of the earth, right? That’s what Apple is right now to me. It just makes no sense for Apple to trade where it is. Seven times enterprise value to free cash flow. Fourteen percent free cash flow yield to enterprise value. Ten percent simple free cash flow yield. If Apple was a junk bond, it would trade 40% higher.”

(Watch more: Why Bill Miller loves Apple and Microsoft)

Niles gives his initial reaction to Miller in the video above. And, he has written for Talking Numbers this follow-up, too:

“Bill Miller’s arguments about free cash flow, dividends, etc. were all the same arguments being made by investors about the cheapness of Motorola, then Nokia and finally BlackBerry as all those stocks went from innovators to also-rans. The only reason to bottom fish a stock with worsening fundamentals is you believe fundamentals are finally improving, not because of some historical metrics of profitability which may be a lot worse in the future.

“By the way, these arguments of Apple being cheap were made at $700, $600, $500, $400 and finally below $400. If you look at Apple with the launch of iTunes and the iPod in 2003, then the iPhone in 2007 and, finally, the iPad in 2010, they were producing products that you could not get from anyone else. Others were struggling to copy them. Revenues accelerated as did profit margins during that period of time. The stock followed.

“Since the unfortunate passing of Steve Jobs, you have seen others – in particular Samsung – actually take the lead in phones that have bigger screens or lower price points for emerging markets. It is easy to forget that Apple missed the June quarter of 2012 and estimates have been coming down ever since.

“Apple has seen revenue growth go from 59% year-over-year in the March quarter of 2012 – the last time estimates went up – to only 1% year-over-year revenue growth in the just reported June quarter of 2013. You had events like a big buyback and an increase in dividends during that period in time but that did not stop the stock decline. Their gross margins during this period of time peaked at 47.4% in that March quarter of 2012 and have declined every quarter sequentially to 36.9% in the June quarter of 2013. When your products are not that unique anymore, you make less money on each one.

“I am long the stock for the first time for fundamental reasons, versus for short-term price appreciation due to the expectations of an increasing dividend/buyback or product launch, for the first time since early last year. Apple pre-announced that revenues and gross margins would be near the high end of their previously guided range. Most importantly, the about-to-be reported September quarter may be the first time since the March quarter of 2012 when forward estimates for Apple go up.

“Second, we think a new iPad should be launched before the end of the year. Finally, we expect Apple to announce a deal with the largest telecom carrier in the world, China Mobile which has over 700 million subscribers and launch a lower priced phone to service that market.

“However – and this is the big question – if the products that are coming are not that unique or do not open up the availability of the iPhone to more cost conscious consumers, you are likely to see margins continue to compress as the business gets more difficult going forward and this will turn out to be a short lived bounce in their stock price and business prospects.”

To see more of Niles’ interview on why he’s long Facebook and what he thinks about Apple, watch the video above.

[Disclosures: AlphaOne Capital Partners has positions, either long or short, in FB, YHOO, AAPL, GOOG, AMZN, INTC, XLNX]

More from Talking Numbers:
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