This is an attempt to present a bearish case for Apple (AAPL) without using math and without ever mentioning a product that begins with the letter "i". The two themes are history and risk. History tells us that a popular and enduring technology company never stays on top for very long. Business history buffs know this to be true and know it happens over and over. Also, risk is usually at its greatest when it's not discernible, because it is the unknown that is risky, not the known. And stocks are usually bid up to high prices because there is no perceived risk.
Going back a ways, in the 1950s, Thomas Watson, Jr. realized the important role that computers would play in business, and in the next 2 decades transformed IBM from a typewriter and adding machine company to the world's leading computer company. By 1965, they produced and sold nearly 3/4ths of all computers worldwide. But it wasn't the growth and technology innovation that made them very Apple like, it was their admiration and success.
IBM was an original leader in corporate social responsibility, supporting anti-discrimination efforts and joining federal equal opportunity programs in the early 1960s. It opened an urban manufacturing plant in 1968, and created a minority supplier program. It was innovative in privacy protection and data security. The company was pro-active in setting environmental standards for its plants that exceeded current regulations of the day. It opened important research centers in the U.S. and around the world. And of course, its international operations grew rapidly, generating more than half of IBM's revenues by the early 1970s and through its leading technologies, helped create the blueprint for how businesses operated globally. It was also very profitable with revenues and net income growing by a factor of 5 in the 1960s.
But the forces of capitalism and competition, as well as government involvement, put an end to this unprecedented streak. In 1969, the U.S. launched what would turn out to be a 13-year antitrust suit against IBM. Although the suit was eventually dropped in 1982, it had become a severe drain on time, resources and focus. Soon after, IBM lost their early lead in both PC hardware and software, thanks in part to its infamous and unfortunate decision to contract PC components to outside companies like Microsoft (MSFT) and Intel (INTC).
Some say Polaroid was the Apple of its day. It was a much beloved customer focused stock that people could not get enough of that almost always produced consumer pleasing products. A significant growth stock for most of its history, Polaroid was even part of the famed Nifty Fifty in the early 1970s. It was known for its camera and film related innovative technologies throughout much of the 1950s and 1960s. In 1972, when the SX-70 was introduced, which was the instant picture developing product with which the company became synonymous, a frenzy was created. Eventually, competitive forces, management turnover, legal battles, and technology transformations created stagnant growth and their demise was inevitable.
Xerox (XRX)? RCA? Most internet stocks in the late 1990s? Dell (DELL)? The historical details are all vastly different and the outcomes are quite different as well. Some companies disappeared and some continued to adapt and grow. But the general stories are still the same - the glory years never returned, and the extreme hype and admiration certainly did not. Apple will likely continue to be a profitable and growing company for a very long time, but will it be on top and will it be loved is the question.
Which brings us to the fact that Apple carries an enormous amount of risk. Not technology risk, it is likely it will be able to stay important for many years. Not financial risk with their free cash flow and truckloads of cash on the balance sheet. But the stock certainly carries human risk, or emotional risk. Investors tend to overestimate their ability to recognize problems, or foresee risk, therefore they accept risk without knowing it. A broad based consensus is something to fear. Especially if the consensus comes from both institutional and individual investors. Cisco (CSCO) in 1999 at 100 times earnings and Mortgage Backed Securities with AAA ratings in 2007 were overwhelming believed to be without risk. Popular stocks increase rapidly largely because everyone believes there to be little or no risk, and are therefore bid up to prices that itself creates the risk. Howard Marks, Chairman of Oaktree Capital Management, put it best when he said:
"The paradox exists because most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them. Elevated popular opinion, then, isn't just the source of low return potential, but also of high risk".
When institutional investors, individual investors, technology bloggers, newspaper writers, social networks and the man on the street all love one company passionately and feel it can do no wrong - popular opinion doesn't get more elevated than that.
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