Apple’s Future

Eating apples without asking what they were was a bad move for Adam. How about investing in Apple without knowing how it makes its money may prove dangerous as well.

This summer I listened to The One Device, Brian Merchant’s history of the iPhone. The idea of a smart phone wasn’t new. Research In Motion began selling its BlackBerry phone in 2002. Nokia was around, and in Japan commuters were looking at retailer’s cellphone-oriented sites in the early 2000s. Apple itself launched a smart phone in a joint venture with Motorola, which flopped. Apple’s iPhone didn’t come out until Summer 2007, and initial sales were slow. So what made a difference?

…you don’t swat at gnats…

In Merchant’s telling two things stood out. One was a fanatical attention to the user. Sleek design, sure, and cool icons for the initial limited functionality. More central was that Steve Jobs wanted his phone to be intuitive in operation, so much so that it could ship without a user manual. The one key in-house technology Apple developed was coordinating swipes with what was on the screen. Even parts of that were purchased from the outside, but it really was novel and required a lot of development of the concept and how to implement it.

Source: Yahoo! Finance

It’s not that everything else was easy, or open source. Apple worked on power management, realizing it needed a more efficient yet reasonably powerful processor chip. Toward that end it used a RISC processor, working on a design from ARM and finding a semiconductor “fab” willing to make it. Fitting everything into the sleek case, pulling in the camera stabilization hardware developed by a Japanese firm, on and on. It was really neat engineering.

The second key was the App Store, which was not part of the company’s vision. Apple sought to keep its operating system closed, in part because of real fears about bugs crashing the phone if people could start modifying an as-yet new and complex software system. Almost immediately, though, hackers found ways into the system, and added functionality that Apple did not – or refused – to provide. That differentiated it from the Canadian maker of BlackBerry, which targeted big banks and other business customers with a phone where emails were encrypted and where users couldn’t download games or otherwise undermine its value as a secure email platform.

Ten years later, where are the entry barriers? As I see it, there are none. Apple engaged in a $1 billion-plus lawsuit with Samsung over design issues, which generated $10s of millions in lawyer fees, if not more. That’s the sort of bullying tactic that works with small firms, but in the end style is hard to defend. Operating systems? Android is freely available, as in free. Hardware? Suppliers designed the guts of chips, not Apple, and once the initial version is past exclusive use contracts, they can sell to whomever. The guts of the phone don’t stay proprietary; a lot is simply the time to market required for a rival to launch comparable features, hence Apple’s obsession with secrecy. Oh, and Google has an app store for products that use its operating system (as does Microsoft).

…cash cows eventually stop giving milk…

So as I see it there are no entry barriers. Indeed, in China, India, Southeast Asia and Africa neither Apple nor (to my knowledge) Samsung are major players. [Transsion is the biggest player in Africa, assembling its phones in Ethiopia.] On a global basis, Apple is losing market share in the overall cell phone market, which still includes a lot of flip phones. (The latest reports give them 15.6% of the smart phone market in 2018Q1, about where they were in 2010Q1.) Anyway, those markets are far bigger than those of the US and Europe and Japan – China alone has over a billion smart phone users. [Go to Statista for data on OS shares.]

But if there are no entry barriers, profits must fall. A lot. So how can we justify a market cap of $1 trillion? Or are we simply in the waning days of a bubble driven by years of 0% interest rates? Or am I missing a wide moat that will keep rivals at bay for years to come?

Alternatively, what does Apple’s demand curve look like? Is it shifting, and if so in which direction?

You can find “bull” and “bear” analyses of Apple on Seeking Alpha. On the pessimist side see Apple Faces Big Challenge In The App Store and Apple: Big Red Flags.

With each release the iPhone has increased in size, now approaching that of an iPad. You can make phone calls on an iPad – it has cell phone hardware. The price point is lower. At what point do you get a small, inexpensive iPad over a large, very expensive iPhone? Or do you move away from Apple altogether, to a phone that fits in your pocket and a device that comes pre-loaded with Office?

21 thoughts on “Apple’s Future

  1. Is Apple too big to grow? This question can be answered differently by definition and market analysts. In the eyes of the stock market, any decrease in the rate of growth is cause for concern. The majority of Apple’s revenue, 56.15%, originates from the sale of IPhones. (statista.com) This causes some concern among investors about revenue differentiation, and the need for Apple to develop a new product to keep up with revenue growth expectations. Although the recent announcement of a revamped and updated Apple Watch has excited many consumers, the percentage of revenue from Apple Watch that contributes to Apple’s total revenue is minuscule, and anticipated demand for the new IPhone is hovering around where the preorder demand was a year ago, (investors.com) which is disappointing considering confidence among America households has reached its highest level since October 2000. (wsj)
     
    Although President Trump exempted the Apple Watch and Airpods from the new 10% tariff on $500 billion dollars of goods imported to the United States, China has threatened to retaliate with restrictions on materials needed to construct Apple products in China. The ongoing trade war with China could have negative indirect implications on IPhones and other Apple Products. (wsj) (mashable.com) This is a story to continue watching through the lens of an Apple investor or potential investor.
     
    In my opinion, although I do not believe Apple is finished as a company, I do believe Apple’s runway for growth is limited for new investors. Key barriers from entry that Apple maintains in the United States are its sleek look, simple-to-use functionality, and dominating social perception as No. 1. While the excitement surrounding Apple has grown since the initial IPhone, nothing besides enhanced camera and battery capabilities has been introduced. For the demand curve to shift rightwards, Apple needs to introduce a product or service that dilutes IPhones’ revenue contributions to overall revenue. Apple may have some small room to run as a company, but many investors are holding on and not buying more. (marketrealist.com)

    Other Sources:
    Money.Cnn.com
    Robinhood
    willseyassetmanagement

  2. I was wondering if you thought that Apple’s products outside of the iPhone could potentially serve as a reason for potential growth. Apple spent $3.4 billion on research and development in the first quarter of 2018 alone after continually raising its budget for R&D over the past few years. I wonder if something “new” is on the way that could potentially make Apple a viable investment. In recent years we’ve seen the development of their iWatch and variation on the iPad so it should be interesting to see if there’s a new product that will resurge Apple when the iPhone is seemingly losing its prevalence.

    • Microsoft spends a lot on R&D and on M&A. Has that led to significant new revenue streams? To my knowledge they remain a one-product company the Office suite of products. Now Apple has revenue streams beside the iPhone, but do those support a $1 trillion valuation?

  3. Apple’s market control of the Iphone will not last, in part due to young consumers shifting away from branding and toward utility. Apple’s prices in both phones and computers are astronomical compared to other corporations, and although their customer service is strong, stiff competition will continue to out-perform Apple at lower prices.

    In the Personal Computer domain, Apple has not caught up with gaming or graphics technology which is becoming more popular worldwide. Esports, for example, is a billion dollar industry with rapid growth that Apple, as atech company, should be tapping into. It isnt. On average, it takes 4 years for a PC game or app to be ported into Apple because of the vastly different operating system and the fact that Apple execs do not care to make their products more similar to generic PCs, for fear of losing branding https://newzoo.com/wp-content/uploads/2016/04/Newzoo_Esports_Revenue_Growth-1.png.

    This reliance on brand power will lead to inefficiencies in both industry and marketing, allowing companies to exploit the major holes in Apple’s consumer base.

  4. What were the effects of getting caught slowing down older iPhones? Was it solely a loss of consumer trust to a certain degree or a sales loss created by the ability to hold on to phones longer? It is also widely rumored that Apple is quietly entering into the self driving car market where emergence as the industry leader could create value.

  5. Apple’s share of the global market of leading smartphone vendors has fluctuated mildly over the past 9 years. It reached a peak of 23 percent of the global market share in late 2011 into early 2012, coming right after the release of the iPhone 4s in early October of 2011. Apple’s troughs in the market share came in the middle of 2014 and 2016, at 11.7 percent. As of last quarter, Apple maintains 12.1% of the global market share. I created a graph of Apple’s percentage of the market share of smartphones since the 4th quarter of 2009, and I added a best fit line. The line is not exactly promising, as it shows the overall decline of Apple’s share in the market over these last 9 years. However, I noticed that Apple’s share of the market witnesses a temporary percentage spike in the 4th quarter of each year. I believe this is due to the fact that Apple typically releases its new versions of the iPhone in September or early October, prompting the temporary increase in their share of the market. Perhaps this is why Apple decided to release the iPhone 8 and the iPhone X in September 2017 and November 2017, respectively. I take the releasing of the two devices in such close quarters time-wise as at least a twinge of desperation on Apple’s behalf. The evolution of the “plus” version of the iPhone also seems to suggest that Apple needed to switch things up in order to attract more consumers. Such attempts have proven relatively ineffective, however, as the fit line on the graph shows the consistent decline of Apple’s share of the global market of smartphones. It will be interesting to see how the release of the iPhone XS and iPhone XR affect this trend, as the two devices are set to release in only a matter of days. As Stuart said, 56.15% of Apple’s revenue comes from the selling of iPhones, so there’s definitely cause for concern for Apple executives and investors.

    statista.com
    wired.com

  6. Apple’s prospects as an investment aren’t particularly exciting, but it’s still a viable holding. Its primary weapon in terms of staying power and maintaining a moat is its branding. There’s something to be said for the aesthetics of the Apple Store and how sleek Apple products feel in your hand. The satisfaction of having blue texts with someone can’t be understated either. Furthermore, its operating system is fairly self-explanatory and tends to generate repeat customers due to familiarity. Apple’s demand curve has remained relatively stagnant over the past five or so years because no blockbuster products have been introduced since the iPad. The Apple Watch is not a failure, but still only accounts for a tiny portion of Apple’s revenue (Statista). In order for Apple to spark growth (a demand shift right), it would likely have to expand sales internationally beyond America and Europe or unveil a revolutionary new product with success akin to the iPad or iPhone.

  7. I believe Apple has expanded as much as possible in the smartphone, computer, and tablet industry. The majority of smart phone users either have iPhones or prefer to pay for a cheaper alternative. iMessage and iCloud make iPhones a product that is easily compatible to other Apple products. In order to drastically expand, I believe Apple needs to delve into another market like they did with Apple Watches and Beats Speakers. It is evident that Apple is trying to accomplish this with how much time and resources they spend on research.

  8. Conviction in Apple’s continued viability as an investment can be drawn from several sources, the possibility that its share price does not reflect value that could be returned to shareholders through buy-backs or dividends, that the market is not incorporating the possibility of future products within the Apple-suite such as an AppleCar or expansion of its services, or that the current economic-moat surrounding Apple and its product ecosystem is too heavily discounted. While there is the always the possibility that a company with the resources of Apple could expand itself into new product markets, I think the most useful thing to look at is the strength of the Apple ecosystem and the brand-loyalty that it has established with the global upper-middle classes as the premium producer of consumer electronics.

    It is certainly true that as the iPhone has gotten more expensive, and there are fewer incremental features that the refresh cycle on the existing iPhone base has increased and that this should present itself as a drag on revenues as growth in new orders stalls. Compounding this problem is an issue of margin compression as component costs rise and Apple no longer can price its products at such a premium relative to Samsung given the similarity of the features offered. However, what if Apple’s moat lies not in the raw features that its products offer but in the massive ecosystem that its products have developed and as such it is able to generate increased lifetime value from customers by offering an array of services/products. The moat of the iPhone is certainly noticeable on the W&L campus, but the reasons for it are somewhat mysterious. Perhaps it is due to user desires for conspicuous consumption, assumption of ease-of-use, or faith in the quality of the product. But whatever it is that drives the popularity of the iPhone what is clear is how this advantage allows Apple to more seamlessly integrate its product offerings into the user experience. Witness Apple Music, Apple Pay, iCloud, or in the products category: Air Pods. These are all items that require no proprietary technological or user interface on the part of Apple, but simply are monetizations of Apple’s compelling ecosystem of goods. Look at Apple-Music vs Spotify, Apple offers a product that is inferior in terms of music library, interface, and social-media integration, but still has more users than Spotify even though it was the second-mover due to the stickiness of Apple products.

    I think there is certainly a worry that these incremental revenues will not be able to move the needle on a company as large as Apple, and perhaps it would be prudent for Apple to return a large portion of its cash-horde to shareholders so there is less of a capital-structure to support, but even if Apple’s international expansions do not pan out it seems as though it will still largely be able to mint money off of its domestic and other upper-middle class customers for the foreseeable future.

  9. Much of Apple’s recent success, especially with the iPhone, comes from the social perception that it is a stylish “vogue” item. However, fashionable trends usually come to an end, and with Apple’s recent lack of innovation, the door is open for a new player to enter the market. If you look at the last few iPhone releases, they have been less and less daring as the years have gone by. While they currently dominate U.S. marketshare, I think that all it will take is another firm to release a product that changes the cell-phone market like the iPhone did when it was first introduced.

    Luckily, Apple is in markets other than just cellular devices, which could be a good place for them to start innovating. The Mac is considered a high end personal computer, and has a lot of appeal with millennials(including myself) who value the look and feel of a Mac. As long as they keep improving their products, they shouldn’t worry too much. That being said, they need to find ways to push the market forward and continue innovating in order to avoid disruption from other firms.

  10. Apple’s recent success stems in part from its ability to seamlessly connect all of its devices. The potential to send a text from a computer, or upload photos taken on a phone onto a computer, or connect devices through any other of a variety of operations, is very attractive to many consumers, especially those in Apple’s target market of teenagers and college students. To agree with others on this thread, Apple’s products (the iPhone especially) are still considered by many to be “cool” devices and superior to those of other companies, even if it might not be the case in a technological sense. As an owner of both an iPhone and Android in the past, I have found that Apple’s display pages are much simpler and easily accessible than those of an Android. As long as Apple can maintain its popular image and seamless integration system, I do not believe there is immediate cause for concern for Apple’s demise.

    Having said this, Apple needs to focus on creating an innovative and possibly revolutionary product to stay ahead of the competition. They attempted this with the release of the Apple Watch, but with only moderate success. As the market has saturated with major players that have large cash hordes and infrastructure, there is concern that one of these companies will release “the next big thing” before Apple, making the company obsolete. Committing its immense cash holdings to R&D for new products and potentially entering new markets should be Apple’s long-term focus. A company that becomes complacent and stops innovating is one that is near its end and should be considered a “sell.” However, as long as Apple continues to release high quality products that keeps investors such as Warren Buffett content, there is no considerable reason to worry about an Apple “apocalypse” approaching in the short term.

    • A couple comments focus on the ecosystem aspect, anecdotal in nature.

      But first, doesn’t that imply that it’s only as strong as the weakest link? I’ve been using Apple computers since 1991, because the Microsoft operating system was not designed to handle alternate fonts (128 characters vs 128×128 characters, double word length with the WSIWYG software to match). But PCs are now fine with Japanese, and Chinese, and so on.

      When I upgraded from a flip phone to a smart phone it was thus natural to get an iPhone. But I don’t want a large phone, I want one that will fit in my pocket. The new iPhones don’t. Meanwhile there are many Android phones, so I can pick one that meets my needs – I don’t need gaming capability or a fancier camera, I only scan email on my phone to delete things, and generally save reading/replying for my computer. A small screen is fine.

      Likewise, Apple computers haven’t made any fundamental improvements. Yes, OSX is nice, rock-solid stable and … familiar. However, it’s no longer vastly superior. The current hardware doesn’t have touch sensitive screens and various other features. Finally, they’re really expensive. And iPads don’t fill the gap, in part because storing files is a super pain, and the one key software that I use (Nisus Writer) isn’t available while Office is unfriendly. So for me an iPad is not useful as a portable work computer.

      Hence when I next change computers or phones, I expect I’ll do non-Apple.

      But in many markets Apple computers have an even smaller share than in the US. The ecosystem approach is irrelevant to the major of smart phone users, whose only connection is their phone, who don’t have and likely never will have a computer, much less a premium Macbook or iPad. Apple simply isn’t a player in such markets, and those are the ones that are growing.

  11. The allure of Apple as a company has long been its ability to expand its influence and pioneer a new field while maining a suitable grip on current technological devices. From the beginning of the iPhone to the iPad to iWatch and Apple TV, Apple has convinced consumers that the company will never run out of innovative ideas. Personally, I believe that consumers will continue to stand in lines that stretch a block long in advance of the newest released iPhone for as long as Apple stands for progress and innovation. While I agree with many who say that Apple is unjustifiably expensive, I do not forecast a significant change in the amount of consumers willing to spend large amounts of money to convince people, maybe just themselves, that they are indeed stylish and can afford to have an iPhone, iPad, or the latest Apple product.

  12. A different thread: are current equity prices rational? That’s not a topic for this course, but do keep in mind that you’ve grown up in a unique environment of 0% interest rates. If bank deposits and bonds pay nothing, then even a vague promise of positive returns can drive the price of a stock to the stratosphere. Once the fuel of 0% rates runs out, they will have to land. Many have never had to land, so will crash.

  13. First, iPhoneX’s biggest selling points, such as the full screen (which apple calls Super Retina Display), Face ID facial recognition, wireless charging configuration and features, are now available in some Android phones, even ahead of apple in some respects. Combined with its starting price of nearly $1,000, it’s theoretically less likely that iPhoneX will sell big, at least as some in the industry have concluded.

    It’s well known that the iPhone hasn’t made major design improvements since the iPhone 6 came out in 2014, when the phone was first divided into two sizes (most notably apple’s first so-called large-screen phone). Since then, both the 2015 iPhone 6s and the 2016 iPhone 7 have followed the same basic pattern, with only partial hardware tweaks and performance improvements. In fact, the reason why the previous iPhone6 was so popular was to meet the pent-up demand of apple iPhone users for large-screen phones at that time, while the large-screen phones in the Android camp represented by samsung had been in the market for several years.

    The good news is that the iPhone itself remains unrivaled in terms of brand influence and loyalty compared with the above market-tested experience. For example, a recent survey of 2,117 smartphone users by Fluent marketing platform showed that nearly 80 percent of iPhone users said they planned to upgrade to the new iPhone. A further 47 percent said they owned at least four iphones. Another 70 percent said their next phone will be another iPhone, and they won’t even consider other brands of phones.(wsj)

    Plus, when it comes to the soft and hard ecology, Apple naturally has an advantage that other manufacturers do not have, which is hard to be shaken in the short term. It is the ecology built around iPhone, which is also consolidated and led with the launch of new iPhone. The most typical manifestation is AR. Each new upgrade or innovation in apple’s iPhone is said to match its ecosystem or new apps. Specifically, iPhoneX (which includes both the iPhone8 and iPhone8 Plus) has significantly improved its CPU and GPU capabilities in order to expand its previously released ARkit apps and experiences. Don’t underestimate apple’s exploration and innovation in ecological applications. It is because of ARkit that Tango, which was invested by Google more than 20 years ago, was destroyed in the event of launch of new ARCore. Apple changed the mode and ecology of AR applications in the future. The well-known fact is that AR has been hailed by the industry as the next new industrial opportunity.

    • So 80% this year, and 80% of 80% next year or 64%, and then … you see where that goes! You need more than brand loyalty, you need to be able to win customers from rivals as well.

      Erosion will take time, for the reasons you note. But Apple must capture Android users, and with a $1,000 price point will that happen? I’m looking forward to spending less on a phone in the not too distant future. No need to upgrade, and I’m not hard on my phone so (battery degradation aside) it is likely to last another couple years, if not more. By that point I hopefully can also play Verizon off against Sprint – the latter is building out its towers in this region.

  14. While I do not believe apple will continue the incredible growth they have experienced over the past decade I believe they will continue to be among the perennial players in technology. Being as they were the first to market when it comes to the modern smartphone they were able to amass a large customer base that will, for the most part, remain loyal to the brand.
    The price of iPhone have dramatically increased without drastic decreases in demand. The smart phone market has been growing rapidly, so while apple’s market share has fallen their sales continue to increase. This illustrates that the price elasticity of iPhones is not very steep. This is likely due to how phones are purchased, few people go out and buy the device in cash, rather they pay a monthly fee, thus disconnecting the true price of the phone. As such apple might be able continue to incrementally increasing their phone prices without seeing a large drop in demand.
    For apple to continue their incredible growth they must be on the forefront of the next step forward in technology, otherwise the wheels may stop turning. Even if apple can not continue their incredible growth they will continue to have a strong line of products with consumer loyalty. While their slowing growth is cause for concern, I believe Apple is more likely to become a consistent dividend paying bluechip, as opposed to a major drawback.

    • Yes, there’s no particular reason Apple won’t remain a major player in the US and other developed country markets where they have a large market share. That however is different from remaining a profitable player. Can they realistically maintain 40% net margins?

  15. I think Apples profitability will allow them to remain prosperous. They illicit much of their manufacturing from Foxconn in what some would describe as an unethical work culture and environment. I think China is thee main thing that accounts for Apples tremendous market control. Apple continues to benefit from the cheapest labor and manufacturing possible for a designer expensive product. capturing close to 75% of the profit for every device sold, competitors will be hard pressed to capture the influence and footprint needed to manufacture in china with the same productivity and cost. Until people hold apple more accountable for its unethical supply chain, or if consumers gain a distaste for apples host of questionable profit sharing, apple will most likely not die, but continue to thrive at the expense of others.

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