A not so long time ago, in a galaxy not so terribly far removed from this one, there was a disturbance in the Force. Apple Computer, as it was known back then, was quite literally on the verge of going out of business. The vultures were circling, the epitaphs were being written, the end was nigh. The Empire, Microsoft for those keeping score, had won, led by Bill Gates, the Darth Vader of the business world. Its Death Star -- which went by the name of Windows -- had taken over the Galaxy and blanketed it in the beige boxes of its stormtroopers, each of which carried a brain built by Emperor Grove of Intel.
What happened next, of course, is a tale as stunning as Luke Skywalker and a bunch of furry Ewoks overcoming the Empire, destroying the Death Star, deposing Vader, and bringing a new era. Nearly two decades removed from those dark days, the embodiment of that era -- the Apple iPhone -- is at the peak of its power. It brings in most of the profits in the industry, fueling "the rebellion". It's magnetic pull brings developers by the millions to the platform, making the Force strong with iPhone. After years of warnings from the Jedi council that developers should build for Android first, instead of iPhone no such shift has occurred. (Indeed, in the time since that linked post appeared Android share in the U.S. has exploded, but so has iPhone/iOS.)
Still, as we exit 2015, there is a disturbance in the "light side" of the Force. Apple, apparently, is once again doomed. Wait, what you say? It's the most valuable company there is, worth more than $600 billion. Yes, yes, but as Yoda might tell us: Reason not from absolutes, see the world for the relative.
From there, the picture is bleak indeed. Apple's $600 billion is soft (like a bunch of old Jedi that have no idea Anakin will be their undoing). It contains $140 billion in cash once you subtract out the debt on the balance sheet. The company has been piling up that debt at infinitesimal interest rates to buy back stock and pay dividends. It turns out this is a profitable trade, according to a CFA who did the math over at The Motley Fool but it earns the company no plaudits on Wall Street. Indeed, one can argue the valuation is now just $460 billion after cash. Net of cash, Google -- a new power in the galaxy -- is arguably worth more at $465 billion.
Apple's numbers look even worse when you consider the valuation metrics. Analysts expect the company to earn very roughly $60 billion next year, placing the price-earnings ratio below 8 after taking out that cash. For Microsoft, which is forecast to grow more slowly than Apple, the forward P/E ratio minus net cash is nearly twice Apple's at 15. As a reminder, that's the Empire we're talking about. Not only is Vader long gone, rehabilitated and off to save worlds with his wealth and power, but there is evidence that Death Stars ain't what they used to be either. Generations raised under the light have come to wonder why they should bow down to Windows and Office, what purpose the beige boxes ever served. They know nothing of Intel and less of Emperor Grove.
How can this be? The light has never been so triumphant. Led by the humble Cook, Apple exists in a world where even its enemies share common interests. Google creates powerful tools for iPhone, even while competing with it. New powers in the galaxy, like Facebook, appear to be rivals only on the far distant horizon. Mobility has won and iPhone is its most powerful embodiment.
Yet along with Grand Master Bezos, whose Black Hole of Galactic Domination Via Reinvestment of Every Dollar has made Amazon a shrewd manipulator of the Force, Google, Facebook and even Microsoft are treated as part of the future by those that do the counting. Apple is valued as though it is the past. As if Luke Skywalker is about to turn off his targeting computer, turn to the Dark Side, and use the Force itself to fire his weapons into the single vulnerability that will destroy Apple's power.
The thesis is that Apple relies too much on the iPhone, which accounts for the majority of its profits, and that this year will be the first where iPhone sales don't exceed the prior year's. With the iPad already looking like the Jedi at the end of Attack of the Clones (i.e. not out, but certainly down) and the Apple Watch a flop, this is the moment where Apple really is going to implode. When you add in the zombie idea that the web will somehow resurrect itself and defeat apps, even the strength of Apple's "ecosystem" -- the idea that more apps bring more users, which bring more apps -- becomes nothing but an eventual weakness.
Is any of this actually rational? Well the world of Star Wars provides some valuable instructions yet again. For all the might of the Empire (incredibly minor spoiler alert!) they keep building the Death Star in a different incarnation over and over and, well, the rebellion somehow finds a way to blow it up. So to does Wall Street keep missing the forest of Endor for the trees on Apple. This isn't some new kid on the block. This is the company that invented the consumer technology revolution. It truly put the personal in personal computer. It put digital music players in everyone's pockets. It made smartphones work.
For all its failure to get Wall Street to value it more highly in 2015, it produced $53.4 billion in earnings for the recently ended fiscal year on $234 billion in revenue. That top line represented 28% growth off an already astounding figure. For good measure, Apple bought back 329 million shares of stock and increased its dividend by 10%. It did all of this while growing net cash on the balance sheet, introducing a greatly updated AppleTV; a revolutionary new Macbook; a large-screen iPad Pro; the aforementioned Apple Watch; a new music service which was the exclusive place to stream Taylor Swift, and somewhere along the way blowing past the 800 million mark on iPhones sold to date. (The "dying" iPad is closing in on 300 million incidentally.)
As Horace Dediu at Asymco likes to explain to people who will take the time to listen, Apple is a recurring revenue business where customers buy products from the company periodically and then spend -- whether on music or movies or apps -- to make those products work better as they own them. Unfortunately for the Apple investor, this narrative tends to last until Katy Huberty at Morgan Stanley decides to post a note explaining that this year will be the one where iPhone sales drop a few percentage points.
It's almost incidental whether she's right or wrong, the fact anywhere cares at all is why the company is valued like a movie studio: dependent entirely on the next hit for its valuation. And because no hit can possibly be as big as iPhone, well, there you go. Never mind the $20 billion services and software business that Apple has built. Sure, sure, that's bigger than all of Facebook. But it isn't the droid you're looking for.
Pay no attention to the fact that Apple has turned iPhone into a monthly subscription product where you pay about $1 per day to have the latest and greatest model every year and the one you turn in gets refurbished and winds up in India where it's an object of desire still.
Ignore the fact that Apple is slowly positioning itself to have a split product calendar again, where a cheaper iPhone is introduced in April, along with a second-generation Apple Watch and a third rev of the iPad Air. That this re-segmenting of product introductions should help smooth a bit of the seasonality and keep people coming into the rebellion's best secret weapon of all -- its ever growing base of company-owned stores -- is irrelevant.
And, of course, the fact Apple has been working for years on bringing subscription video to Apple TV, a potential multi-billion-dollar business, should be dismissed because thus far those efforts haven't succeeded. Like the undisciplined young Anakin and even Luke, the early failures should be presumed to tell the whole story here, right? No one should be looking ahead to the continued millions of cord cutters and the increasing desired of content owners to find some way, any way into living rooms -- even if that means dealing with Apple on its terms. It's not as if Apple made this work in music once (twice?) upon a time.
Then there is transportation, which is just on the cusp of the greatest revolution since one of the earliest Jedi -- the one called Ford, where Apple has apparently amassed its own army. This too should be ignored, for unlike Google's highly publicized efforts, it happens mostly in secret, at rebel bases only the few are trusted with information about.
Yes, indeed, Apple is doomed. Except unlike the last time it has nearly unlimited resources. It has hundreds of millions of customers. It has armies of loyal suppliers. It has tremendous leadership. It has more weapons. It's enemies fight against one another and not just against it. Perhaps someday it will be held in similar esteem as the Empire.
