Apple (AAPL) Stock: Peter Thiel is Right: The Age of Apple is Over
Peter Thiel is a prescient investor and well-known venture capitalist. A technology icon, he's a member of the Trump transition team, and will help shape tech policy over the next four to eight years.
Thiel is also a man who thinks the age of Apple (ticker: AAPL), the largest public company in the world, is over.
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When Thiel talks, investors listen. He, along with Tesla Motors ( TSLA) CEO Elon Musk, was one of the co-founders of PayPal Holdings ( PYPL). He leveraged his PayPal money after eBay ( EBAY) acquired it for $1.5 billion to make early investments in companies like Facebook ( FB), Airbnb and Palantir, among others.
So AAPL stock owners should wonder why Thiel, in an interview with The New York Times, expressed his belief that one of the most innovative companies of this millennium has little left to offer.
"We know what a smartphone looks like and does," Thiel says. "It's not the fault of Tim Cook, but it's not an area where there will be any more innovation."
Those allegations may be hard for Apple shareholders to hear. But keeping an open mind to criticism is a common trait of great investors, and considering the fact that AAPL is one of the most widely held stocks in America, these comments are relevant to millions of Americans.
And unfortunately for them, Thiel is onto something.
Numbers don't lie. In fiscal 2016, Apple posted its first annual sales decline in 15 years, as sales of its flagship iPhone faltered. iPhone sales began falling in the fiscal second quarter of 2016, the first yearly sales decline the blockbuster product -- first introduced in 2007 -- had ever seen.
iPhone sales have continued to slump in the quarters since then as well; in the second quarter iPhone revenue fell by 18 percent, then 23 percent in Q3 and 13 percent in Q4.
But you'd be wrong. Thiel focused on the smartphone industry for a reason: iPhone sales account for an incredible 60 percent of overall AAPL revenue.
"2016 was the worst year on record for the smartphone industry," says Angelo Zino, CFRA equity analyst. Zino thinks investors can expect a more "muted environment" for smartphones going forward. "And given about two-thirds of Apple's revenue base is in iPhones, they're going to need to find other ways innovate."
Without innovation, "replacement cycles are going to extend over time," Zino says. "Apple needs to find ways to diversify its end markets."
Cook is certainly aware of Apple's crippling one-dimensional nature. Unfortunately, all of Apple's attempts to do something new in recent years have failed miserably.
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The Apple Watch, for instance, is the only new product line introduced since Cook became CEO in 2011. It hasn't done so well.
"The Apple Watch is looking like a failed product and has been surpassed by Amazon Echo as the device de jour, highlighting Apple's competitive pressure from Google ( GOOG, GOOGL) and Amazon ( AMZN) at delivering intelligent cloud services," says Peter Yared, CTO of Sapho and former CIO of CBS Interactive.
"The reality is that the innovation days may be behind it -- they are selling LG's screens at this point rather than their own," Yared says.
An Apple TV service was rumored but never produced. So was an Apple-branded car, which in 2014 Apple reportedly hired over 1,000 people to develop. Since then, the idea has apparently been abandoned, and hundreds working on it have been let go.
So, when Thiel confirms that the "age of Apple is over," he's not kidding. Apple stock owners should consider these issues going forward.
Of course, it's intellectually dishonest to say that there's absolutely no bullish thesis for Apple stock. There are several ways 2017 could turn out well for AAPL shareholders.
-- Donald Trump is widely expected to lower corporate tax rates, and a reduction in the repatriation tax -- which U.S.-based multinationals pay to the U.S. government when they bring back money from overseas -- would be a huge boon to Apple. Apple has more cash than any company in America. And of $237.6 billion in cash on its books, about $215 billion of it is held overseas. At the current 35 percent rate, it would cost AAPL more than $75 billion to fully repatriate. Lowering the repatriation tax would likely result in billions of dollars in savings that could go toward paying off debt, increasing dividends, or reinvesting and hiring.
-- The next iPhone could be big. Yes, the iPhone has seen a glacial rate of innovation. However, the iPhone 8 is expected in September and is expected to be much more exciting than the underwhelming iPhone 7. It will be the 10th anniversary of the original iPhone, so consumer technology circles are expecting something big, with some speculating that wireless charging may be a key feature of the iPhone 8.
An uncertain path. Apple isn't a growth company anymore. It got too big for its own britches, and too reliant on one product. While there's little doubt AAPL will be a prominent blue-chip company for decades to come -- its massive cash hoard alone makes this inevitable -- whether it will ever thrive again is very much in doubt.
Smartphones have become more and more commoditized, and improvements more incremental and meaningless. To reverse course and become the old, inspiring Apple of yore, AAPL needs to take its own advice and Think Different. Take on a new challenge.
Thiel might have inadvertently made a recommendation: "Cellphones distract us from the fact that the subways are 100 years old," he said.
[See: Artificial Intelligence Stocks: 10 Companies Betting on AI.]
There you have it, Mr. Cook. Your next blockbuster product: the iSubway.
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