Apple Inc: a tale of two universes

Business success may well be defined by key indicators such as rising profits for 10 years, growing turnover over the same time period, market share that continues to climb and general acclaim for the products and services your business produces.

Apple, by the above definition, is clearly a business success story, and then some. The Cupertino-based giant’s share price has gone from US$119 in 2008 to US$458 in early 2013. More critically, it has grown by 249% in five years compared to the average on the NASDAQ exchange of 34%. Apple has grown almost seven and a half times faster than the market. Profits and margins have soared, and the cash pile Apple now has in reserve is US$137.1-billion.

All this success has been built on one of the smallest product ranges of almost any technology company, with seemingly unstoppable iPhone and iPad roll-outs year after year. The results released for the final quarter of 2012, appeared, on the surface at least, to support this ongoing roaring success story.

Apple’s results were announced after the close of business, once the general market was closed, but this did not stop the market dumping shares in a spectacular way right after the results presentation. Twenty-one million shares changed hands in minutes, and resulted in a massive drop in the share price, to around US$450. Blood was on the streets, and for the first time in a while, it looked like it was Apple’s.

Analysts far and wide were maintaining that Apple had peaked, that competitors had finally forced Apple to become reactive rather than revolutionary. Apple’s performance was likened to product life cycles as the gross margins from one quarter spiked well above 40% and are now down below 40%, the inference was that Apple as a company was on its way down, and the heady growth days were over.

Product life cycles do follow the classic bell curve, with the most successful launches, having rapid growth with a period of sustained strength, and then often precipitous falls, as the product is replaced, superseded or rendered obsolete by competition.

Gross margin on the other hand increases and decreases mainly due to supply chain and commodity issues. Sales and specials at the retail level also can contribute significantly to fluctuations. Margins move significantly based on clever purchasing, massive oversupply in certain components, or simple product sales mix within a quarter.

Apple’s spike in the third quarter of 2012 reflected all of these. Significantly the introduction in the fourth quarter of 2012 a completely new product line up, which traditionally has lower initial margin until production becomes more efficient and scales over time, which will result in margin growth.

All of this does not explain the share price fluctuations. During late 2012 and early 2013 market players successfully sold up Apple shares. A clear target of US$1 000 per share was claimed as achievable. What most forget is that the market makes money, whether a share goes up or down. In the investor universe this may not be the case, but in the technical trading environment, volumes bought and volumes sold make the real money. Trading is what it is all about.

Apple shares were hyped way beyond reality. The Steve Jobs reality distortion field held for almost a full year after his untimely demise. We will never know if it would have continued had he remained. What we do know is that Apple has changed as a company from what it was a year ago.

Despite these operational and leadership changes, Apple products generate no less buzz in the market. Apple products also remain the benchmark that all others are judged by, and profits and sales at Apple reflect this. The share price and share price movement operate in a parallel universes to all this good business. The forces moving the price of Apple shares, often have little or no correlation to the realities of the actual business.

We can’t predict the future. What we can do is extrapolate from past performance. Apple has proven time and again that it understands its intended market. The iPad Mini is a case in point. Rather than being reactive, as many maintain, its introduction was perfectly timed to generate massive sales in a somewhat saturated iPad market, and cleverly undercut the competition in all possible ways. Who knows what Apple has up its sleeves for the future? What you can rely on is that whatever Apple comes up with, it will be market leading in terms of specs, build quality, and or function.

The main question is, will this be enough to stave off the competition? The answer is complex. Apple is not the only tech success story: Samsung springs to mind as another clever ambitious and innovative company that is gaining massively in traditional Apple territory. Samsung is also not alone. BlackBerry, Nokia and increasingly Huawei, are all out there fighting for a share of the market.

Mobile technology and computing, including tablets, has become extremely commoditized with technical specs and features, along with ecosystems and components, increasingly becoming indistinguishable.

This is great news for consumers, as the average level of quality in technology had risen rapidly. The technology market is far less forgiving and far more demanding than it was five years ago. Apple is a clear victim of this, and for many this is a great thing. Too much dominance or success can breed hubris which is innovation’s bitterest enemy. I am not accusing Apple of this, but the playing field is far flatter and far more competitive than it has been in the past five years. We are all reaping the benefits of great quality, easy to use technology, as a result.

When all of this is taken into account, don’t expect Apples shares to reach for US$1 000 any time soon, but don’t write Apple off. It is no doubt working on the next big thing, and will bring its unique blend of technical savvy, supply chain genius, and truly massive resources to bear on the problem. If I had spare money Apple is a share I would definitely buy, and keep for a rainy day.