Apple (AAPL) is a company that elicits an incredible degree of passion from many people - both positive and negative. Investment decisions, however, are best made when removing oneself from such passion.
While there certainly are many Apple enthusiasts who go overboard, there are as well many, if not more, fanatical iHaters, who are surprisingly fanatical in their distaste for the Cupertino company. But again, the professional needs to distance oneself from such prejudice.
Therefore, to my mind, for investment professionals to dismiss Apple's success as being cult-driven not only insults the more than 300 million customers (iOS alone), but is a ridiculous and irresponsible basis for any serious business analysis. If someone wants to argue that Apple's momentum will not hold, that they will lose to other OSes, that is fine. Present a reasonable argument and I will listen - but to argue that the ONLY basis (or even the major basis) of Apple success is the Cult, the Cool, and the hoodwinking of masses, does not belong in any serious debate. It is devoid of reality.
If one goes to one of the partisan Apple sites such as Mac Daily News, where the site itself frequently leaves abrasive comments, then one expects to see idiotic, aggressive posts - on both sides - that are written either by people who have gone over the edge to fanaticism, or are just trolls - out to get laughs by provoking others. But such language and arguments do not belong in the arena of professional analysis.
The questions for the investor are:
- What exactly are the motivations behind the popularity of Apple Products, and
- Should we be afraid of a sudden mass exodus?
Number two is precisely the fear that some bloggers promote through a reliance on this kind of thinking. Here is a sample of one financial blog post.
The problem, however, is that the often quoted fundamentals are not painting the full picture, and a more holistic view of the company's outlook is needed. … While earnings of Apple have been strong, much of the sales seem to be based on hype. Apple products seemed to have represented the "cool" factor and a certain cult developed around its brand. [emphasis added]
But, can this be sustained? The problem with hyped up demand is one related to sustainability. Yes, Apple products are still perceived to be "cool" and a must have gadget, but, if the next coolest thing comes out, or even if the current hype around its gadget fades away, earnings could begin to falter to a great extent.
To me, this is hogwash!
This is not to say that there do not exist some people who are driven by a cultish identification with Apple or by a sense of fashion (although the same can be said for the anti-Apple crowd who have their own cult.) The percentage of people who buy based solely on fashion, however, I believe is rather small. Most people buy precisely because the product - be it iPhone, iPad or Mac - meets many personal needs AND meets these needs well.
How do we know this? Because if you look at the satisfaction surveys, Apple products are all at the top of the list. Apple owners are the most likely to recommend them to friends. Finally, Apple products are at least arguably the best - the best in features, in quality of user experience (UI), and of physical build quality.
Obviously, the best in features is something that is very personal. It can get down to preferences about surface things such as the icons, or the size of the screen, or deeper things such as "I prefer an open system." (Although that could be a long debate as well.) So here we should just leave things up to the individual, have respect that each person can decide for himself. It's foolish to argue over taste!
As for the user experience, again this is subjective. Still, most people agree that this is Apple's forte. They make things easy to use. This is what made the Mac, the iPod and the iPhone the successes that they are. They all took what was cumbersome and difficult and made it smooth and intuitive. While Windows and Android have copied their successes, Apple is typically awarded the prize in this area.
Physical build quality covers both the "package" and the internals. By quality I am not referring to the looks per se, but to the execution and build quality. Again, most impartial observers give the highest ratings to Apple here. The unibody case for the MacBooks (see this video) and now for the iPhone 5 are examples of the almost obsessive attention to detail. It seems to me that only a real fanatic would deny this. Here is from an article by Slate:
When I pick up the iPhone 5 and examine it closely, I find it difficult to believe that this device actually exists… Instead it just feels like a single, solid, exquisitely crafted piece of machinery, and once you pick it up you never want to put it down.
I have examined a Samsung Galaxy S3, a nice piece of work, but I would never even think that it was that nice.
But perhaps this is just the ramblings of a confessed Apple appreciator?
There are several independent authorities on the topic: surveys and sales.
One thing that cannot be argued against is the sales. Sales of all Apple products (with the exception of the iPods) are up, and the rates are extraordinary.
- Some 250 million iPhones have been sold to date, and
- Over 60 million iPads.
- Mac computer sales continue to rise at a time when PCs in general are declining.
The web site Asymco prepared this graph showing the rise of the various products. Note that the iPad is rising faster than even the iPhone did. This illustrates that there are millions of people who are buying these devices. Are you trying to tell me that all of them are crazy cultists? All of them are simply sheep seduced by what is cool?
Chart from Asymco
The doctors who use the iPads in the hospital - are they all cultists?
"Half of those doctors who own a tablet have used their device at the point-of-care, Manhattan Research said." (Digital Intelligence Blog 5/11/2012)
The salesmen using Salesforce software to close a sale - are they all just sheep fooled by the hype? The business woman who uses the iPhone to keep connected with her business even while on the road - is she crazy?
And surveys continually show Apple products at the top. Here is part of a PC Magazine survey (2/28/2012). You would think that at least in the workplace, the Windows PCs would have an advantage. Not so.
It's rare that a Windows-based laptop vendor comes anywhere close to achieving the user satisfaction ratings that Apple gets. For the fifth straight year, Apple receives an overall satisfaction rating of 9.2. [note the graph is not the overall but the "at work" rating.]
Meanwhile, in June 2011, ChangeWave Research did a survey of Mobile Operating Systems. The following chart show respondents indicating "Very Satisfied" with their smartphone. The iOS phones (i.e. iPhones) had 70%, Google's (GOOG) Android only 50%, and the others below.
In December of 2011, they presented a comparison chart of smartphones ratings by manufacturer - again the "Very Satisfied" category.
Then, in case it's tablets you are interested in, ChangeWave's 2012 survey compares "Very Satisfied" customers of various tablets. The new iPad led the way with an 81% marking this level of satisfaction, while the Galaxy Tab was at 46%.
I really don't think that there were any thought police standing over the respondents to these surveys, forcing them to mark the way they did. This leads to what I think are the only two possible logical conclusions. Either:
- Apple has the amazing ability to not only trick 300+ million people into buying their products, but they have them so fooled that the customers even falsely believe that they like them, OR (XOR for you techies out there)
- Most people are buying Apple products for the very rational reason that they actually LIKE them, the products actually serve their needs, and meet or even exceed their expectations.
You may opt for A, but to me B seems by far the most likely. For the investor, the data show that cultism and fashion, although they might be a small part of the product line popularity, are not the prime motivations for the popularity of the iDevices. Quality and an ability to solve basic needs of the customer in an elegant way are the real drivers. Therefore, barring some great breakdown in engineering at Apple, we do not have to fear a sudden collapse in sales due simply to a change in mood of the populace.
It seems to me that anyone who espouses the idea that Apple's success is due only, or even mainly, to hype and fashion and cultism, that they are telling me that they, in their infinitely better wisdom, know what is better for 300 million people than those 300 million know themselves. Not only is that preposterous, but it is the height of condescension. And then they turn and accuse Apple fans of being arrogant!
Now - I do not care in the least if you prefer an Android device, or a Windows device, or a Blackberry or a Palm. You are more than welcome to have your own personal preference. You are, in fact, entitled to have your personal preference. I believe that competition is good, and choice is also good.
But when someone seriously writes in an investment article or blog saying that hype is the basis of Apple's success, then I have to wonder if perhaps it is he who has fallen into a cult. I have to wonder who exactly has been drinking that proverbial Kool-Aid.
Disclosure: I am long AAPL.