Investors Believe Apple Will Shape the Future of Technology: Do You?

Jun.23.10 | About: Apple Inc. (AAPL)

With an outstanding performance last year that saw its stock price double, Apple (NASDAQ:AAPL) has now overtaken Microsoft (NASDAQ:MSFT) as the biggest tech company by market cap. The market seems to be putting their money on early frontrunner Apple to shape the future of the mobile internet; but should you bet on the first horse out of the gate?

Some of Apple's recent moves might raise a red flag for investors who assume that the stock will continue to defy gravity...

Like Gizmodo editor Jason Chen's recent arrest for publishing pictures of the new iPhone prototype. Tech blog Gizmodo acquired a prototype of the new iPhone from a bar patron who picked it up after a beer-drinking Apple developer left it behind. Gizmodo published details on the phone, and Apple found out about the leak. The next thing you know, and cops are busting down the editor's doors.

"It's probably no exaggeration to say that Apple's draconian security policies are among the tightest of any company operating purely in the private sector, with a focus on secrecy that rivals that of military contractors," writes blogger Charlie Stross. "But even so, the control freak obsessiveness which Steve Jobs is bringing to bear on the iPad — and the desperate flailing around evident among Apple's competitors — bears some examination. What's going on?"

Stross' theory: Deep down inside, Steve Jobs knows that he's gambling the future of a $250B company on an all-or-nothing push into a new market. And he knows there are big risks with this new direction--the tech industry is going to change dramatically in a very short span of time, and Apple will have to navigate a plethora of challenges.

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Jobs is nervous about another company raining on Apple's parade, and he's willing to turn into Big Brother to protect his company's market position. How ironic, considering the tone of their infamous 1984 Superbowl commercial.

Jobs knows that the PC industry is dying, with the price of PCs and laptops falling by about 50% per decade in real terms, despite performance simultaneously rising in real terms. Apple has so far survived this collapse in profitability by aiming at the premium end of the market--but is this really a sustainable model when underlying prices continue to drop?

Jobs also knows that wireless broadband is coming, and that customers will increasingly move their data out to "the cloud" (i.e. store all their files and applications on the internet). He knows that this presents an opportunity to deliver apps to customers wherever they are. And as long as he's making money on the apps, he's hedging the falling costs of the hardware.

Stross' take on the iPhone OS, and the iPad, isn't just that they're the start of a whole new range of Apple computers. Instead, Stross sees these products as

a hugely ambitious attempt to keep Apple relevant to the future of computing, once Moore's law tapers off and the personal computer industry craters and turns into a profitability wasteland.

[...]

The long term goal is to support the long-term migration of Apple from being a hardware company with a software arm into being a cloud computing company with a hardware subsidiary — almost like Google (NASDAQ:GOOG), if you squint at the Google Nexus One in the right light. The alternative is to join the PC industry in a long death spiral into irrelevance.

Stross concludes that

Apple is trying desperately to force the growth of a new ecosystem — one that rivals the 26-year-old Macintosh environment — to maturity in five years flat. That's the time scale in which they expect the cloud computing revolution to flatten the existing PC industry.

So unless Apple undergoes an extreme corporate makeover by 2015,

Apple is doomed to the same irrelevance as the rest of the PC industry.

Can Apple reinvent itself successfully in such a short span of time? And what if Steve Jobs, whose health issues have raised concern in the past, leaves Apple over the next few years? Will investors still have confidence in a Jobs-less Apple?

The PC industry is going to collapse, and everyone is Silicon Valley is trying to work out a strategy for surviving the aftermath, writes Stross. With so much volatility expected in the industry over the next 5 years, why has the stock market been so quick to bet on Apple as the winning horse? Who's to say that Apple still be the biggest tech company in 2015?

Consider the following: Apple's market cap is $250B. That's a massive number, especially when you start comparing it to the market caps of other well-known companies operating in much more stable industries.

Apple ($250B market cap) = Coca-Cola ($120B) + Pepsico ($100B) + Lockheed Martin ($30B)

(Note on image: The numbers on top represent forward P/E ratios)

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Does it really make sense for Apple to be bigger than Coca-Cola (NYSE:KO), Pepsico (NYSE:PEP) and Lockheed Martin (NYSE:LMT) combined? Coca-Cola is the world's largest beverage company, Pepsico is the world's second largest food and beverage business, and Lockheed Martin is one of the largest military defense contractors in the world.

People are always going to need food and drink products offered by Coca-Cola and Pepsico, and sadly there will always be a demand for military weapons. But as more and more alternatives crop up, will demand for the next generation iPad or iPhone remain?

Here's another equation to consider:

Apple ($250B market cap) = Ford ($40B) + Caterpillar ($40B) + Nike ($40B) + Walt Disney ($70B) + Starbucks ($20B) + Target ($40B)

(Note on image: The numbers on top represent forward P/E ratios)

Click to enlarge

Does it really make sense for Apple to be bigger than Ford (NYSE:F), Caterpillar (NYSE:CAT), Nike (NYSE:NKE), Walt Disney (NYSE:DIS), Starbucks (NASDAQ:SBUX) and Target (NYSE:TGT) combined?

You be the judge...

Disclosure: No positions

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