Free 7-day Trial
All Articles and Columns »

How "Unique" Is Apple?

October 20, 2012 | About:

The Science of Hitting

216 followers
There was an article in the Wall Street Journal on Saturday discussing Apple’s (AAPL) newest store in Beijing – the company’s third in the city and their largest in Asia. Here’s the particular section that caught my attention for this article:

“Hundreds began lining up as early as Friday evening for the 9 a.m. grand opening and a chance to get their hands of special T-shirts commemorating the new store.

A pair of high school students, Wang Xueang and Chang Dawei, were first in line at 8:30 p.m. Friday night, bringing snacks in tow. They wanted to be among the first to see the store, they said, because they admired the 'unique' brand. 'Their goal isn’t to make money but to change the world, and it’s a culture we should learn from,” Mr. Wang said.'"

Let me start by saying the following: when Mr. Wang talks about changing the world, I would assume that he’s talking about the company’s game changing technology (or at a minimum, their ability to create products consumers love – they didn’t invent the MP3 player, but created a product in a class of its own in the eyes of millions -- while the company has stayed ahead in this regard for a decade, they don’t have a monopoly on innovation, and there are plenty of companies with huge R&D budgets and intelligent people looking to upend the lead horse.

When I first read Mr. Wang’s quote, I thought of “unique” in a different manner, and the way it has historically been thought of in terms of Apple – used by a small fraction of the world with a sense of differentiation from the masses. When thought of in this fashion, it reminds me of the luxury brands in China – and looking at that marketplace and how it has changed recently may be instructive for what’s in store for Apple (quotation from a China Daily article):

“When Sun Sisi planned to buy a new handbag, the 27-year-old Beijing office worker, who already owns some LV and Chanel handbags, turned her focus to niche brands this time.

'I am tired of the big names, and it is more important that I do not want a bag that many people on the street already have," Sun said. Sun is not the only one thinking this way in China's big cities. Luxury, but without showing off, is what Chinese luxury consumers are looking for now, especially in cities like Beijing and Shanghai.'"

The luxury consumers' new preference has helped some niche brands, which are not well-known, to grow fast in China, while some mass-market brands are seeing slower growth.

Burberry Group Plc, which recently released its trading update for the three months through June 30, said its revenue growth in the Asia-Pacific area dropped to 18 percent from 67 percent in the same quarter of 2011. Gucci brand's sales in the Chinese mainland increased by 17.2 percent in the first half of 2012 compared with the same period of 2011.

Meanwhile, leather-goods maker Bottega Veneta, which targets an elite clientele and insists on no logo, had a 62.4 percent sales growth in the mainland during the period, according to the half-year result of PPR SA, which is the parent company of both Gucci and BV.

"'Chinese luxury consumers are gradually giving up the brands, which the public is familiar with, and picking up the niche brands,' said Zhou Ting, executive director of the research center for luxury goods and services at the University of International Business and Economics in Beijing.”

This brings us to a critical question – what has made Apple so successful (with 17.1 percent U.S. market share as of August 2012) in mobile? The clear answer is innovation – when the iPhone was released in June 2007, it was literally in a class of its own, competing with products that looked dated by comparison (see here for an example). As we all know, this is no longer true – Apple faces real competition from Samsung’s Galaxy S III, and Microsoft’s (MSFT) hardware partners will release phones over the coming months that will add additional pressure to the company’s top selling product (the iPhone has accounted for more than 50 percent of Apple’s sales year to date).

This is where I believe the distinction between Apple of old and new comes into perspective; while Mr. Yang thinks the company is “unique”, I think the reality is that most consumers are only concerned with the product in their hand (they don’t have any special affinity for Apple) – and that they wouldn’t hesitate to drop their Apple products if something better came along.

Consider the case of Nokia (NOK) – the company was the industry leader, and spent the better part of the past decade at the top of “Best Global Brands” rankings; here’s what was written by Bloomberg in August of 2007:

“Given its No. 5 ranking, it may seem crazy to consider the Finnish giant a comeback story. But it is one, as evidenced by a 12% jump in brand value, which extends a rankings winning streak after faltering in 2004. Nokia realized its focus on making cheap handsets for the developing world was hurting it in the U.S. and Europe, where consumers wanted phones that played video and surfed the Web. Nokia released high-end phones aimed at both the consumer and business user and is showing strength in emerging and mature markets alike.”

With hindsight, we know that this “strength” never materialized, and that the company is fighting for its life just five years later (a time period during which the stock has fallen more than 90%); my contention is that the idea of brand equity in this segment is really a case of product equity – you are only as good as your latest innovation, and the crowd will abandon you if you’re no longer on the cutting edge. This is what happened to Nokia in the space of a few years – and I think that anybody who believes Apple is immune to this phenomenon is kidding themselves (obviously this line of logic assumes Apple won’t stay on the cutting edge, which is far from assured).

Some people think that there’s lock-in among these devices – when you buy an iPhone, you’ve got to have an iPad, a Mac, etc; while I think this argument has merit, I think that it is way overstated in the current environment (interconnectivity among devices is still in the early days, and I still think it’s unclear what role the product platform as a whole will play). I would simply point to some industry statistics that suggest switching might not be as painful as some assume: Gartner, for example, estimates that of all mobile app store downloads in 2011, nearly 90% were free downloads.

My point is this – investors who are assuming lock-in among consumers to any product or brand better have a thorough understanding of what’s driving that lock-in and how sustainable it is; I think history has shown that these “advantages” have proven to be overstated in real time, only to be correctly analyzed in retrospect – and I think that Apple may be a case where that could play out over the course of a few years without a clear sign of industry leadership in terms of game changing innovation (and an iPad mini doesn’t fit the bill).

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 3.8/5 (33 votes)

Comments

yhlbb
Yhlbb - 1 year ago
I don't think you own an iPhone, iPod touch, or iPad.
The Science of Hitting
The Science of Hitting premium member - 1 year ago
Yhlbb,

I own an iPod, and have used all the devices mentioned. Are you implying that they have features that are not currently matched by (or couldn't be matched by) competitors? What do these products have/do that leads you to that response?

People liked the Motorola RAZR a lot too - the original sold 50M units in the first two years, alot more than the iPhone did over a comparable time period. Did you own one? A lot of people would have told you it's a unrivaled phone with a cool design and some great features...

As I point out in my article, staying on the leading edge of inovation is key, and it's very difficult to do; Apple has done so to date, and many people have faith that they will continue to. I think history shows that this is much more uncertain than many believe.

Do you have any thoughts on the sustainability of this innovation, or do you simply assume people will buy Apple products regardless of their innovation over time?

Peticolas
Peticolas - 1 year ago
I think the risk with Apple is that it's becoming too much of a cell phone company. 50% of its revenues and 70% of its margin come from the iPhone. I was a happier shareholder when they had a more diversified revenue stream. Frankly, when I saw the iPhone 5 rollout, I was impressed with the panoramic photo capability as a genuine piece of tech innovation. Other than that, tech innovation seemed to be missing. I actually think Google is the more innovative company at this point.

Disclosure: I own shares of both Apple and Google,
yhlbb
Yhlbb - 1 year ago
The best way to answer your question is to own an iDvice yourself (my recommendation is the 8GB 4th-gen iPod Touch on craigslist for $100 or less to start with).

I have had good luck reading Buffett's words. For example, I read that he bought Acme Brick in 2000. I felt that he was betting a rebound in the housing market, so I bought 2,000 shares of PHM (they build houses in my area) in 2011 at the average price of $6.1/share; the price went down below $4 after I bought them; I still own PHM today.

This year, I read that he would "not be at all surprised" if Apple and Google are worth a "lot more" in ten years. I knew he had looked at the numbers and business of these two companies. But the two are not in his circle-of-competence. It happens that the two are in my circle-of-competence (I have a Ph.D. in CS specializing in the areas of OS and networking).

My bet is on Apple, and I am hoping the price will go down further so I can buy more. Currently, I am betting on a longer time frame than 1 year. In particular, I am betting a blowout Q1 2013.

Currently, I don’t see any company that can compete with Apple in design, manufacturing, and distribution. With Taiwan and China’s help, Apple can compete on price (and offer much better products). Google is still a one-product company (ads that is making money). Their effort to emulate Apple (by buying Motorola) will only hurt them down the road.

In short, I think Apple is a positive “black swan.”

P.S. I don’t recommend buying any stocks mentioned above.

The Science of Hitting
The Science of Hitting premium member - 1 year ago
Peticolas,

You make a great point about the iPhone, and that's the reality of this industry: one great innovative product won't last for long - it must be continually followed up with game changing new products (which there's no question Apple has had to date). In regards to the panoramic photo tool, that technology has actually been on other platforms for some time - for example, my girlfriend has noted every time that new commercial has shown that she's had that on her Droid Bionic for over a year now.

Yhlbb,

As I noted above, I already have an iPod (maybe you didn't read my comment). As for the rest of your comment, it addresses nothing presented in the article; I'm not talking about Apple's ability to beat earnings in the next year - I'm talking about the sustainability of the current level of earnings 3+ years into the future.
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
A number of years ago we started purchasing apple products and have never enjoyed such a long span of realitive computing bliss. That builds brand loyalty. Pain of switching helps further maintain that 'loyalty'. Much like the time I bought a Toyota and my dad noticed how reliable it was compared to his Chryslers and GMs and so bought a Toyota himself. His experince was so satisfying we couldnt get him to look at any other vehicles even a decade later. Too much trouble and risk to take a chance when he had confidence and familiarity with Toyota.

Recently, we bought all Sony equipment, TV, home theatre, DVD player etc in the hope that they'd all work together seemlessly and hassle-free. The reality though has been the opposite. There's so much room for Apple to further expand market share.
yhlbb
Yhlbb - 1 year ago
Investing in tech is a risky business. But I found Apple to be the easiest to decode. I use their products daily (their products are very sticky; once you use one, you are hooked), I constantly check what phones people are using when I am near a group of people, and there is an intense focus on the company on the net by reporters and users worldwide, such that it's hard to miss not reading any potential competing products and issues with their products (all good info to make a stock buy/sell decision). And, most importantly, the Apple brand is very strong (#2 in the world now; will be #1 soon), which is valued by Buffett when he looks for stocks or companies to buy.

BTW, my family drives only Toyota cars as well (the best value is Scion XB), and I own their stock (looking to sell because of the conflict with China). The best HDTV (especially for movie viewing) is Panasonic plasma HDTV.

P.S.

1. I don’t recommend buying any stocks mentioned above. I need to make a correction: “Acme Brick Company agreed to purchase substantially all of the assets of Jenkins Brick & Tile Company in 2011.”

2. iPod Touch is not the same as iPod because “iPod” is an ambiguous word.

SeaBud
SeaBud premium member - 1 year ago
Apple (consumer electronics) are my circle of competence. Apple has been a black swan event. The question Science is raising is will they continue to be a black swan. I think if they only stay in phones/computers, they will certainly not continue their unprecedented margins/success as their ease of use and technological lead is fading. There is opportunity in AppleTV/home media and their history of successful integration (best user experience) hints at success.

However, Steve Jobs is gone. Not sure if this can be overestimated. Second, competitors now understand that the Apple ecosystem, rather than pure technology, won them their margins. Telecomm carriers (ATT/Verizon), phone companies (Google/moto, Nokia, Samsung) and software companies (Microsoft, Google) are all taking direct aim at Apple to steal some of that margin.

I own all Apple products, but if I can get the same or similar experience for less, I will buy it (and I am not price sensitive). Most of growth is in more price sensitive geographies (India/China) and this does not bode well for Apple. I own Apple in brokerage accounts but would not buy it now. If their next growth product is announced and looks like a blockbuster, they might continue this run, but it will not continue by evolving current products. I like Microsoft and Nokia as a safer growth stock and high risk opportunity, respectively.
tkervin
Tkervin - 1 year ago
Apple has a massive market cap. That will, in the end, limit the upside unless past history is no longer a guide to future max company size. (I know, this time it is different)

Apple was a better buy when I purchased at $65. (I sold too soon alas!)

Eventually AAPL will become a dividend stock. For now there is little reason to fool around with new positions here. Goodness, what is the chance of a multi-bagger at this market cap size?

None.
yhlbb
Yhlbb - 1 year ago
Let me give you an example: I bought 2,000 share of PHM in 2011 and it's almost a 3-bagger now. My gain is about $23K now, not bad. Now, consider, I bought 300 shares of AAPL for about $100K. Now, it's about 190K. The gain is about 90K. Which one do you prefer?

You might ask why not buy $100K worth of PHM (~16.6K shares)? Well, I was too chicken to do that.

Now, let say I buy $500K worth of AAPL, and a few years later it's $1M (only a 1-bagger); that's not a good investment?

You have to look at the down side as well. not just think about the up side (multi-bagger).
The Science of Hitting
The Science of Hitting premium member - 1 year ago
Yhlbb,

Have you assessed the downside in Apple? Why not do a write-up on the importance of the individual products to Apple's top and bottom line, as well as how long they've been key to the company's success (how important was iPod, and how long did it last? etc) and how long competitors with similar products (for example, the Motorola RAZR discussed above or any Nokia products) have been able to sustain such dominance (and profitability). That would be an interesting exercise in assessing the potential downside if the company has trouble innovating in a post-Jobs world (unless you think iPod mini is a game changer?).
Matt Tommasiello
Matt Tommasiello - 1 year ago
Great post. I have the same thoughts regarding the sustainability of their innovation. I think they've produced great products over the last 10 years but have always found myself coming back to the question of is it sustainable.

I still haven't been able to figure it out, and don't think I will. I do know I'm not comfortable assuming they'll be able to release hit product after hit product for another decade.

Again great post, I've refrained from writing something along these lines because of the feedback. For the most part people get a bit defensive with Apple.

You're braver than most who decide to write about Apple.

The Science of Hitting
The Science of Hitting premium member - 1 year ago
Matt,

Thanks for the kind words. You're spot on in your remarks, and it's a good warning for investors - if a stock becomes like religion to you (defending it at all costs without willingly accepting the facts/risks in question), be careful. I'm certainly not predicting the end of Apple is near - I simply think that the "moat" many think they see could easily be destroyed in a period of 3-5 years, and that the "cheap" P/E multiple starts to look a lot different when you account for the fact that earnings from key products have a tendency to dry up as competitors play catch up (requiring a continuous cycle of innovation that might be more difficult to continue without Steve Jobs at the helm). Again, thanks for the comment!

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Hide