Apple – Priced to Perfection?
By: Shishir Nigam Fri, Nov 20, 2009
The price chart below looks like any investor’s dream if they got in at the right time. Things definitely have been going Apple’s way of late – in their latest quarter, Apple had record quarterly sales for Mac products (3.05 million units), iPod Touch sales grew 100% year-on-year, iTunes maintained its position as the world’s largest music retailer, iPhone sales (7.4 million units) rose 185% year-on-year and Apple now has $34 billion in cash and other liquid securities on their balance sheet. Phenomenal – to say the least, considering that we are only now coming out of a recession. But here’s the million (or billion) dollar question – can Apple really maintain or improve on these staggering growth rates? Expectations for Apple are now set at stratospheric highs, only perfection will do – nothing less.
Losing their first mover advantage?
Apple benefited from being a first mover in each of its product lines. The iPod changed the portable music industry, iTunes changed music retail, the iPhone changed smartphones and the App store changed software. Being the first mover allowed Apple to aggressively increase market share. However, first mover advantage does not last forever, once new entrants adopt the new trends, competition gets very much down to trench warfare and who can hold their ground better.
That is what we will be seeing as Apple sees more competition in each product line. To take an example, in the smartphone arena, numerous phones have emerged such as the Palm Pre, HTC Touch, LG Vu, Samsung Instinct and new Blackberries. Not to mention Google’s open source Android operating system which is being seen as the biggest threat to the iPhone. Many people are seeing similarities between what happened to the Mac when the PCs started taking up market share in the 80s and what could happen to the iPhone because of the Android platform. Nearly all the major players in the smartphone industry are part of the Open Handset Alliance that developed the Android which has now been implemented on a wide range of devices, including those from Nokia, Dell, Asus and Motorola. As a result, the choice of devices using Android will be huge. In the 80s, this choice was generated by Microsoft’s new standardized operating system which could be run on many hardware platforms and thus pushed the Macintosh out of the market. Might we see a re-run?
Likewise, while the App store is being touted as the feature that’ll keep smartphone competition away, the App store is no longer a feature unique to the iPhone. From the developer’s point of view, they will tailor their new apps to take advantage of all platforms such as the Android, PSP and the Blackberry app store, because it doesn’t make economic sense for them to restrict their apps to iPhone users.
A Comparison – Research in Motion
All that to say, it will be immensely hard for Apple to keep up its rate of growth, and margins now that it has moved past the stage where it’s still benefiting from being a first mover. To offer a comparison, look at the price chart of RIMM below from Aug 06 – Jun 08. That was when RIMM was benefiting from its own first mover advantage and expectations for its future were sky high. The second chart shows the price till present day.
Here’s a quote from a research report on RIMM from early 2008 – “Wall Street has high expectations for RIMM, they believe the company will report a solid first quarter while preparing to release a flurry of new products in the coming months to ensure its dominance in the business-oriented smart phone market.“ Sound familiar?
While I agree that Apple has a lot more loyalty towards its products than Research in Motion did, Apple too will suffer from competition and to continue to expect blow-out quarters (which analysts continue to do, hence an average price target of $234) might be asking for a little too much perfection.
Disclosure: No position in AAPL.
Image Credit: Dan Diemer under a Creative Commons license.
Young & Invested is THE hub for finance and investing insights from the new generation. Head to our blog for more insights! — http://youngandinvested.com
Last 3 posts by Shishir Nigam
- When Correlations Collide - March 7th, 2010
- Is the United States an “Emerging Market”? - February 28th, 2010
- It’s Time To Accept The C$ At Parity - February 21st, 2010
Great article Shishir. I really agree with you that its hard maintain such high expectations. One of my favourite investors (Dave Dreman) explains in his book that positive surprises for such highly value stocks never raise the price too much since it’s already expected, but even the smallest negative surprise will cause large decreases. I can defintitely see that applying to the case of Apple.
It would have been interesting to see your analysis on the upcoming Apple tablet as well since I’m VERY curious to see as to how that will affect their market share.
Hey Shishir,
Great insights but when looking at apple you really have to look at their future line up, their loyalty base, and what their current platforms (iTunes, AppStore, itunesu) really mean.
All of their recent products, from the iPod to the iPhone, gave the word revolutinize a whole new meaningz
Yes, I may have some bias as I am typing this comment on my iPhone but having used the new smart phones, they still don’t come close to iPhones user interface and browsing.
But the real story with apple is the upcoming rumoured tablet. Even though apple hasn’t gave a word about the product, publishers such as Conde Nest have already been preparing their publications for the revolutionary digital device. Translation: a market and demand is already being created before the product has even come out, now that’s power.
But with tablet you really have to look into the actual market apple want to tap in and that is education. With the expansion iTunesU on iTunes, I see apple positioning itself to be the supreme supplier for higher education institutions all across north America and the world in the future. My prediction- textbooks are toast and every university student will have the tablet with students purchasing books from the itunesu store. Now calculate the profits there.
My recommendation: buy apple on dips, especially the weak market that will be seen after dissapointing holiday shopping season.
*apology for any typos as I did type this on my iPhone
I don’t know which analyst wrote that report and to say that Apple will stand still and let the competition swept them over is a bit short sighted and to them with RIM really takes the cake.
RIM had been sitting on their glories for far too long and they had been borrowing technology from others to build up their infrastructure in other words they are no innovative juggernauts and if not for their BES they would have been cast to the side.
Innovation is the name of the game and Apple is great at it and will continue to do so in the interest of making money and not capturing market share. I only fault I can see is their highhandedness as their app store approval process and if they don’t rein that in one day their customers and fanbois will cast their eyes in other direction.
OK, fair enough. When a company is high flying most every analyst in the world wants to be the first to call it’s downfall. But if I may inject my experience on the matter.
In 1999 I bought 1000 shares of AAPL @ $35. Those same shares today are worth $800 each. (adjusted for 2 splits) If I had sold any of the 5-thousand times someone suggested I should, do you think I would be as happy, or as rich as I am today?
Trying to time the market is so Kobayashi Maru…… and why in the hell would I sell while Apple is breaking revenue and earnings records during the worst recession in modern history?
I´m sorry but I have to say “it is innovation and quality stu***d”. Apple was not first with iPod, nor with iPhone!!
To expand on Art’s comments.
Apple was NOT first mover in any of the four products that are mentioned in the article.
The iPod was far from the first music player. There were hundreds already available when the iPod came out. And if you recall, originally it was only available for OSX users. Only later available for windows users when the windows version of iTunes came out.
iTunes also was far from the first music store. Real and Sony had one previously, as well as the free and infamous Napster. iTunes now is a huge ecosystem that handles audio, video, books, mobile applications and the syncing of telephones with calendar programs, address books, etc. It’s a one stop program that handles everything you wanted for your mobile device. Even corporations that handle iPhones, handle them through iTunes.
Calling the iPhone a first mover for smart phones is ludicrous. Palms, Blackberrys, Windows Mobile phones all predated the iPhone. Windows mobile, in particular, has been out for over 10 years.
And finally, the app store is actually a part of the iTunes store. And again other phone systems had predating applications stores. They just never made them easily accessible for their customers. And more importantly, they don’t have the OS ecosystem for developers that Apple has for the iPhone. iPhone apps are 1) easier to develop, 2) look better, and 3) are more consistent in operation and appearance. All good things for both customers and developers. It just works.
I think apple is going to go strong for a while longer, until there is a good competitor, as we come out of the recssion poeple’s purchasing power will (hopefully) increase, thus they buy more tech gadgets(luxary goods) and apples iphone (in my opnion) does not have a decent competitor, right now. However in the near future I see the competitors stepping it up.
You wrote, “Apple benefited from being a first mover in each of its product lines. The iPod changed the portable music industry, iTunes changed music retail, the iPhone changed smartphones and the App store changed software. Being the first mover allowed Apple to aggressively increase market share. However, first mover advantage does not last forever, once new entrants adopt the new trends, competition gets very much down to trench warfare and who can hold their ground better.”
Nonsense. Apple was NOT the first mover in any of those product areas.
The iPod was not the first PMP.
iTunes was NOT the first online music retailer.
The iPhone was not the first smartphone.
The AppStore was not the first mobile app store.
Your idea is catchy, but it’s completely false.
Your conclusion is just as ridiculous. Even if we were to assume Apple was first mover, where is the support for your claim that Apple’s advantage won’t last? Has the iPod slipped from its 70% share of the global PMP market? Nope. Has iTunes slipped from selling 70% of online sales? Nope. Has the iPhone slipped? Nope, its share is still growing. Has the AppStore slipped? Nope, it’s getting further and further ahead in numbers of apps and in numbers of downloads both paid and free. So, where is the justification for your catchy premise?
You wrote, “Many people are seeing similarities between what happened to the Mac when the PCs started taking up market share in the 80s and what could happen to the iPhone because of the Android platform.”
This is OLD news. People have been making these analogies since the iPod gained success. There is only a superficial resemblance between the old PC market of the 80s/90s and today’s world. Is the Android really threatening the iPhone or is it threatening something else? Isn’t it really threatening WinMo and Symbian?
You said, “Nearly all the major players in the smartphone industry are part of the Open Handset Alliance that developed the Android which has now been implemented on a wide range of devices, including those from Nokia, Dell, Asus and Motorola”
It’s free to join the OHA. Don’t expect Nokia to make any Android devices as long as it’s promoting Symbian and Maemo. Why should anyone feel threatened by Dell? Why is Samsung coming out with their own mobile OS Bada, even though they are a member of the OHA? It’s free to join and listen to all the things that are going on.
You wrote, “As a result, the choice of devices using Android will be huge.” It doesn’t matter how many devices there are, it’s up to the carriers to put the devices on the shelves. Look at Nokia in the US. Nokia is the world’s device leader, and yet, as long as they can’t get decent shelfspace on the wireless carriers’ shelves they’ll be a niche. The carriers have been slow to allow Android devices on their networks for fear of being turned into a dumb pipe. We have to wait to see how “huge” this becomes.
You wrote, “In the 80s, this choice was generated by Microsoft’s new standardized operating system which could be run on many hardware platforms and thus pushed the Macintosh out of the market”
What choice? MS signed contractual agreements with the OEMs to only sell DOS and later Windows. Who had a choice?
You wrote, “Likewise, while the App store is being touted as the feature that’ll keep smartphone competition away, the App store is no longer a feature unique to the iPhone.”
Uhm, yeah, like Palm’s Pre has an app store, and its 300+ apps are so equal to the 100k apps on the iPhone. You make no mention that people with an investment in apps on one platform are likely to stick with that platform.
You wrote, “From the developer’s point of view, they will tailor their new apps to take advantage of all platforms such as the Android, PSP and the Blackberry app store, because it doesn’t make economic sense for them to restrict their apps to iPhone users.”
Did you just lift this comment from Ray Ozzie? From an economic point of view, a developer will write apps for the platform that will give him the highest ROI, and then consider porting in descending order of popularity.
Your whole premise is built around the idea of “first mover” which Apple wasn’t. You even point out that Blackberry was first mover. How can the iPhone be first mover if BB was too? Just so much nonsense based upon a false premise.
AdamC,
Thanks for your comment. I realize Apple will not stand still and let competition blow them away. But the point that I make is that it’ll have to devote more and more energy to warding off competition – which might well result in slower growth and lower margins. And THAT is something analysts and investors are not yet ready to accept, so when it happens, it’ll come as a -ve surprise. For a stock like AAPL that has so much positive expectation priced in, the smallest -ve surprise can hurt its uptrend.
Pete and art,
Thanks for your comments. You make a good point and “first mover” was probably the wrong term to use to describe my idea. By “first mover”, I meant to say that Apple in each of its product lines provided a user experience and product features that were novel in many ways from existing products, thanks to which Apple was able to differentiate itself. The benefits of differentiation allowed Apple to gather market share and loyal customers. But the “differentiation” is not permanent. It wears off when your competition catches up and as a results you devote more and more resources to warding off that competition, detracting from your previously focused growth efforts. No company, including Apple, is immune to the effects of increased competition and what it takes away from their growth strategies.