Quarterlies? Why Not Invest on the Long View?

Awaiting apple’s earnings results is almost as anticipated as the ball drop on New Year’s Eve. I was asked to be interviewed on my prognosis today. No thanks. My understanding of the minutiae that moves day-to-day stock prices is weak; though I assure you I watch Apple closely; it’s a fine example of Good and Bad management.

The Good:

  • An amazing innovation track record.
  • A long-lived cool-factor relevance – something that qualifies it for elite brand status amongst Lego, etc
  • A fervent fanatic following
  • Impressive retail staff selection, training and (apple) store service experience
  • A laudable ability to focus eg get more revenue out of few offerings
  • An astute view of own long term needs: a tricked-out ‘spaceship’ office; early recognition of, and investment in, cloud networks; an early understanding of, and investment in, content (music library, book library, etc).

 

And the Bad:

  • A curious lack of appreciation of the people who made it great; the artist community that 1st gave business to apple became Cupertino’s victims when it imposed ‘take it or leave it’ precedent-setting low authorship fees.
  • An intriguing, conspicuous passion to keep margins to themselves, not share the wealth (Foxconn)
  • A tendency to lapse into hubris- several time sin the past (and perhaps again now?)

 

Turns out Apple did top $13B in earnings this quarter. But such figures are not as critical as one may think. I’ve seen so many firms the year ‘incentivize’ customers over the years, “shifting purchases forward” that I’ve no confidence quarterly results meaningfully reflect actual consumption (end-user demand). Quarterlies just reflect shipments out the door- and that’s laughably subject to manipulation (not that I’ve any reason to believe that Apple would manipulate such figures the way many other firms do).

What I do know is that, at a market cap of $500B or roughly 10 X earnings, Apple is not overpriced versus eg packaged goods firms with longstanding brand stables. However, while Apple products are in high growth categories, and they command huge price premiums vs the market’s closest equivalent’ competitors, and while Apple has some fanatically loyal buyers (disciples), I’m not as confident that Apple will still be atop smartphones, tablets, etc decades from now, as P&G brands (Pantene, Head & Shoulders, Gillette, Crest) have been leading their markets for decades (albeit at lower % price premiums than apple does in its categories).

Yes, Apple is in categories are underdeveloped (tablets) or have big global expansion potential (smartphones in BRIC nations), but the chance of Apple (or ANY tech company) holding leadership in any category for decades is questionable. To wit:

Samsung is coming after apple- and they’re no minnow. Their market cap is almost half that of Apple. Their talented tech teams work at a frenetic pace; Samsung offers almost 7 dozen distinct, market-specific smartphones (versus apple’s half dozen).

As a market matures, more & more distinct needs/segments do emerge. Apple’s one-size-fits-all focused product development strategy contributes mightily to its revered ability to train staff (few products to understand), draw media attention, optimize user-to-user trading of “How-To” tips. But the days of that focus strategy may be numbered. If eg apple has to create a dumbed-down smartphone to appeal to emerging nations (a rumour that persists, though repeatedly denied in Cupertino) then Apple will face new challenges:

  1. spreading its marketing investment over more fronts, and explaining more products;
  2. risk of diverting their cheaper phones into Developed nations’ markets (where they dilute the brand image, confuse customer service reps, etc).
  3. lose media efficiency (many launches and campaigns, vs one global launch per item)

 

Platform Tipping:

Long term investors might want to think more deeply about whether smartphones/tablets are near a ‘tipping point’ re: number & choice of platforms. Apple’s iOs, vs MS Vista, vs Google Android, vs RIM’s BB10 is a big dilemma. Some tech markets for long periods tolerate multiple coexisting software/ language platform choices (Siemens vs Allen-Bradley PLC; Linux vs MS vs iOs). Some don’t (Blue Ray vs HD; Beta vs Laser Disc). I’ll not guess which way the mobile I.T. is destined; tech markets can be complex: sometimes standardizing, sometimes splintering, sometimes going 1 way, then reversing. The market might keep supporting multiple platforms; it greatly depends on the features each platforms offers, and the lack of that feature in competing platforms:

Android has easier access & greater market share than apple; that appeals to programmers & app developers which means upgradability & mods are near infinite.

BB10 is said to have the very best work-personal firewalls for ‘one-device’ users, and it will presumably retain BB’s famous privacy/ security advantages.

Microsoft has low mobile market share, but its showing renewed interest in mobile-desktop platform integration. In addition, MS has the deep pockets & extensive, close customer relations to exploit to give it a good run globally.

So- longer term, Apple’s platform will promise more of its legendary app-happy ‘cool-factor’ and…. what else? Perhaps go-anywhere content- given apple’s library & cloud advantages? Or will apple find other ways to make its platform irresistible & viable, and, if so, amongst which consumer audiences?

So much to consider- and so little of this really rests on how many units apple shipped in the latest quarter.

My suggestion? Think longer term, before you get excited, or depressed, about apple’s stock value.

Steven