Apple’s days of glory may be over

Recent news about Berkshire Hathaway’s disclosure of a stake in the world-renowned tech behemoth Apple have sparked the attention of both Wall Street and Main Street; probably because everyone was trying (or considering) to ‘bottom pick’ Apple’s shares after a -18% decline in its share price since mid-April this year.

While everyone may be familiar with the arguments for going long on Apple (relatively-attractive valuations like < 5.0 X T12M EBITDA, strong consumer/household brand, solid balance sheet, etc), I shall explain why Apple’s days of glory may be over, and why Berkshire’s purchase may end up to be a value trap.

(i) The smartphone market’s growth may be reaching a plateau. With smartphone ownership rates rising and certain emerging markets tough to crack, a big cylinder of Apple’s growth is threatened. According to its 2015’s fiscal year numbers, the Asia Pacific region alone constituted 31% of its overall revenues!

2015 Revenue GEO
A major revenue source for Apple was no doubt China, and recent weakness led to some concerns among Apple’s senior executives on Apple’s prospects in the giant emerging market, given that China alone accounted for more than 40% of growth from 2011 – 2015, according to CRT Capital Group. If further inroads into other rapidly-growing emerging markets like India cannot be made, Apple may experience trouble maintaining its momentum.

revenue

Apple has been banking on its suite of smartphones and gadgets, and all may be starting to peak in their product life cycles. Clearly, the market knows this as well, and has been pricing in all this developments. 2015’s fiscal numbers show that iPhone sales alone account for more then 66% of Apple’s overall revenues! If Apple is showing signs of maturity, then it badly needs to innovate to even maintain their market share! Apple may once again pull it off just like it did back in 2013 during a lull in iPhone product cycles. But if they don’t, the cases of such as the likes of Eastman Kodak and Nokia comes into mind…

(ii) Increasing competitive pressures! In a state of maturity, competitive pressures usually increase not because of competitors catching up, but due to the already existing products. In the life cycle of the personal computer (PC) industry, the PC market reached a certain point in its cycle that too many users already had a PC that had is “sufficiently good”, with no reasons left to upgrade further. Apple’s products at this point of time may be starting to show signs of such an issue.

Tech S curve

Moreover, there is the very real threat of new and disruptive technology that may reset the whole dynamic and rearrange the pieces of this rapidly changing technology space. Marco Ament comments:

“Today, Amazon, Facebook, and Google are placing large bets on advanced AI, ubiquitous assistants, and voice interfaces, hoping that these will become the next thing that our devices are for. If they’re right – and that’s a big “if” – I’m worried for Apple… If the landscape shifts to prioritise those big data AI services, Apple will find itself in a similar position as BlackBerry did almost a decade ago: what they’re able to do, despite being very good at it, won’t be enough anymore, and they won’t be able to catch up.”

(iii) Berkshire’s very recognition of Apple as a viable investment may spell a problem

Berkshire Hathaway’s well-known philosophy of buying companies with strong balance sheets (lowly-geared/flushed with cash), solid business models (economic moats) and strong brands may actually work against Apple’s thesis in the long term. Generally, Berkshire loves companies that “don’t change often” or to paraphrase: “look the same in 10 years time as they do today, no matter what happens to the world and the global economy.”

This may be an issue – if Apple looks the same 10 years, no, just 6 years down the road as it is now then it is finished for good. It would be a dead sitting duck, slowly decaying as its rivals continue to expand at Apple’s expense. All the billions spent on share repurchases and warped financial engineering can go down for nothing at the end of the day, as an IT firm needs to innovate and constantly adapt and evolve. For people who say this is not possible, one just needs to look at Berkshire’s purchase of IBM since 2011/2012 – and how badly the company’s share price has performed relatively to all its other technology rivals as well as the broader market (S&P 500 Index).

*I have no exposure in Apple*


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