Apple is the most valuable company, a status which it achieved first in August 2011 but was quickly surpassed by Exxon Mobile, again. Since then Apple has become even more valuable and managed to take the pole position for the near future. It grew approximately 100% since last year and is now worth a staggering USD 560bn. And it still has a lot going for it. However, I also think there are some major risks which are too often overlooked.
The smartphone opportunity
Arguably, Apple still produces the best or at least one of the very best smart phones in the world. Gobal smart phone penetration is still merely 28% which leaves plenty of room to grow.
While the market is starting to get saturated in the US, there is still good growth potential in Europe. The emerging markets are just starting to adopt the next generation mobile technology and offer even more exciting opportunities.
Apple is THE world beating innovation engine
Apple is arguably the most innovative company of the last decade. Part of their magic comes from transferring of product management approaches from the IT sector to the consumer electronics sector: Apple had to learn the hard way during the early nineties that the computer industry is an incredibly competitive environment where strong network effects often prevail. It lost the operating system war against Microsoft and became a niche supplier for the creative industry.
Apple applied its learnings about platforms and ecosystems to the consumer electronics market. A market where replacement cycles are often between 2 years phones and 10 years for home stereo equipment. And even in those two years innovation is of the incremental sort and by no means disruptive.
Here Apple, which is used to product cycles in the IT of often only 6 months, and where concepts like continuous deployment are all the rave, had an easy play against slow moving giants like Sony (iPod vs MiniDisc players) or Nokia (iOS vs Symbian).
And there is still ample room for more products: The iPad contributes approximately 20% to revenues and is a product line which has not existed just 2 years ago. Or iTV…
From a financial perspective, Apple is quite strong as well: They are highly profitable, making approximately USD 25bn revenues a quarter. They have USD 100bn in the bank which allows them to take long term bets and make acquisitions if needed. And most interestingly they are even fairly priced at around 17 P/E for the last 12 months.
However, Apple’s approach to innovation works until you have to diversify
While you can’t copy Apple’s product design and marketing genius, competitors which are equally dynamic have entered into the market of transforming consumer electronics. Apple is no longer fighting Nokia in the Smartphone sector but Google which knows how to address a vertically integrated company: with an open eco system and platform approach. While it is more complicated to coordinate a network of independent companies, you can clearly see how the advantage of Apple’s products over the competitors is shrinking. And you can even see how the competitors are ever faster at adapting the next product category: It took 5 or 6 years to catch up with the iPod, 3 to 4 years to catch up with the iPhone and I would expect that we will see tablets which are comparable to the iPad coming on the market within this year.
The market growth potential requires a diversified product portfolio
To successfully address the growth potential in the emerging markets, Apple will have to launch devices which cost considerably less than USD 700 for a phone. This is probably even valid for the remainders of the US and European markets. The untapped market potential most likely belongs to the late majority and laggard market segments. These customers buy a device because they have to and do it for purely pragmatic reasons.
Now Apple’s organizational set-up does not lend itself too well for churning out a wide variety of products. It automatically means you can pay less attention to the launch of a single product and ultimately, that’s what they excel at. So this market dynamic is actually more in favor of Google’s ecosystem approach.
Software as a Service removes lock-in by Apple
The last decade brought us a mature and diversified web services market. This initially helped to make smartphones possible because you did not need to store all of Google Maps locally. You just used the power of the cloud.
Now that the cloud is a mature and diverse eco system, there is much less value in designing a product end to end. Cloud services enable you to switch a device such as a tablet, smartphone or PC without the need to re-install or configure any software. As long as the operating system gets the infrastructure layer right like good battery life, good look and feel and reliable connectivity it doesn’t really matter that much whether I am running iOS, Android or Windows Mobile.
Apple’s lock-in in that regard is vanishing fast. Some web services like Spotify are even better than Apple’s iPod App on the iPhone in the meantime.
Financial success will make it more difficult to maintain growth
Apple is so big in the meantime, that portfolio managers are starting to take a look at the US stock market with shares excluding Apple. Heck, Apple’s worth 1% of equities world wide:
See also: iRational – The Economist
In my eyes, this means two things:
- Anybody who thinks Apple is a great investment has it
- Anybody who has to match in index has it; the risk of not having it and underperforming the index is way too large.
There will be incredible pressure to find market opportunities which are big enough to move the needle: if Apple want’s to grow revenues by 30% (they have done 50% – 70% historically), they need to create USD 20bn in additional sales. This will become even harder in the coming years.
People who are in the first group above will probably have made a nice return and cash in if the run is becoming more difficult. People in the second group actually should never have invested in the first place and will run to the exit when things get difficult.
Finally, out of a pure investment perspective: What’s the upside?
It would be a hell of a feat to be the company which gets to USD 1 trillion market capitalization first. So that’s 2x if everything works out great.
I would strongly argue, that e.g. Salesforce can become the next SAP or Oracle. Now compare the upside of Salesforce which has a market cap of USD 21bn and could grow – if everything works out – to USD 80 – 140 bn (SAP and Oracle’s market cap, respectively).
Apple’s done it – they are legend. But I’m not convinced it’s a good investment.