In June 2010, with the shares at $260.83, I argued that that Apple (AAPL) was a risky stock for long-term investors. It was one of the most popular stories on Seeking Alpha that day, with a wave of vitriolic comments – one commenter simply called me a loser for not owning Apple stock. A few brave souls defended my position. My thesis rested on three qualitative factors:
- Succession challenges concerning founding CEO Steve Jobs
- The concentration of intellectual and business forces allied against Apple
- Increasing public policy pressure when a company gets super-lucrative
Concededly, the shares have performed well, especially considering their resilience following the recent announcement of Jobs going on medical leave. At time of writing Apple is just a shade below the pre-announcement price of $348.48 at January 14 close. This raises the question of whether the stock’s strength despite Jobs absence signals lower risk for long-term investors.
The market likes Apple, but my view is still no.
Apple has outperformed since summer 2010, but less than others
First, it’s important not to confuse brains with a bull market and put Apple’s recent gains in perspective. Using the June 1, 2010 closing in my earlier post as the beginning of a window to measure Apple’s mid-term appreciation, the shares ($346.50 at February 4 close) rose 32.9%, outperforming the S&P 500 (which appreciated 22.4%) by 10.5%. But another cloud computing play – stodgy old IBM (IBM) – is virtually neck-and-neck with Apple over the same period, gaining 31.9%, a 9.5% market beat. Other industrial giants fared even better, with Exxon Mobil (XOM) returning 41% and Alcoa (AA) 53% (respectively 18.6% and 30.6% over the S&P 500). And this comparison doesn’t include dividends, which Apple doesn’t pay.
The iPhone 4 antenna controversy proves that Apple now works under harsher rules
Shortly after my initial post, the iPhone 4 antenna controversy broke, with Apple defenders claiming that the publicity associated with the reception blew the glitch out of proportion. In my view the Apple defenders were correct, but the very existence of the controversy proves my point. The concentration of forces taking aim at Apple has become so great – including competitors leaping to exploit the situation – that what would have been a minor rollout bug for most companies became a front-page story since Apple was the “culprit.”
What this shows is that future Apple controversies may have a greater potential to adversely affect Apple’s business than circumstances would ordinarily dictate.
Succession issues have not yet affected profits.
When Steve Jobs announced his medical leave, many commentators promptly talked up Chief Operating Officer Tim Cook, who stepped in as interim CEO. Cook is no doubt highly capable, but current operations have yet to test the challenges he would face if he were to run the company permanently. Stepping into a great person’s shoes is a treacherous walk for anyone.
Two qualities Apple will lose if Jobs departs are 1) his personal aura in supporting Apple’s image, and 2) his visionary role in shaping the product pipeline. It’s hard to measure the impact of these attributes with numbers, and since Jobs is still on board with a large pipeline in place there’s no real-time loss to observe anyway. But the difficulty in measuring how or whether this loss would occur in the future does not mean that it won’t happen at some point – just that it’s hard to quantify now.
Will Google’s (GOOG) Android smart phone operating system crimp iPhone (and also potentially iPad) sales? With the Verizon (VZ) iPhone freeing iPhone customers from quality-laggard wireless provider AT&T (T), it’s not an uphill battle to make the case for no.
But there is a counter-perspective. The initial Verizon iPhone will not be 4G, giving more early adopters who set tech industry trends an incentive to try Android. It’s possible Apple will release a new 4G iPhone this summer (see here) [i] but that still leaves a half year for trend setters who influence larger groups to sign on to take Android for a spin on Sprint (S) or T-Mobile’s (owned by Deutsche Telekom AG (OTC:DTEGY)) 4G networks (see here) [ii].
There’s every reason to think that Apple will continue to turn a healthy profit and will continue to bring desirable products to market for years to come. But my point is that even if that scenario predictably plays out, there are still credible long-term risk factors that could affect share price.
Apple is a rare confluence of quality and a magical image that makes it red-hot. But image can change quickly based on seemingly minor changes in environment, and there’s perhaps no sector where the velocity of change in the state of the art is as fast as in personal information technology. Sure, it’s possible that despite its huge market capitalization Apple will continue to outperform, but the risks that it won’t over the long term are real.
[i] See Mark Millan, “Why there's no 4G in Verizon's iPhone 4,” cnn.com, January 11, 2011
[ii] See “Who Will Win the Android vs. iPhone Race?,” January 27, 2011, eMarketer, for a prediction that Android will surpass the iPhone’s operating system in 2012.
Disclaimer: The information provided in this post does not constitute professional investment advice, and should only be used in consonance with all available information, including the opinion of a professional adviser, to make an investment decision.