Apple: The Consumer Cult (Prelude to the Employee Cult)
The Mac-vs-PC argument used to be somewhat of a boxers-or-briefs argument: there was no definitive objectively right answer, and it all really depended on your personal preferences and needs. Each side directed some humorous quips at the other, but it was all in good fun -- nobody would think it reasonable to shed blood or tears over another's choice in electronics or underwear.
But as I've learned from reading the news and writing here on SeekingAlpha, things have changed. If you challenge Apple's unparalleled and unquestionable superiority to every other product (and company) in the world, you're toast. Not the type of toast that's nice and crunchy and goes well with some butter and jam, mind you. The type of toast that's long burnt to an inedible crisp, that's only good for lining the garbage can.
Some background on my realization: a few days ago, I wrote an analysis of Apple's long term future. As almost all of the coverage on Apple (NASDAQ:AAPL) is universally positive, I wanted to play contrarian and examine some of the headwinds Apple may face.
One of the primary points I made was that Apple has developed a following with a cultlike devotion, and it's unreasonable to expect the aforementioned cult-ish-ness to last forever. As such, Apple may (key in on may) eventually have problems maintaining market share against more reasonably priced competitors.
Ironically, the responses to the article (An Apple Mean Reversion: Not As Crazy As It Sounds) essentially proved my point about the whole cult thing. Commenters defended Apple with the fervor that those of faith would defend their religion from the slightest negative statement.
While I was expecting some degree of backlash from Apple fans, I wasn't quite prepared for the sheer brutality of the responses. I was literally attacked by commenters, one of whom, by their own admission, "did not read the article in depth and am just making off-the-cuff remarks." One, via private message, said I was "full of crap" and proceeded to make several analogies inappropriate for repetition here. Another went so far as to publicly belittle my taste in cars and the SeekingAlpha editorial staff's taste in articles:
He's [sic] be a dream demographic for the muscle car era, where numbers in a magazine were the only things that matter to get someone to buy...
The SA editorial staff seems to have a very high bar for pro-Apple content and a very low bar for anti-Apple content. Maybe they are cheap and sad as well.
Now here's the interesting thing. The article wasn't actually all that anti-Apple from a stock/company perspective. It was more be-cautious-five-years-down-the-road. Things I said in the article in favor of the great Apple include:
- "I've personally made a killing on Apple stock. In fact, my only mistake was selling it too early."
- "Apple is by no means going to collapse as a company anytime in the next twenty years."
- "If Apple blows the world away with Apple TV, it may not matter that their mobile products are overpriced and underwhelming."
- "there are still at least a few more years of blockbuster profits ahead, and with Apple paying a dividend, it might eventually become a "buy-and-keep-forever" stock along the lines of Coca Cola"
- "It's really not unrealistic to project a $1,000 stock price sometime between now and 2015. Right now, Apple is priced very fairly."
- "I'm on the record saying that I believe Apple will continue to expand and exert dominance."
In spite of these statements (and a link to an Instablog post where I lay out my case for why I think Apple stock is currently a great buy), I was derided as nothing more than a lunatic/charlatan/idiot stuck in the past.
My point was simply that for the reasons I presented, Apple is vulnerable to having market share stolen in the future when they aren't quite so popular. That's all.
[I]nvestors should realize that if Apple starts to experience an unwarranted parabolic increase in P/E, it may hit record highs only to fall back to earth, like many tech stocks did in the late '90s.
Essentially: keep riding Apple for now, but realize that the ride won't last forever.
Now tell me, if someone said they think Oreos might not be as dominant of a cookie in 30 years as they are now, would they be attacked with such vicious force by rabid Kraft fans?
I think not. Anecdotal proof of the cult mentality among Apple lovers.
But even beyond my virtual excoriation-by-comment-box and my original argument about the futility of the iPad, there's something else that suggests Apple-love is somewhat of a cult mentality.
Let's Play the "Name Things Tim Cook Has That Jamie Dimon Doesn't" Game. I'll Start: Popularity, and a Whole Lot More Money
The New York Times recently published a fantastic article on the state of the Apple employee, which I unfortunately didn't get a chance to read before writing my last article. So I'm writing a follow-up article to cover the new developments. I'd recommend reading it before going any further. Most of the points I'm about to make are based on the article, which is quite in depth. (All of the quoted sections below are from the NYT expose.)
The article highlights a rather concerning double standard in regards to employee pay. While I personally have no qualms about multimillion dollar CEO compensation packages (I think, in most cases, they deserve the money), I'm part of a relatively small group. The populist song of the year is Down With The CEO, epitomized by the widespread hatred of JPMorgan CEO Jamie Dimon.
In my last article, I made a quip about Occupy Wall Street protesters demonizing corporations via tweets from their Apple iPhones. (Note the irony.) But here's another dose of irony for the irony-loving hipsters. Despite the fact that Apple Stores generate $473,000 in yearly revenue per employee (double the retail average), employees at Apple Stores are paid barely anything and worse, receive no commissions. One salesman earned $11.25 an hour during a three month stretch in which he sold -- wait for it -- a cool $750,000 worth of merchandise. (At a 2% commission, which is not at all exorbitant, the employee would've earned $15,000 on commission during that quarter alone.)
Now here's the irony. Last year, CEO Tim Cook received -- again, wait for it -- a stock grant totaling $570 million at today's share prices. No, that's not a typo. 570 million.
Granted, compared with Apple's ridiculous $100B pile of cash, Tim Cook's compensation is a drop in the bucket (and I personally think he deserves every penny). But it's interesting that the hipsters hate Jamie Dimon and his $20M payday, yet they're totally okay with Tim Cook's $570M.
I'm not the only one who finds this double standard interesting.
It's interesting to ask why we find it offensive that Wal-Mart pays a single mother $9 an hour, but we don't find it offensive that Apple pays a young man $12 an hour. - Paul Osterman, professor at M.I.T's Sloan School of Management
Apple Employees and the Cult Of The "Greater Good"
It's fairly easy to write off my original arguments about the Cult of Apple. People make irrational purchasing decisions all the time, and in the grand scale of life, spending $800 on an iPad you don't really need is not that big of a deal, especially if it makes you happy. (This applies to consumer spending in general. Do I need a Boss 302? Definitely not. Do I absolutely love the Boss 302? Yes, yes I do. Guilty as accused -- I love my muscle cars.)
But being a consumer and being an employee are two different things.
Quick detour into psychology/organizational behavior. Generally, people fall into one of two categories as employees. They're either primarily motivated by "extrinsic" factors -- like money, time off, social status, etc -- or they're primarily motivated by "intrinsic factors" like personal fulfillment, 'making a difference,' etc. People in the second category are willing to sacrifice big paychecks for the knowledge that their work is doing good -- for example, they may work for minimum wage for the Red Cross, the Peace Corps, or some other humanitarian organization.
Surprisingly, Apple employees tend fall into the second category. From the NYT article:
Apple's success, it turns out, rests on a set of intangibles; foremost among them is a built-in fan base that ensures a steady supply of eager applicants and an employee culture that tries to turn every job into an exalted mission.
This is why Apple can do something unique in the annals of retailing: pay a modest hourly wage, and no commission, to employees who typically have college degrees and who at the highest performing levels can move as much as $3 million in goods a year.
"When you're working for Apple you feel like you're working for this greater good," says a former salesman who asked for anonymity because he didn't want to draw attention to himself. "That's why they don't have a revolution on their hands."
I generally tend to take an Atlas Shrugged style Randian perspective towards the function of workers: I believe that employees at all levels who are doing productive work are helping keep the gears and wheels of society turning, and thus, everyone with a job is contributing to the "greater good." However, this is more of a philosophical argument than a practical one: in general terms, "working for the greater good" means working for a humanitarian or educational endeavor, not in a retail store. In the case of Apple employees, "working for the greater good" means working for a corporation that:
- Has a $100B pile of cash that it really doesn't know what to do with
- Is posting record profits, is the world's most valuable company, and could foreseeably become the first $1 trillion company ever
- Paid the CEO $570M in a stock grant vesting over 10 years. (Which, for comparison purposes, is enough to pay 19,000 full time Apple Store employees for one year at an hourly wage of $15.)
So do I believe Apple employees play a part in the functioning of our society? Of course I do, just as I believe all retail employees play a part. But is working for an Apple Store some special calling superior to working for any other retailer like Best Buy or Target?
Not even close.
Yet Apple actually encourages this mentality.
The phrase that trainees hear time and again, which echoes once they arrive at the stores, is "enriching people's lives." The idea is to instill in employees the notion that they are doing something far grander than just selling or fixing products. If there is a secret to Apple's sauce, this is it: the company ennobles employees. It understands that a lot of people will forgo money if they have a sense of higher purpose.
The applesauce pun is amusing, but the overall tale spun is quite tragic. There really aren't any words I can find to describe just how messed up this is, besides Stan Marsh's trademark phrase: "Dude, this is pretty !@#$ed up right here." (For the record, little Stan is depicted as an iPhone owner, and his friends own Mac computers.)
Fortunately, many Apple employees do end up realizing that working for Apple isn't really all that special.
[Apple employees] discovered that there was a gap between what the job appeared to be (kind of hip) and what it was (frenetic and in many cases a dead end).
And that statement right there is the key. Apple's cultish popularity won't last forever -- with employees, it's already wearing out as they realize Apple isn't everything it's cut out to be. Sooner or later, consumers will realize the same. Then, Apple will actually have to compete with other companies in terms of pricing and product superiority, because they won't have the brand loyalty they do today.
A History Lesson On (Over)Popularity
Quick: you fell in a time machine and it's 1992. Name the hippest, coolest company around.
The correct answer is Microsoft.
Now whiz back to 2012, 20 years later. Go out and find any random 13 year old (a surefire societal barometer of what is and isn't cool) and ask them if Apple or Microsoft is cooler.
"Apple," they'll answer, only half paying attention. (The other half of their attention is glued to their iPhone.)
Microsoft got caught up in the tech bubble of the late '90s, and the stock catapulted to unreasonable valuations. It then, of course, reverted back to the mean -- and investors who had bought at or near the peak were sitting on a staggering 50%+ loss.
20 years later, Apple is the hot company of the day/week/year/month/decade. Now, with a very fair P/E of around 14 (and an absurdly low PEG ratio of 0.1458), no rational person could conclude that Apple is in a "bubble" state right now. But say you woke up tomorrow morning and your brokerage account showed Apple at a price of $2,000, for a P/E of over 50.
That might be a good time to consider selling, just as 2000 was a great year to sell Microsoft.
If any stock I held suddenly jumped to sky-high valuations, I'd thank my lucky stars and sell. Why? Risk/reward ratios. Sure, I might miss out on another few days of appreciation -- but when am I ever going to get another chance to buy a stock at a P/E of 10 and sell it at a P/E of 100?
So my overall points for both this article and my previous one are the following:
- Apple will continue expanding for the next few years at the very least.
- Apple stock is very reasonably valued right now and I'm pretty sure at least half of my mutual funds hold Apple.
- Apple has cult-ivated (pun very much intended) a cultlike fanbase, which is likely to result in plenty more blockbuster quarters of record earnings.
- Apple is well managed and will most likely continue to provide strong shareholder value.
- However, like Microsoft, Facebook, and every other hot tech company, Apple will not be cool and hip forever. (This doesn't just apply to corporations. I mean, really, who listens to the Backstreet Boys anymore?)
- If Apple goes parabolic (see the MSFT chart) and starts to reach unreasonable valuation metrics, you should probably sell and wait a few months and/or years for the stock to reach more reasonable levels before approaching it again. (Again, see the MSFT chart.)
- Apple's a great company, and they have definitely come up with some innovative products (iPod, iPhone). However, they're not the greatest thing since sliced bread, nor the greatest thing the world will ever see. Their position as "America's Favorite Corporation" will fade over time.
If, after reading those bullet points, you still intend to cause me physical harm for being anti-Apple, you need to reread the bullet points over and over again until you realize a key fact.
I'm not anti-Apple. I'm realistic.
And those are two different things entirely.
(Oh, and for the Apple bulls raring to jump down my throat again, consider this insightful point from fellow SeekingAlpha contributor George ACS:
My recent articles on Apple certainly demonstrated that people take some things far too seriously and are incapable of being objective. One has to wonder whether someone who slings vitriol at the mere suggestion that caution may be warranted is capable of exercising an emotion free decision process when weighing the merits of continuing to hold a greatly appreciated stock. - Investing The Tamil Rebel Way
That is all.)
Disclaimer: I am an individual investor, not a licensed investment advisor or broker dealer. Investors are cautioned to perform their own due diligence. All information contained within this report is presented as-is and has been derived from public sources & management. Always contact a financial professional before making any major financial decisions. All investments have an inherent degree of risk. The future is uncertain, and actual results may be materially different from those expected. Past performance is no guarantee of future results. All views expressed herein are my own, and cannot be interpreted as the views of my employer(s) or any organizations I am affiliated with. Presentation of information does not necessarily constitute a recommendation to buy or sell. Never make any investment without conducting your own research and reading multiple points of view.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.