The Case Against Apple
- By Stepan Lavrouk
Apple Inc. (AAPL) has been one of the most successful companies of the 21st century. Since Steve Jobs returned to Apple in 1997, the company has restored the Mac operating system to prominence and sparked a revolution in mobile phone design with the launch of the iPhone in 2007. It is difficult to bet against a business with such an impressive history. There are reasons to believe, however, that Apple's best days are behind it. Margin compression and lack of new product lines are just two issues that pose structural problems for the company.
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The intrinsic value of AAPL
IPhone sales growth is stagnating
The iPhone accounts for more than 60% of Apple's total sales, making it the company's most important product. The iPhone is more than a communication device - it is branded and sold as a status symbol, and the high price point for models like the iPhone X reflects that. Stagnating sales growth has been a problem for some time, and management itself has cautioned that sales are falling. In the fourth quarter of 2018, revenue from the iPhone division of Apple fell 15% compared with the same period in the previous year.
The reason for the decline is there is finite demand for status products that cost a lot of money. Regardless of how attractive the device is and how many cool features it may have, there are only so many people who are able, or willing, to spend $1,000 on a phone, particularly one which is expected to lose its functionality and exclusivity in 18 months' time when the next model is released.
Fatigue from this programmed obsolescence may also be causing sales to stagnate, with many consumers becoming fed up with their expensive devices breaking down over shorter and shorter periods of time. Finally, there is a natural limit to how many people can be lured in with the promise of slightly faster processing speeds and bigger screens. The original iPhone was popular because it presented a completely different idea of what a mobile device could look like. The differences between the iPhone X and the iPhone 8 are comparatively negligible.
Lower margins
One of the most common criticisms of the direction Apple has taken since Jobs' death in 2011 is that it lacks new ideas. New iterations of the iPhone have slightly bigger screens and faster processors, iPads are just big iPhones, the Apple Watch is just a small iPad and so on. While there is some truth to this argument (Jobs had a unique mind when it came to designing products), it is not in and of itself a serious problem. After all, there are plenty of highly successful companies that are able to get by without revolutionizing their industry.
The problem is Apple's plan for the future seems to be to pivot toward services - for instance, its foray into the market for video streaming and the recently announced Apple credit card. There are two issues here. First, these are markets with powerful established players who know what they are doing. By contrast, Apple's edge is in hardware and operating system software, which might not translate to these industries. Second, even if the company manages to get a foothold in the services market, the margins there are significantly lower than they are in the famously high-margin business of iPhone manufacturing.
Conclusion
This isn't to say Apple is incapable of succeeding in these new markets, or of perhaps redesigning or repricing the iPhone in a way that boosts sales. But at the same time, we shouldn't ignore the possibility that the iPhone may be a unique product, whose success cannot be replicated. The future for the company may not be as bright as the present.
Disclosure: The author owns no stocks mentioned.
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This article first appeared on GuruFocus.
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