Do Investors Truly Believe in Apple?

on July 2, 2012

I am not a financial analyst and I don’t do the kind of analysis solely to be used for making short or long term investment calls. I have provided analysis for some financial institutions as a part of their internal analysis but my role as an industry analyst is to study markets, trends, and the industry at large. So I plan on tackling this issue of Apple’s stock fluctuations, and most importantly Wall Streets somewhat hesitant stance toward Apple, from an industry analyst perspective not a financial analyst perspective–since I am not the latter.

Apple’s stock is where it is today because Apple has continued to post quarter after quarter revenue and profit growth. Apple has done this primarily on the back of key fundamentals like vertical integration, their ecosystem, attention to design and user experience, solutions based thinking, and a focus on satisfying customers rather than Wall St. just to name a few. Although Apple’s stock has been relatively consistent on its upward trend there are still interesting fluctuations despite their unchallenged dominance in many product segments over the past 10 years. I know many firms who are bullish on Apple. Yet there seem to always be folks who are hesitant to embrace Apple as a long term growth stock and the question is why?

Too Good to Be True

There is a theory I have heard a number of times that there is a belief that Apple’s growth trend is too good to be true. I suspect that there is some truth to this and that there are investment firms out there with this belief. I believe this is an incorrect perspective, but if the too good to true belief is out there we must be aware of it.

Financial investment firms are in the business of not just predicting what the long term stock potential is but also what other firms may do. If investors, regardless of their long term trust in Apple’s stock, know there are those who may sell shares if there is a hint of bad news, then they have to be ready for a potential sell off. Investors often have to bet with or against the market and the key is to know which and when.

So if the too good to be true theory is partially to blame then it has to be taken into consideration by a firm if they are to make an educated guess on when to bet with or against the market.

Even though the too good to be true theory is wrong in my view, there are bound to be some who cling to it regardless of the facts. However, I feel the root of some hesitancy about Apple’s long term stock is rooted in something deeper.

History is Not on Apple’s Side

I tend to believe that the main thinking affecting investors with a negative sentiment in Apple’s long term future is one of historical perspective. Apple with their closed and vertical model lost to the more open model of Microsoft long ago. So the conventional thinking would be that both Google or Microsoft with their more open platform approach will again rise to dominance if history does repeat itself. There are, however, several things I believe are wrong with the thinking that history will repeat itself.

To see the first error all we need to do is observe many recent events. If the conventional wisdom is that open always wins then those open platform players just committed suicide. Microsoft with Surface and to some degree Google with the Nexus program, but more specifically what they may do with Motorola, are both a step in the vertical direction. In fact if you read between the lines from statements from both Microsoft and Google around the importance of tightly integrated hardware with software, then you will observe that those statements are in fact a validation that Apple’s vertical model is not only the right way forward but the superior way forward.

The other flaw in focusing only on historical perspective is that it does not take into account that the market has changed drastically. Specifically, the market for personal computers has matured. To use historical perspective to compare an immature market with a mature market is nearly impossible. The buying psychology of customers in a mature market vs an immature market are fundamentally different.

In fact I would argue that for most of the time when Microsoft dominated the industry, the mass market consumers were not the main purchasers of computers but rather corporations and institutions were. Therefore in the 90s specifically, corporate IT were the customers where in todays markets end consumers are the customers and they buy fundamentally differently than IT historically has.

The market is also significantly larger than when Microsoft was dominant. Nearly every person on the planet will someday be a candidate for a personal computer of some kind. Which means that there is still a tremendous amount of growth ahead of us and my conviction is that Apple is in this for the long haul.

For these reasons, it is impossible to use historical perspective or the argument that history is not on Apple’s side as a reason to be bearish.

Where Do We Go From Here?

The biggest question in my mind, which needs further analysis and thought is whether or not there can be more than one leader in the industry at a time. It is clear that right now Apple is setting the trends and to a degree dictating where we are headed with personal computing.

When a market is maturing or even in the process of becoming post mature there tends to be a leader responsible for standardizing a solution. But in mature markets of other industries like packaged goods, consumer electronics, automobiles, etc., we don’t typically identify a clear leader, rather each company charts out a course and stays with it.

Of course the market for personal computers may be very difficult to compare with other mature markets but if we were to find one that is closest I would say it is automobiles. I don’t have an answer, or a fully formed opinion as to whether the personal computing industry can have multiple leaders but I am sure that topic will make for good discussion.

If we can make the case that there can only be one, or at the least very few, leading a segment then I believe we can confidently make a strong case that two decades of leadership–or more– is not out of Apple’s grasp. This and the fact that there is so much headroom for growth in personal computers globally.

When you add market growth potential, with Apple’s fundamentals, the vertical trend, and their constant success in customer satisfaction, it is my opinion that it is hard to bet against them.