- Your history
Apple has its Nokia-moment
Apple is on the brink of becoming the biggest company in the world in terms of market capitalization. It will exceed the size of Exxon Mobil, the US oil company. (The chart on the top shows the Market Cap of Nokia and Apple in Bn USD)
I am a huge Apple fan, and admire Steve Jobs for every step he made with his company. Apple has been a truly amazing story, and they have changed our daily lives in many ways. When we started Econopolis we bought the hardware and the stock. Today we continue to expand our Apple hardware, but AAPL looks too expensive now.
But the difference between a great company and a great investment is valuation. There are several reasons why I believe that Apple will be a lousy investment if you buy it at these levels, and keep it for ten years or longer:
- Competition: no sector is so tough as the technology sector. Apple has been very successful over the last five years, after periods of mixed success. Other tech companies are competing or simply copying Apple's strategy and products. No other technology company, be it in games, screens, phones, computers,... has ever kept a top position for a very long period.
- Deflation: the technology sector is particularly challenging because of a constant deflation. This makes it difficult to keep margins and profitability for a long period.
- The race in technology: take a look at RIM, which is now almost RIP... Research in Motion has been (and still is) a top nodge company. But growth is fading on the back of improved technology, and the costly race to keep a technological edge.
- Steve Jobs: one of the iconic personalities in technology, Jobs has been the driving force of Apple. His drive and way of looking at things has changed the culture and spurred innovation. Unfortunately, Jobs' health has been shaky, and there is no true successor for Steve Jobs.
- Implied growth: Apple has exceeded once and again expectations. But expectations tend to rise, and reach a point were they are difficult to exceed. Apple has to maintain its current leading position, but even expand it.
This is not a short term call, but more an opinion for the medium to long term. Apple is going through its Nokia-moment: on top of the world, admired by everybody, it is above all norms.
It took Nokia ten years to realize that even such a top position is no guarantee for a long life in the tech world. The technology sector is certainly the toughest around. Apple will have to enjoy it while it lasts.
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Update: the chart on the bottom shows the market capitalizations of Apple, Microsoft, Exxon and Nokia in USD.
The valuation of Apple looks not too demanding at first sight: 16 times earnings. Remember that Nokia once carried 70 times (peak) earnings in 2000. But, the real challenge is to maintain current profitability while growing further. Even at 16x earnings in 2000, Nokia would have had the same challenge, and evolution.
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On demand: even more consumer electronics companies: Samsung, HTC, Sony
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17 Comments
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Neoproject
On 26 Jul, 2011
Nokia just missed the smartphone hype by far and are now running behind. Had they jumped right on it, then Nokia would be still leading.
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Theo
On 27 Jul, 2011
Apple has been a great investment for the last 10 years.
I'm also not so sure it would continue to be so in the next 10 years though.
Without Jobs having the vision of what entertainment market could be, mainly through his involvement with media corporations both in audio-visual and press, and offer a platform for those different types of media and the devices to access the content... Apple was long dead without him, and his type of genius cannot be found in any type of CEO who doesn't have the same passion for his own creation.
The recent patent dispute with HTC has also revealed that Apple is vulnerable to other competitors.
Stunts as the "fake" Apple stores in China do contribute to their brand recognition in key markets, but fact is Apple is loosing sales to Samsung without the latter having to resort to such unworthy tactics. -
Erik H
On 27 Jul, 2011
Competition: It's been longer than 5 years for Apple: iPod - iPhone - iPad (and take a look at the new MacBoor Air). After the huge succes of the iPod everybody thought this was a one trick pony too ....
Deflation: the big argument AGAIST Apple is the fact that they keep their margins high. Even if they lower them in the coming decade, it still will be a healthy company. By stategic investments in their supply chain (flash memory and touch screens) they can keep prices low.
The race in technology: Apple is not afraid for canabalisation of their own products. IPhone competes with iPod, iPad owners tend not to buy a new Mac. They are not afraid of innovation, they fear stand-still. Again: MacBook Air (solid state hard drive, thin, no CD drive) and look at the critics on their Final Cut X software ("a leap too big")
Implied growth: Post PC era is just beginning. just like the iPod, the iPhone will be followed by cheaper versions
But I'm an fanboi of course ... :-) -
MartinVW
On 27 Jul, 2011
I just hope that Nokia will get its act together with Microsoft/Skype and offer by 2012 those VOIP smartphones that will blow away the competition (and get my Nokia shares out of the very deep water/ocean).
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Theo
On 27 Jul, 2011
Any wifi smartphone can be turned into a VOIP phone... no need to wait for Nokia.
Sony-Ericsson was the first wifi smartphone sold by Skype on its own website.
Nowadays you just get your Skype account on any smartphone... or any of the other VOIP services there are.
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Jean-Pierre Bobbaers
On 27 Jul, 2011
Strange article....
I don't believe that predicting the value of a stock or the future of a company over a period of ten years is reasonably possible.
Will Google, Microsoft, Skype, Amazon still be flourishing in ten years? Or will it be like Yahoo?
Nokia did not stick to Finnish design rules. Did not invest in R&D. Copied Apples store strategy in a ridiculous way. The store on Regentstreet (opposite of apple) is one of the biggest disasters I have seen in my career.
I believe Apple still has a great future for the next three to five years.
They are 2 years ahead when it comes to technology.
It's one of the strongest brands in the world. The have 21 % net margin ( Dell 6%)
They have enough money in the drawer to buy Nokia, Rimm and a bunch of others.
Apple is smart enough to stay out of the B2B sector (low margin, high maintenance)
They dominate the mobile market.
Next they will attack the livingroom. Ever tried the new Apple tv with airplay?
Streaming your movies or picts from your iPhone straight to the big screen.
That's a Troyan horse (Steve calls it a hobby :-) that costs 99$.
Soon you can play hunderds of thousands of games on your tv and your iPad or iPhone is your game controller.
I advise to keep your stock and enjoy the ride towards 550$
In three years I will give you another update since I don't have the power yet to predict the future.
Do you? ;-) -
Jean-Pierre Bobbaers
On 27 Jul, 2011
One more thing.....
The Nokia store on Regentstreet closed down last year. ;-) -
Jan Holvoet
On 27 Jul, 2011
You say "the difference between a great company and a great investment is valuation" but none of your points relate to valuation?
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Dieter Delarue
On 27 Jul, 2011
Geert,
There are indeed similarities that can stuff a comparison.
On the other hand, what to think of:
(i) the fact that Apple does not only sell hardware (like Nokia) but also has its hand in the sale of content (whether it's through iTunes, apps for its machines or their share in subscriptions that newspapers sell to their readers);
(ii) the fact that there might be some market share still to develop for Apple in the hardware for use in business section; what if tomorrow not only Econopolis and architects or other graphic designers but also other companies start considering a move from PC to iMac? Has Apple really reached the ceiling in terms of hardware sales market share?
Doesn't this make the comparison with Nokia and the prediction in particular less appropriate or valuable?
Krgds,
Dieter -
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Geert Noels
On 27 Jul, 2011
@ErikH
Don't misunderstand me: Apple is healthy, but expensive.
The same goes for Google.
Intel is one of these companies that has found a sustainable business model, albeit highly cyclical.
As said, the technology sector is very challenging, and long run survival rates are not so high.
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Steven P
On 27 Jul, 2011
I think a lot has to do with their focus (or better lack of focus) on innovation over the last few years. How else could you explain a company with a reputation like Nokia (with probably an army of scientists at hand) getting overrun by Blackberry first and now outsmarted even worse by Apple.
Lack of innovation is lagging behind, no matter in what sector you are.
Recommended reading: "Het Edisonteam' by Patrick Willemarck -
stevenb
On 27 Jul, 2011
Terwijl Nokia in de GSM-markt GSM's op de markt bracht, kwam Apple met de iPhone. Sony e.d. lanceerden MP3-spelers in de MP3-spelersmarkt, Apple introduceerde de iPod. Voor de iPad bestond er zelfs nog geen noemenswaardige tablet-markt geloof ik. Mensen lopen niet rond met een tablet-pc, ze lopen rond met een iPad. Merknaam als soortnaam. Je vraagt je bij wijze van spreken af wat er gebeurt wanneer Apple zich zou wagen aan een nieuw soort spelconsole of tv-toestel.
Apple lijkt er steeds in te slagen op een unieke wijze (design, look&feel, kwaliteit, ...) een uniek product in een grijze markt voor te stellen aan het publiek. Apple springt uit de band, je wil het hebben. Early Adopters zijn nooit zo early geweest als in het Apple tijdperk.
Zolang Apple zich op deze wijze van de concurrentie weet te onderscheiden door vernieuwend in een al dan niet reeds platgeconcurreerde markt te stappen, lijkt Apple mij zelfs nog in het beginstadium te zitten. Technologie is méér dan het huidige Apple-assortiment... -
Gorik
On 28 Jul, 2011
Je moet rekening houden met het 'halo effect' van de Ipad en Iphone, hierdoor zal Apple veel maar Mac's verkopen. Een beetje de stepping-stoned-theorie van de IT :-)
Ziekte van Jobs is idd een enorm risico. -
Pedro
On 29 Jul, 2011
The life span of companies in general is shrinking rapidly. Long term stock picking is yesterday's investment strategy. Buffett’s long-term investment return has plummeted over 50% during the past 10 years.
In technology a decade is indeed an eternity. Successful technology companies have an extreme focus on innovation, bringing new products to the market, cost-cutting, productive efficiency, and engaging in super-competitive behavior. Therefore technology companies that have a competitive advantage are good investments if you buy them for the short term - because of...valuation. The time horizon of your investment should not necessarily be longer than the life span of a new successful product that outsmarts the competition.
If Buffet would have bought Apple shares instead of an iPod in 2001, he would now have a return on investment of more than $16,000 on $399. That’s a return of more than 4,000%.
The price of an iPhone in 2007 invested in Apple shares would have a return of $1,200 or a gain of more than 200%.
2010 was the year of the iPad. Apple priced it at $499. Your investment would’ve been worth $750 or more than 50% investment return today.
How much do you think you will earn if you invest the price of an iPad 2 in Apple shares and sell them before you replace your iPad 1 ? -
Theo
On 29 Jul, 2011
Friday iPad Fun for cats
http://www.youtube.com/watch?v=vaif2uq_0Vc
Tom the Cat on iPhone is also cool
http://www.youtube.com/watch?v=BgLMdBh4-eQ -
Erik H
On 29 Jul, 2011
For now, there's no need to panic:
http://www.asymco.com/2011/07/29/apple-captured-two-thirds-of-available-mobile-phone-profits-in-q2/
Remember: Q2 was previously the yearly cycle for a new iPhone. The current model is here for 14 months now and is still a bestseller.
In Short: No, I don't think this is Apple's 'Nokia-moment'
