Understanding Apple, Part 1 of 2

Avi Greengart / October 21st, 2013

If you follow Apple in the press and talk to analysts, you’re probably confused. There are three conflicting narratives being presented: Apple is doomed, Apple is disappointing, or Apple is dominating. So many journalists have written about Apple’s lack of innovation without Steve Jobs that, “Apple is doomed,” has almost become a meme. Most financial analysts are in the “Apple is disappointing” camp – the P/E ratio of Apple’s stock price is certainly depressed relative to the competition, yet market analysts – including yours truly – describe Apple as dominant today and highly dangerous going forward. How can all these be true?

Apple is Doomed

There are certainly media sources overwhelmingly friendly to Apple, and much of the tech press gets accused of being overly cozy with Apple and Google and Microsoft simultaneously. However, the treatment of Apple in the general press is often quite negative.

It has become a cliché that the press enjoys building people and companies up, only to tear them down again (…and sometimes build them up again – which I like to call the full Behind the Music cycle). Some of this is basic human psychology, but there is also an element of cynical capitalism at work – anything controversial that is written about Apple generates healthy page views which generates advertising revenue. The press sees incremental improvements as less newsworthy than entirely new products, even if the upgrades are wildly successful. Mainstream journalists are also wary of being caught in an Apple “reality distortion field,” and are so scared of being perceived as biased towards Apple that they end up highlighting the negative.

Most negative coverage of Apple includes quotes from disappointed financial analysts (more on this below), but the biggest proof point used in anti-Apple coverage is the lack of Steve Jobs. At the time of his death, Apple had absolutely transformed consumer technology, making media players, smartphones, and tablets mainstream objects of desire. It is impossible to refute the fact that Jobs was the catalyst for Apple’s decade of success. So without him, Apple must be doomed. Just keep in mind that if Apple continues to grow and introduce new hit products, the story line will shift to “Apple is Back.”

Apple is Disappointing

There may be some financial analysts who say things to move the stock and profit off the movement – and since Apple is the subject of so much scrutiny in the press, this is easier to do with Apple than probably any other stock. However, even if you discount any ulterior motives, it is clear that financial analysts are not happy with Apple’s strategy. The PE ratio of Apple’s stock price – even after the runup following the record-setting iPhone 5C/5S sales – is significantly lower than other tech firms. In other words, the market is not valuing Apple as highly as other companies. This is hard to reconcile with Apple’s run of incredible profits. What is going on?

Apple has a huge amount of cash on hand and makes enormous profits – financial analysts do not deny this, and they will be the first to point out that Apple is already one of the largest companies in terms of market capitalization. However, financial analysts value companies based on future profit growth. Thus, they don’t believe that Apple can grow profits any further. Apple targets the top end of the market, and they maintain that this segment of the market is saturated. They further point out that Apple now has nearly every major carrier in the world already selling the iPhone. The problem is not that Apple is not successful, the problem is that they believe Apple is too successful to grow any more.

In fact, the consensus among financial analysts seems to be that is that Apple’s profits will almost certainly fall over time, either due to competition (Android phones which provide a “good enough” smartphone experience at a lower price) or by Apple listening to the financial analysts who want Apple to sell lower margin iPhones to expand market share and snag entry level phone buyers. That might also mean Apple would cannibalize its own high end iPhone sales as some of its own customers choose the “good enough” model in Apple’s line instead of the latest and greatest.

Financial analysts are not stupid. There are at least two valid reasons why Apple might need to expand its market share even at the expense of profits.

By focusing on the high end of the market, Apple has left the fastest growing portion of the market to Android in both phones and tablets. Apple’s advantage in apps is a key differentiator; it is possible that Android’s larger aggregate user base will eventually cause developers to focus on Android first and iOS second, eroding Apple’s value proposition.

Apple is aware of this possibility, which is why Tim Cook highlights Apple’s strong usage statistics every chance he gets. Apple argues that as long as iOS users spend more money and time on their iOS devices than Android users do on theirs, Apple should maintain developers’ attention.

By leaving the entry point to mobile unguarded, Apple is allowing other brands to establish themselves. It is possible that as emerging market consumers buying power grows, they will stick with the brands they grew up with. Japanese auto manufacturers followed this strategy when they courted the entry level customer in the 1960’s and 1970’s and launched luxury brand extensions in the late 1980’s.

Apple seems willing to take that bet.

Financial analysts value companies based on future profit growth, and successful companies are constantly investing in new markets to create new revenue sources. Apple is the most successful company to have employed this strategy. In just the past decade it introduced iTunes, the iPod, the iPhone, and the iPad (while also reinvigorating its PC line – another product Apple invented in an earlier era). Journalists discount Apple’s ability to create new products because Steve Jobs is gone. Some financial analysts are likely doing the same, but others simply do not know how to value future innovation until they see it being sold. If you think that Apple cannot possibly grow its profits and you cannot put a price tag on any future products that Apple might introduce, you will find Apple quite disappointing.

To be continued.

The final section of this article will cover how market analysts see Apple, and where future profit growth will come from.

Avi Greengart

Avi is the Research Director for Consumer Devices at Current Analysis. He is responsible for the Mobile Devices and Digital Home Devices groups, including CurrentCOMPETE (market, company, event, and device competitive analysis) and Wireless Tracking (pricing, promotions, availability, and device feature data and analysis) content.
  • DeadParrot

    The problem with having
    “Apple is doomed” == “Steve Jobs is gone”
    is that Apple has always been doomed. At least for a major portion of the media and financial community. Apple was doomed during “Steve Jobs 1”, “Steve Jobs was fired”, “Steve Jobs 2” and “Steve Jobs is gone”. Only the stated reasons sometimes change.

    • Avi Greengart

      Well, Apple without Steve Jobs in the mid-1990’s really was doomed! (It very nearly ran out of cash.)

      • rattyuk

        But they deserved to then. They were the people who kicked Jobs out in the first place. Bean counters led by a sugar water salesman. The bland leading the blind.

        • stefnagel

          Ha.

        • klahanas

          I very rarely agree with you. This is one of those times.

    • IDoItForLove

      Apple really is doomed. Apple has never, ever, been able to compete with competition. Look at apples history, its current market growth, and what its trying to achieve, then it becomes clear that they have a wrong idea about how to approach themselves.

      • Carlos Revelez

        Apple is doomed? Really? I’d been listened that stupid story since early 90s. Many “experts” and genius had killed Apple so many times that they already sound like Peter and the wolf. Apple always had competed with competition, just tell me one single OEM that has figures like Apple’s, just tell me one. You can’t, because in the PC era, the only companies that made real money were Intel and Microsoft, all the OEM just won cents meanwhile Intel and Microsoft became real empires. Today, the entire tech industry follow Apple’s movements, including Intel and Microsoft, and they only can react to Apple’s strategies, they don’t have a clue about consumer trends, that’s why any movement they try is going to fail, just check the ultrabook “strategy” results.

  • RobbieP

    Analists always talk up sizzle (Google. Amazon. Etc) and talk down on steak (Apple MS. Etc). Sizzle is so easy to BS/hypothesize. Steak actually talks brains. And as we all know, brains is so hard to teach. ;-)).

    • Avi Greengart

      I wouldn’t lump Google and Amazon together. Google has a wildly profitable ad business today. Amazon invests every dime it makes in new businesses. Investing in Google means you think that Google will behave like it does today and make more money. Investing in Amazon means you think that Amazon will, at some point, behave differently than it does today, and at that time it will be wildly profitable.

      • Live long and prosper

        Googles man money source is ads. unfortunately blocking ads is becoming the norm. Googles success in the future is in new technology and direction, just like amazon. The both try to do roughly the same thing, its almost predictable to see where they will be going in the next year or two.

  • Space Gorilla

    I think there’s a good deal of anger and resentment towards Apple, throughout the tech industry. Apple’s approach to computing devices (simplicity, abstraction, integration, appliance) wasn’t supposed to win, heck it wasn’t even supposed to work. But that approach has proven to be incredibly successful, and is clearly driving the industry. There’s a lot of people who are fairly pissed off about that.

    • Avi Greengart

      You’re right, up to a point. Many engineers value flexibility and feature diversity, which conflict with Apple’s goal of simplicity, which means limiting options and providing only one right way to accomplish a task – Apple’s way. Apple’s success among this crowd is often attributed to “marketing,” when it’s really that the engineers don’t value the benefits of Apple’s approach or understand why others would find them appealing.

      • Space Gorilla

        I don’t agree, the engineers, architects, programmers, etc that I know all use Apple gear, because they want quality tools that work well. The notion that Apple limits options and provides only one right way to accomplish a task, that’s nonsense. There are many ways to get a job done using Apple gear. Just as a hammer is both simple and flexible. Simplicity doesn’t equal limitation.

        It’s hard to nail down exactly, but not all tech folks are mad at Apple. It seems like the guy who works in IT support and fiddles with programming as a hobby, that guy is pissed off. But the comp sci grads I work with who all have their Masters degrees, they all use Apple gear. Hmm, it’s as if there are some people interested in the tool and some people interested in the work. The people interested in the work just want the tool that works best to help them get the job done. The people interested in the tool argue about specs, open vs closed, and other aspects of the tool.

        • Avi Greengart

          As I said, you’re right up to a point. Apple’s Macs are far, far more flexible than its iOS devices, which really do have only one way to do most things. The classic engineer who wants more controls, more ways to fiddle with the system, and less structure isn’t happy with this – Wozniak (ironically!) and many Google engineers I know fit this profile. And of course there are many engineers who like Apple products for their strong design – in hardware, in software, and in hardware/software integration – and consider deliberate limitations part of good design.

      • klahanas

        The pity of it all is that they are not mutually exclusive, rather it’s been built that way.

  • sn24

    Does anyone know if the Haswell processors will be on the Retina Display model only or the non-Retina one as well?

  • hocestquisumus

    All this wouldn’t even be a topic if Apple didn’t behave the way they do. The relentless, never ending barrage of hype marketing (yes, I’m talking about the ‘rumors’). The superlatives. The sheer arrogance.

    Fact is, it’s not doomed. Not yet, because they have enough cash to operate for years without earning a single dime. In the long run it’ll be just another tech company among many others that will or will not open up. I see it where it was in the 80s and 90s come 2025 or something: an arrogant niche company producing overexpensive hipster toys.

    • Space Gorilla

      Fascinating comment, “an arrogant niche company producing overexpensive hipster toys”. Do you mind telling me what you do for a living? I’m trying to formulate a theory about why people are so pissed at Apple.

    • Arrogant commentary from an arrogant putz who is drinking the Kool-Aid offered by shills and hedge fund propaganda artists.

      an arrogant niche company producing overexpensive hipster toys.

      I’d like to think you are just another pathetic troll, but there is really no doubt you are as idiotic as your commentary makes you appear.

      • HobosAreMyFriends

        I’m pretty sure that is most peoples idea of apple. You got to remember, apple was a failure of a company before the IPod, and that only came about because jobs flat out stated that apple cant compete with Microsoft. They took their desktop programming knowledge to a device that didn’t have software associated with it, and marketed the hell out of it as to hipsters. Apple being a “Hipster” company will be stuck to it for a very long time.

        • steve_wildstrom

          I just want to correct a bit of this imaginary history. apple’s recovery began with the original iMac, which was an extremely daring design at the time.

          The iPod wasn’t sold to “hipsters” (a category that didn’t exist at the time) but to a mass-market audience, especially after Steve Jobs reluctantly approved iTunes for Windows.

          Apple’s genius, like that of many highly successful companies, has been to meet needs customers didn’t know they had.

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