Back in August 2011, I posted a prediction that Apple’s growth would slow. Today Apple announced flat profits and the stock declined 6 percent in after-hours trading despite the company not having suffered a truly failed product launch (like Windows 8!). One of my follow-up comments on the original posting explained the theory better than the original post:
Mark: “Five years from now you’ll be using some new Apple product that you aren’t even imagining yet.” That’s also true of BMW (1/10th the market cap of Apple) and just about every other company that makes consumer products. The capacity to innovate is already priced into Apple stock, just as it is into BMW’s, and does not have infinite value. Since Apple has been very successful in the past, the stock price reflects investors’ estimate that they will be very successful in the future. So where another company might get a huge lift in value from a new product launch, for Apple it will already have been priced in. By contrast, a failed product launch could bring Apple’s perceived value down.
(The stock price, of course, could still go up if Apple decides to retain earnings or do stock buy-backs rather than pay dividends.)
How would you have done if you’d read my posting, thought about it, and sold Apple in early September 2011? You’d have received about $400 per share and presumably purchased the S&P 500. The stock closed at $514 today but the after-hours trading decline of 6 percent suggests a price of $483. SPY has gone up 26.5 percent since then so you’d have $504. I don’t think that this analysis correctly reflects the difference in dividends paid by the S&P compared to Apple. The fact that the two investments performed so similarly suggests that my hedge fund genius friend Tom is correct when he says that all investment classes should be expected to produce the same return.
Readers: What’s the next act for Apple? Let me start by listing off a partial list of somewhat expensive products that are painful to use, contain at least some electronics, and that would be relatively easy to improve:
- big-screen televisions and Blu-Ray players (whenever I want to use one the device decides that it is time for it to download and upgrade its software)
- cable television (flipping up and down through a list of 1000 channels?!?! How is it that an interface developed for a TV with a rotary knob to select among 10 possible channels was ported to the 1000-channel case?)
- compact digital cameras (a million buttons and menu items, almost none of them relevant to a photographer’s objectives in making a picture)
- Windows 8
- Android tablets other than Amazon’s (I have the Google Nexus 7 and it simply cannot hold a charge so it is essentially limited to being plugged in full time; ridiculously poor power management compared to the iPad)
- automobiles (start with the fact that the speedometer is front an center rather than a moving map; why would I care about my speed if I’m in heavy traffic (which I always am, since I drive in the U.S.) and/or if I am traveling at a legal speed (which the car knows from its navigation system database))
- houses (even a toilet knows when you’re standing in front of it; how come all of the stuff in a recently built house isn’t smart enough to detect the “nobody is home” case and turn down the heat?)
Apple’s superior profitability seems to stem from the spectacular stupidity of other companies and sometimes industries. One would think that this source of profit would dry up as the world economy becomes globalized and market discipline kills off the dullest competitors. However, the examples above show that there is still a tremendous amount of opportunity for a company with enough scale to reach consumers and enough taste not to make something absurdly bad.