When you start thinking about it more carefully, however, you can see why the market values the company at only $330-billion (U.S.) or so.
There is, to begin with, the issue of CEO Steve Jobs’s health. But I don’t think that’s as much of a factor as some suggest. Yes, he’s the co-founder and the public face and the acknowledged saviour, but the truth is that he’s surrounded himself with some pretty bright people and seems to delegate well. The company, after all, keeps innovating despite his illness. He’s not the only nerd in the lab.
I think the miserly valuation has more to do with two related points: size and a certain flaw in the business model.
Apple earned $818-million in the third quarter of 2007. Four years later, it announced a profit of $7.31-billion, almost nine times higher. The annualized estimate for earnings is about $26-billion.
To continue compounding profits at that rate would mean coming up with a revolutionary idea (or more than one) that could add billions in earnings to the bottom line. That’s obviously not likely. In fact, just to increase profits by 10 per cent it needs a pretty good idea, once the growth in existing products reaches its natural limit.
Apple is in some ways like Big Pharma – the Pfizers and Mercks of the world – which have gotten so big they can’t consistently grow at above average rates any more.
But I would argue that Apple has another problem. While it consistently amazes consumers with the coolest and most useful computing things, it also has a reliable knack for damaging itself, to a point, every time it comes up with a new gadget.
Apple’s laptop sales grow briskly, but that growth has for years come at the expense of desktops, where sales are growing but obviously not as much as they would have. This is true of every computer maker. More and more people just use portables.
But this cannibalization is happening in other devices too. Apple sold more than 11 million iPods in the third quarter of 2008. It sold only 7.54 million in the third quarter announced yesterday – a drop of 20 per cent over the same period a year ago. In fact, on an annual basis, sales have been falling for a couple of years.
Where did these sales go? To iPhones, largely, but now to iPads as well. You obviously don’t need an iPod Touch if you’re carrying an iPhone around. And by the same token, do you really need one if you’re toting an iPad? Not likely.
But that’s not the only example of redundancy in the lineup. If you use a Mac laptop and buy an iPad, will you buy another laptop when yours has run its useful course? I would guess that many customers won’t. The iPad may be limited in function, but the fact is that most of us only use a fraction of the computing power of a modern laptop. You use it for e-mail, Web browsing, maybe a little word processing, watching shows and music (I’m speaking of consumers mostly, not so much business users). A modern laptop packs a lot more computing power than is required for those functions.
So when some analysts argue that Apple is cheap at 10 times earnings, I’m not sold, and I don’t think you should be either. It needs to create and sell blockbuster gadgets to really move the earnings needle, and it also needs to compensate for the cannibalization of its existing sales. If anyone can do it, you’d think Apple could. But at $330-billion, it’s tough. And furthermore, what will those products be?
The truth is Apple innovates, it doesn’t invent. RIM invented the smart phone. Sony invented the portable music player. Apple just did a better job at making and selling them (so far, anyway – don’t count out RIM just yet).
So if history is any guide, the inventory of potential products is in the marketplace already. Where is this blockbuster product that Apple will latch on to, improve and make billions from? It’s not obvious, at least to me.
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