I know this is heresy. But I’m really starting to wonder if Apple Inc. (AAPL) is peaking.
Yes, there are certainly a lot of very smart people — and even some analysts — that can point to growing market share in the tablet and phone sectors, solid consistent growing earnings (which hasn’t always been an Apple hallmark), solid balance sheet, etc.
But there’s a growing number of people, and not just at Samsung, who are starting to look more closely at the chinks in Apple’s armor and are starting to wonder if those dents are exposing some very telling weaknesses that are slowly being exacerbated.
The underlying point here isn’t just an argument about the numbers. It’s the same fixation we have with stock market success that blinds us to all bubbles. But instead of this bubble being in an industry or sector, it’s a corporate bubble.
Now, before I start debunking a few of the myths that surround this mystical tech juggernaut, I want to point out to my detractors that I will discuss this heresy without the use of statistics or numbers. That debate can rage forever but doesn’t really address the underlying issue. Lies, damn lies and statistics will only prove the case once the trend is in place. And when the trend changes, the numbers change. Magical, isn’t it?
We are discussing the long-term future of the company and the challenges it will face in an analog marketplace of consumers.
In my economics classes I was always fascinated by the awesome ability to predict and analyze data and determine trends with formulas. But there was one lecture I remember in particular. It discussed one variable in an equation that was the key in working out how to adjust some IS-LM derivation.
The professor explained that the variable “E” represented consumers’ expectations. And when you had that number and it was accurate, it opened up a world of answers in savings ratios, money supply, capital expenditures, you name it.
And in the perfect, brilliant, innocence that only a young student or a great mind could develop, a student asked: “How do we factor for ‘E,’ then?” I mean, this was the magic bullet to all micro- and macroeconomics, right?
The professor replied that we can never really know “E,” but we can make certain assumptions that will give us a representation of “E.”
I got a bit dizzy. If we know the number that will make everything work but we can never really know that number, then it’s all building numbers on numbers and formulas on formulas. Economics was witchcraft for math geeks. It’s not a soft science; it’s gym class for statistics fanatics.
Moving forward, basing my arguments on numbers can just as easily clarify as well as obscure; so I want to address the trends and simple human behavior in the marketplace.
What’s more, I have nothing against Apple. I kick myself thinking about when I was on the fence about buying it at 13, about five years ago. But that’s my point. Apple stock was under 10 less than a decade ago. Is the company really a logarithmically different company with iPods, iPhones and iPads?
But perhaps not.
I’m not calling for the demise of Apple in some apocalypse. I’m not saying that in five more years it will be down to 13 again.
My point is that Nokia Corporation (NOK) was the largest mobile phone maker in the world for many years and now is fighting to survive. Research In Motion Limited (RIMM) built the greatest smartphone the world had ever seen until people wanted touch screens. Motorola was the second largest mobile phone maker in the world; yet, a handful of years later, it’s lucky if it’s in the middle of the pack.
And again, you hear the same things you hear about this stock that you hear about all overheated markets:
Myth 1: Apple isn’t like its competitors because it more than a device maker. Well, when Cisco Systems, Inc. (CSCO) was trading in the upper 60s and buying up all the competition, it was considered one of the most powerful and dynamic computing companies on the planet and was even eating IBM’s (IBM) lunch. Microsoft Corp. was a dominant software company that was going to take over the entire operating system market; it was simply a matter of time.
And that’s the point: The only constant over time is change. Remember the second law of thermodynamics? And Apple is not immune to the laws of physics unless Steve Jobs was even more brilliant than he has been described.
Back to the real point. All great tech companies become great because at one point in time they’re offering unique products and solutions. But that story is a story of passion, not rational thought.
“Tech cool” is a very fickle market. And when they get bored and someone brings out something cool, the masses will leave their old well-loved tech behind very quickly.
Myth 2: Apple understands its users and has built a sustainable business model. Well, yes, it has — for now. Apple moved away from Google Maps and licensed TomTom map information, but it hadn’t done the testing thoroughly enough. Towns ended up in rivers. Some places were miles from where they actually exist. And then Apple cordoned off Google Maps apps from new iPhone buyers, the true faithful. Partner TomTom was not pleased.
I would have to say, Jobs’ essence is already evaporating. These mistakes are corporate mistakes — not the kind of stuff that Apple does to the Apple family. The man behind the curtain is gone.
Myth 3: Apple is a different kind of company than its competitors. Really? I think Wall Street looks at the same numbers. And this “it’s different this time” argument is like a full-blown alcoholic saying he doesn’t have a drinking problem. Market forces are market forces. See my mobile phone example or Cisco example. Or, two more words for you: tech bubble.
There’s even some talk that Apple is juicing its sales numbers, which is the kind of talk that hit a lot of dotcom companies that were desperate to keep Wall Street happy and investors invested. It may not be true, but the fact that people are starting to talk means there’s already a quiet shift in sentiment.
Myth 4: Apple users are part of an integrated telecom world; they’re not just phones and computers. So it’s a tech religion/cult? A cult has to have a leader, someone who embodies the essence of the belief structure and that was Jobs. He’s gone, so you raise a new leader or you risk schisms or a hypervigilant closed system. Neither one is good for business.
If it’s not a cult, then you’re dealing with a closed system the former CEO built that chooses the apps you can access, monitors your every move and conversation, and then exploits that relationship to sell you more things from its chosen vendors. Wow, that’s the kind of healthy relationship I want.
In the old days, Microsoft was hacked incessantly (and continues to be to a lesser extent) because of its closed operating system that was delivered as it was intended to be used and no one could modify Windows without the wrath of the company being loosed on him. Hubris is a dangerous thing, and Jobs was the only guy who could manage to make it an asset — partly due to his foil in Bill Gates. Jobs is gone, Gates is solving malaria and clean drinking water pandemics, and Steve Ballmer is running a nice little income stock.
Myth 5: They have the best products in the market and will continue to benefit from their loyal followers. The truth is that Apple came up with the right products at the right time for a lot of novice computer and device users. They were given products that make learning how to use music players, smartphones and next-generation computers easy.
Apple laid the groundwork for soccer moms and tweens and hoping-to-be-hip 40 and 50 somethings to learn to use technology without looking like fools. But once they learn how to use this stuff, there’s no guarantee they will stick.
The teens who were using BlackBerrys are now standing in lines to get iPhones. They will quickly dump their iPhones for the next coolest iteration of a mobile platform. And as consumers of tech become more sophisticated, they will demand things and not simply be happy with what they are given. That will be a tough transition for Apple.
And once Apple’s sales start to fall, you’d better not be holding too much of this stock, because it will sink like a hot air balloon with a big hole on a hot day.
I could go on. But I think you get my point.
What do I like?
QUALCOMM Incorporated (QCOM) is probably my favorite long-term tech play. I am also partial toward Google Inc. (GOOG) but I have some reservations on its operating system (OS) strategy, particularly for its mobile devices in the near term.