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The Metamorphosis Of Apple

|Includes: Apple Inc. (AAPL)

"Apple is becoming a value stock"

Drugdates, September 2012

After yesterday's new iPhone released it became increasingly clear that times are changing for the Cupertino company, and even more so for its investors.

Over the last decade, Apple (NASDAQ:AAPL)) has been the typical growth stock, always surpassing investors expectations and then some. iPods, iPhones and iPads dazzled audiences and Wall Street alike. What was just a struggling tech company in the early 90's, rapidly became the incumbent to beat, and no one was even closer of doing so. Competitors like Samsung, Microsoft (NASDAQ:MSFT) Nokia (NYSE:NOK) and Motorola (NYSE:MSI) were left clearly in the dust, despite their efforts (late effort in some cases) to bring out models that could rise to the highs of Apple's portfolio. No matter what they did, invent or copy (as some courts seem to think), not a scratch could be made in Apple's capacity to gain new market share.

Years passed on, and competition kept evolving. At each new iPhone or iPad, a stronger answer was given by its peers, with better phones, packed with superior and more advanced characteristics. I guess that's what happens when markets become more mature. Competition is more fierce, however the battlefield moves from disruptive innovation, where new products actually revolutionize the way we perform something, into a new competitive ground, where the battles are not fought in a truly disruptive way, but in a dispute for more characteristics. Faster processors, cameras with more pixels, better batteries, but... no real change in the way we perform something. No real change in how we do a determined "job".

The iPhone 5 shows quite clearly that the battleground has switched, and usually in such cases the incumbent company has the upper hand. Does this mean that Apple will start losing market share or that its revenues will decrease? Probably not.

What it means is that to keep the same growing pace as before will become an daunting task. Consumers have a natural limit of the number and quality of characteristics they are able to keep paying a premium price for, until they switch their option into cheaper brands and models, that can ultimately deliver pretty much the same result.

This will be a problem for Apple, but there are two more that will start to arise.

On one hand, if we analyze the evolution of Apple's revenues in the last decade, we can see that the growth pace has been incredible, sometimes more than doubling from quarter to quarter. There is however a mathematical law that states that once a company reaches a bigger and bigger volume (of revenues for instance) it will become increasingly more difficult to keep the same growth pace it had in the past. As the next graph shows, this pace is starting to decrease, specially now that Apple's revenues are becoming bigger and bigger.

Off course there are options, either by gaining more market share or entering new markets (iTv maybe?!), and therefore keeping new revenue sources coming, or by expecting that analysts become more conservative in their expectations (this will be more hurtful).

Another problem, perhaps of a more empirical nature, is the feeling I have (and I think more and more people feel the same), that Apple is starting to be regarded has the new Microsoft . Remember that period at the turning of the century when Microsoft was seen has the evil giant? The impression I have right now is that such title is being conquered by a new owner.

Does this mean that Apple is a bad investment?

In the medium-term I believe that no. Surely I would like to see the stock priced lower, so that a possible entry point would seem more reasonable, even so, I still think that the price is heading higher.

The problem with Apple will be in the long-term, where I see much a lower revenue growth pace and events like stock buybacks and dividends as something inevitable.

One final remark about Apple's P/E. In this specific issue, my vision is different of what i usually read from many analysts. The current P/E doesn't show an undervalued stock, but a company that is slowly changing its configuration into a value play. It's in fact, at this point, quite similar to Microsoft's and even higher than Samsung. Until 2008, Apple's P/E was almost double of Microsoft, showing a company with excellent growth perspectives, much higher than the industry as a whole. Now, that difference as been almost erased.

Makes us think...

Disclosure: I am long NOK.