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.
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.
On demand: even more consumer electronics companies: Samsung, HTC, Sony