Why I'm (Still) Long Apple

A few years ago I bought some Apple shares (AAPL) in my pension plan. When I got the idea, shares were trading in the high 20s and when I finally capitulated and pulled the trigger (after chasing it for months with unfilled limit orders) it was in the high 50s.

I bought it because the first time I saw an iPod I was blown away, and because of the great experience we had with our iMac at home after ditching our old Dell (DELL). It's been a pretty good investment. My expectations for Apple's success with the iPod/(then iPhone) driving gains in marketshare for Apple's computers has been met or surpassed. I probably should have sold when it ticked over $200 (if only to reload when it traded lower) but that is back-trading and oh-so-easy.

A more useful question would be: Is it worth buying today? and if so, what is going to drive the next leg of the company's growth? I think the answer is yes, and I think you'll find the kernel of the answer as to why in this graph (hat tip to @azeem for the pointer):

Next gen-users

The latest computing survey results from the University of Virginia's freshman class show evidence of continued Apple marketshare growth in the higher education market (via Daring Fireball). The chart above shows that Apple has made steady gains since 2003 in the percentage of incoming UVA freshman who own a Mac. The latest year (2008) shows that 37% of incoming students owned a Mac while the percentage owning a Windows (MSFT) operating system had shrunk to 62% from a peak of 96% in 2001.

Ok, so Apple's selling lots of laptops to college undergrads: Nice, but not a game-changer, right? Wrong. I think it just might be.

Firstly, and most obviously, Apple is substantially growing market share with this key demographic (young, upwardly-mobile, educated, proto-professionals). The company is doing so with a product with significant (perceived) switching costs. This is great for long term sustainable sales growth. But it gets better. Very soon, over half of university graduates entering the workforce will have grown up / come of age using Macs. And they won't exactly start doing cartwheels if they are forced to use PCs at work.

(As an aside, this will thrust into stark relief the coming colossal collision between big company culture rooted in a 1990s technology paradigm - i.e. a bright line separation between corporate and personal IT assets and usage - and the reality of the 2010's when the best and brightest will expect (almost) complete convergence of the two and regard trying to distinguish between the two as ridiculous and anachronistic.) I fully expect a story in Fortune or the WSJ etc. within the next 2-3 years, reporting on graduates

...who had turned down a job with ABC Inc in favour of one with XYZ Inc. because the former allowed only corporate PC's at work while the latter was a mainly Apple environment and was happy for employees to buy their own laptops as long as they complied with data and security policies...

Apple as a competitive recruiting advantage: You don't want to be short the stock the day after this tipping point triggers.

As an added bonus, catalyzed (or at least accelerated) by the current Great Recession, a large number of 30/40/50-something professionals are leaving big corporations and striking out either on their own or in smaller enterprises. Many of these professionals have never worked with anything other than a PC at work and quite frankly never gave it a second thought. But many of them also had Macs at home - they were cooler, easier to use - especially for music and home media (which drove the purchase decision) and could even run Windows easily if absolutely necessary (like for the kids EA game collection...) And when these folks leave Megacorp Inc. and start working on their next venture, doing a bit of consulting, writing a business plan, day to day networking... they're using the Mac at home. When it's time to get an office, it hits them: Why on earth would I want to go back to using a PC. So they don't.

People criticize the smugness of the cool Mac vs. the loser PC commercials but the reality is that this positioning is only gaining momentum amongst some of the most desirable demographic groups in the economy.

Here's a little experiment: if you are a senior executive in a Fortune 1000 firm, send an email to all of your employees (that you currently provide with a PC) and ask them if they could choose what computer to use at work, what would they prefer: iMac/Macbook or a Windows-based PC? (A few smart-assed geeks might answer they would like a Linux Box but you can ignore them because they are probably using whatever they want already, being smart and geeky enough to have circumvented standard corporate policy.)

Warning: only do this survey if you know how you will react if 30% or more say they'd rather use a Mac. Waking sleeping giants and all that...

Disclosure: Long AAPL

Comments

[Josh B Thom...:]

The name of the article suggests self-doubt; you should have left out the (still). The article did not discuss that windows 7 is addressing all the strength and weakness comparisons that you made. The version that comes out after Windows 7 will make ALL the bells and whistles currently considered "Apple like" mainstream. Bringing bells and whistles to the mainstram is MSFT's DNA.

May 24 01:06 PM

[Paul H. M.:]

Apple has some cool products, but remember, it's not only Microsoft they are competing with. Google developing their own OS too.

Apple is playing in a field with two of the most vicious competitors in the corporate world. Anybody who owns AAPL stock would be wise to hedge their bets with some holdings in GOOG and MSFT, the most likely companies to kill AAPL's great run.

Let's remember: it was only a decade ago that MSFT almost wiped AAPL off the face of the earth. Given the difference in prices, and people's desire to save money, I wouldn't be surprised to see AAPL on its knees again in 5 years from now.

May 24 01:52 PM

[webspeedracer:]

Paul,
Long-dead price arguments aside, I would argue that Google and Apple don't compete with each other, they complement each other to a large extent. Apple provides a personal digital ecosystem (hardware and software) that allows users to access services like those which Google provides, but also to enjoy a nearly seamless experience for their computing life. This ecosystem dramatically reduces the time-cost of the user experience, and just-as-dramatically increases their enjoyment factor, which is why Apple continues to gain market share even in a down economy.

MSFT, on the other hand is directly in Google's sights. They both are hardware-agnostic, and as such are on a collision course, as everyone knows, and this means that MSFT is being attacked from multiple sides, with Apple and Google divvying up the ever-growing pie.

Apple will continue to rise over the next five years as their "ecosystem" expands to include your car and your home (in a more integrated fashion than they do now).

Best,
Jason

On May 24 01:52 PM Paul H. M. wrote:

> Apple has some cool products, but remember, it's not only Microsoft
> they are competing with. Google developing their own OS too.
>
> Apple is playing in a field with two of the most vicious competitors
> in the corporate world. Anybody who owns AAPL stock would be wise
> to hedge their bets with some holdings in GOOG and MSFT, the most
> likely companies to kill AAPL's great run.
>
> Let's remember: it was only a decade ago that MSFT almost wiped AAPL
> off the face of the earth. Given the difference in prices, and people's
> desire to save money, I wouldn't be surprised to see AAPL on its
> knees again in 5 years from now.

May 25 12:27 AM

[jack dee:]

oh please can we end the silly mac takes over the world story

May 25 01:08 AM

[Josh B Thom...:]

>MSFT, on the other hand is directly in Google's sights. They both >are hardware-agnostic
- MSFT is hardware-agnostic? - that is a beyond foolish description of MSFT's connection to hardware.
>Apple provides a personal digital ecosystem that allows users to >access services like those which Google provides
- So does MSFT. You can access Goolgle from a MAC? That's impressive.
> MSFT is being attacked from multiple sides
- All technology companies are being attacked from all sides; this is not unique to MSFT
> Apple will continue to rise over the next five years as
> their "ecosystem" expands to include your car and your home
- This is an industry trend not unique to Apple or MSFT

May 25 01:23 AM

[Googleisevi...:]

We need to have a way to rate these clowns. This site is a joke if no one is held responsible.

We need a five star system like Amazon.
This guy gets a negative five.

This is an investment site and not an I love Mac site.
An intelligent arguement for Mac is possible if someone can hold back thier I love Steve Jobs lust.

May 25 04:05 AM

[FreeRange:]

@Thompson - nonsense - you are delusional - all of the early reviews of Windoze 7 state pretty much the exact opposite of what you say here.... Get real!


On May 24 01:06 PM Josh B Thompson wrote:

> The name of the article suggests self-doubt; you should have left
> out the (still). The article did not discuss that windows 7 is addressing
> all the strength and weakness comparisons that you made. The version
> that comes out after Windows 7 will make ALL the bells and whistles
> currently considered "Apple like" mainstream. Bringing bells and
> whistles to the mainstram is MSFT's DNA.

May 25 04:28 AM

[FreeRange:]

@Thompson - your posts just keep getting more and more moronic! The referral wasn't that Mac users can access Google, but that Google's online offerings are like the mac ecosystem. But being an idiot MSFT defender you wouldn't understand this concept would you? MSFT has never built great products, or had high customer satisfaction ratings like Apple. Do you think just maybe there is a reason for that?


On May 25 01:23 AM Josh B Thompson wrote:

> >MSFT, on the other hand is directly in Google's sights. They both
> >are hardware-agnostic
> - MSFT is hardware-agnostic? - that is a beyond foolish description
> of MSFT's connection to hardware.

May 25 04:37 AM

[brewer:]

I think it's clear that those tech challenged defenders of MSFT are a barometer for Apple. The better Apple is doing, the more delusional they become.

Excellent article that tells it like it is.

@Googleisevil123--you are being very offensive.

May 25 10:02 AM

[Josh B Thom...:]

When my views get attacked with empty hyper-emotional comebacks, it's clear who is right.

May 25 10:21 AM

[2speed:]

I too am still long AAPL, and I agree that (assuming) they are growing market share, it is with the young, now college-aged consumer. But they have been using this strategy since Jobs1, with give-aways of Apple 2s to elementary schools in the 80s.

I'm a double 60s guy (in my 20s in the 60s and now just in my 60s) and have been negative the MSFT/PC platform since 1977 when I started computing with Tandy products and fought the tide all the way through the Tandy 2000. (Why is a Tandy 2000 like a bowling ball? No software for either one.)

Finally I adopted the hated WinTel machine for one reason only. If software existed, it existed for the PC. It made money for me and it still does.

In my business (CPA), a switch to AAPL would mean real money out of my pocket... first with the cost of the hardware... then with the time spent searching for the applications I need and use, or to find a compromise... then the higher software cost.

I will probably switch when retire or change professions, or if the applications I use become web based where the platform is not relevant.

In the meantime, my AAPL purchases will be limited to stock, options and iPods/iPhones.

May 25 10:23 AM

[mollytjm:]

very good article. Apple is a great company on all fronts. There just isn't a downside. I'd think that would be obvious but apparently it isn't. No one innovates, quickly and well, like Apple. No one gets top ratings keeps customer satisfaction at such a high level for so long against a very strong (and bigger) opposition. There's a reason. We're not pro-Mac just for the heck of it or because we want a name. There have been plenty of power name computers around..Sony, Gateway (remember them?) and others. Apple fought for and earned it's good reputation.

And when you figure in buying virus protection, time lost to freezes, glitches, crashes, deleted data and viruses, Macs are not more expensive, especially to students, who get discounts and free stuff.

Apple has all the Buffett value items going for it, and a huge moat. It's financially safe and even prospering in this difficult economy. That all adds up to a good investment.
long APPL

May 25 10:34 AM

[2contango:]

It really comes down to value. Can Apple continue to convince people to buy a more expensive product? Are the benefits of the Apple's operating system worth the extra money? Are people willing to keep giving a large corporation outsize margins and profits? I think in today's environment, consumers are looking for the best value. And more and more buyers seem to be trading down, not up. (Just look at netbook sales.)

Apple makes great products. But in terms of plain old market analysis, I wouldn't put my money on Apple right now.

(Personally, I don't spend a lot of time thinking about my operating system. Nearly all of my time is spent using applications. Very little is spent directly interacting with the OS.)

May 25 02:33 PM

[Tom B:]

"Are the benefits of the Apple's operating system worth the extra money?" YES, they are. Even in the days when Apple's OS was fully proprietary (the 80's and 90's), it was a better user experience than Win 3.x, Win 95, WinMe, Win 2000. Now that it is UNIX-based, it can stand up to usage that would pretty much bring a Windows machine to its knees. This is a huge advantage in an age when streaming audio and video are part of our daily experience. And the fact that OS X remains secure in spite of all attempts to crack it means you can surf the web with confidence that you won't get malware unless YOU do something really stupid (like installing software from an untrusted source using your root password).


On May 25 02:33 PM 2contango wrote:

> It really comes down to value. Can Apple continue to convince people
> to buy a more expensive product? Are the benefits of the Apple's
> operating system worth the extra money? Are people willing to keep
> giving a large corporation outsize margins and profits? I think in
> today's environment, consumers are looking for the best value. And
> more and more buyers seem to be trading down, not up. (Just look
> at netbook sales.)
>
> Apple makes great products. But in terms of plain old market analysis,
> I wouldn't put my money on Apple right now.
>
> (Personally, I don't spend a lot of time thinking about my operating
> system. Nearly all of my time is spent using applications. Very little
> is spent directly interacting with the OS.)

May 25 11:38 PM

[kbear2:]

One rationale cited in the article for being Apple long is based on the concept that the younger generation is using Apple products and will continue to pursue using that brand. Of course this makes sense and I remember reading the exact same argument in the late 90's when it was used to explain why Apple was near death. Windows was being used in schools and colleges and those students would grow up to buy PCs.

Well, that didn't last very long. Apple's innovation brought about the iPod and OSX and the rest is the history that we are now creating. As long as Apple can stay one step ahead of the competition it will continue to prosper and maintain/grow its base. I bought my first Apple shares in 97 and will continue to hold as long as there is no other company offering the promise that it does.

May 26 01:13 AM

[Josh B Thom...:]

when does choir practice begin

May 26 02:28 AM

[Techtrader10:]

I keep hearing all these great reasons why Apple and their products are the best. What I'm not hearing is why people are going to pay more for their stock when the economy is faltering.

May 26 04:06 AM

[Tom B:]

Look at the P/E. It's around 20, which is absurd for a stock with Apple's likely upside. Beyond absurd.


On May 26 04:06 AM Techtrader10 wrote:

> I keep hearing all these great reasons why Apple and their products
> are the best. What I'm not hearing is why people are going to pay
> more for their stock when the economy is faltering.

May 26 08:42 AM

[reagan:]

Listening to Techtrader 10 is like listening to a broken record. Geez, get a life. With the upcoming new phones & software, the upcoming cotract w/China & when Jobs comes back(yes, Techtrader10,he's coming back) the future looks very bright for long term holders of the stock. Go away, Techtrader10. You are boring us.

May 26 06:04 PM

[Sean Park:]

"or if the applications I use become web based" - I think this is another key opportunity for AAPL to gain marketshare (esp. in SME space); as 2contango wrote, I think most people don't care too much (or at all) about the OS per se, it just has to work. As applications increasing migrate to the cloud and the browser becomes the de facto OS from the end user's point of view, one of the last great competitive barriers protecting MSFT will start to crumble. (As an aside, GOOG's Chrome initiative is clearly a hedge on the browser-as-an-OS scenario imo.) Once the OS is irrelevant, the user experience becomes the key selling point. Think Sony in media electronics in the 70s and 80s: only moreso (ubiquitous computing is harder and more pervasive than ubiquitous hi-fi) - many (not all) people will pay more for a stylish product that "just works." Is this position unassailable? No way. (Think Sony in the 90s and 00s!) Indeed, Amish Rake Fighter's comment with respect to trust is valid and will only become more important as AAPL grows market share beyond their 'fanboy' base. AAPL has definitely shipped some lemons over the years, and this is not great but worse is the 'we-can-do-no-wrong' Orwellian approach to managing bad news or criticism in the market. Although I have always hated this and thought it was a poor long term strategy for the company, I could make a case in my head for why they might want to do this in terms of creating this 'reality-distortion-fi... brand: sort of like the cool kid in high school who treats his acolytes like shit and that makes him/her even more cool. However as they gain market share this positioning will flip from becoming an asset to being a liability. Definitely a risk factor to watch for but one I think is at least a couple years and 5-10 pts of market share away for now. Another alarm bell to watch for: when/if they launch their version of the Cadillac Cimarron.


On May 25 10:23 AM 2speed wrote:

>
> Finally I adopted the hated WinTel machine for one reason only. If
> software existed, it existed for the PC. It made money for me and
> it still does.
>
> In my business (seekingalpha.com/symbo...), a switch to
> AAPL would mean real money out of my pocket... first with the cost
> of the hardware... then with the time spent searching for the applications
> I need and use, or to find a compromise... then the higher software
> cost.
>
> I will probably switch when retire or change professions, or if the
> applications I use become web based where the platform is not relevant.
>
>
> In the meantime, my AAPL purchases will be limited to stock, options
> and iPods/iPhones.

May 27 09:11 AM

[Tom B:]

"or if the applications I use become web based" ....then OS/internet security SHOULD be a critical matter to you. AAPL has a couple of small holes here and there in their browser, but NOTHING like IE's holes. And Apple's OS security is unmatched. This is something MSFT fanboys always try to gloss over.

May 27 09:34 AM

[Josh B Thom...:]

saying the browser becomes the OS is like saying the screen becomes the OS. It ignores the need for an OS.

On May 27 09:11 AM Sean Park wrote:

> "or if the applications I use become web based" - I think this is
> another key opportunity for AAPL to gain marketshare (esp. in SME
> space); as 2contango wrote, I think most people don't care too much
> (or at all) about the OS per se, it just has to work. As applications
> increasing migrate to the cloud and the browser becomes the de facto
> OS from the end user's point of view, one of the last great competitive
> barriers protecting MSFT will start to crumble. (As an aside, GOOG's
> Chrome initiative is clearly a hedge on the browser-as-an-OS scenario
> imo.) Once the OS is irrelevant, the user experience becomes the
> key selling point. Think Sony in media electronics in the 70s and
> 80s: only moreso (ubiquitous computing is harder and more pervasive
> than ubiquitous hi-fi) - many (not all) people will pay more for
> a stylish product that "just works." Is this position unassailable?
> No way. (Think Sony in the 90s and 00s!) Indeed, Amish Rake Fighter's
> comment with respect to trust is valid and will only become more
> important as AAPL grows market share beyond their 'fanboy' base.
> AAPL has definitely shipped some lemons over the years, and this
> is not great but worse is the 'we-can-do-no-wrong' Orwellian approach
> to managing bad news or criticism in the market. Although I have
> always hated this and thought it was a poor long term strategy for
> the company, I could make a case in my head for why they might want
> to do this in terms of creating this 'reality-distortion-fi... brand:
> sort of like the cool kid in high school who treats his acolytes
> like shit and that makes him/her even more cool. However as they
> gain market share this positioning will flip from becoming an asset
> to being a liability. Definitely a risk factor to watch for but one
> I think is at least a couple years and 5-10 pts of market share away
> for now. Another alarm bell to watch for: when/if they launch their
> version of the Cadillac Cimarron.

Jun 07 12:42 AM

[jack dee:]

"browser-as-an-OS " WTF are you talking about? just what are you planning to use to BOOT?

And how will corp run it apps? in a browser? that cant manage the RAM?

Jun 08 05:54 PM