Hidden dangers in the Apple hype machine
By
Matthew Lynn Sep 06, 2012
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Get ready for the hype machine to go into overdrive. Next week Apple is expected to launch the latest version of its best-selling iPhone. There is already rampant speculation about all the amazing features it might include: a larger screen, a new type of plug, some redesigned headphones. Heck, who knows? Perhaps it will turn you into a slimmer and better-looking person just by holding the thing.
But for investors the key question is what it might do to the value of your portfolio. Apple is now by far the largest company in the world. By itself it accounts for 4% of the S&P 500 index, the global benchmark. All it takes is one dud product launch – and one of those is bound to come along eventually – and the shares could start to slide dramatically. If so, the company is now so huge that it will take the whole market down with it.
The iPhone has been a huge success. From nowhere Apple has turned itself into one of the largest mobile handset manufacturers in the world. More importantly, this mobile phone is incredibly profitable. No one knows the precise figures because Apple does not break them down, but most analysts reckon that margins across its range are in the region of 50%. Most electronics companies think they are lucky if they make 3% or 4% on everything they sell.
But even better, Apple makes a ton of money from software. It rakes off a cut every time someone buys an app or a song through iTunes. While companies such as Amazon are reckoned to sell Kindles at a loss while hoping to make money on selling downloads, Apple pulls off the clever trick of making money on both.
That formula has turned it into a fabulous money-making machine – and investors are desperate to get a slice of it. This year alone, the shares are up by more than 55%, even though the market has been broadly flat. Measured by market value, it is the biggest business in the world – and the most valuable company the world has ever seen. Last month, its total value touched $600bn. Whereas earlier this year, it was vying with Exxon Mobil for the top slot, it has now pulled $200bn ahead of it.
Yet while its business model is incredibly successful, it is also precarious. Apple depends, crucially, on being the most fashionable brand on the planet. If it starts to lose any of its lustre the shares will slide – and fast.
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The rumours around the new phone don’t make it sound that exciting. A bigger screen, a new kind of socket, snazzy new headphones. None of those innovations are exactly earth-shattering. But the company has a great record of springing surprises and of keeping its innovations secret until the last moment – so it would be foolish to bet against its latest offering. The stockmarket certainly doesn’t seem worried. The share price assumes the company will carry on conquering new markets with the same consummate ease that it has done for the past few years.
Perhaps it will. There are still huge new industries for it to move into. If an Apple TV was as successful as everything else it has made since it launched the iPod it could double in size again. If the new iPhone included a chip that allows it to double up as a credit card (one of the rumoured innovations) it could take on the credit-card industry: an iBank could give that very tired-looking industry a serious challenger.
Yet the entire history of the technology industry suggests that it is very hard to stay at the top for a sustained period. IBM was the leader for years until it missed out on the personal computer revolution. Microsoft was the world’s biggest company until it missed out on the internet. Cisco Systems topped the global league tables before losing its dominance. Nokia was the largest company in Europe until Apple revolutionised the handset market. Each firm lead the field for five to ten years before an upstart competitor came along with something better to offer.
A company such as Exxon Mobil has stayed at the top of the global league table for decades because it owns a lot of oil in the ground and tens of thousand of petrol stations around the world. It is very hard for anyone to replicate that – and very expensive. But Apple relies mainly on some very clever designers, some slick marketing people, and as we saw from its recent victory over Samsung, some aggressive and smart patent lawyers.
But these are far less definable assets and they’re far easier to replicate, particularly when the prize of 50% margins is on offer. Apple may have discovered the secret of corporate immortality in the technology industry – but you wouldn’t want to bet on it.
The real issue is that the US stockmarket is dependent on this one company. Apple is a big chunk of the S&P 500. And the S&P is the benchmark index that sets the mood for every other index around the world. So if it starts to fall sharply, it will take the whole market down with it.
True, Apple’s new phone may be a huge success. There is no reason to think it won’t be. But at some point Apple will come up with a dud – a phone that’s about as exciting as the latest version of Windows, or a new Toyota people carrier. And that will trigger its decline. It could happen next week – and you don’t want to be invested in the S&P 500 when it happens.
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Matthew Lynn
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