No one loves Apple more than stockbrokers. Of the 55 analysts surveyed by Reuters, 49 rate Apple a buy or outperform, which means there are six people on the planet still listening to Walkmans. Even by the standards of stockbroking, a world where everything is about to go up all the time, this is an almost conspiratorial consensus.
And yet the brokers may well be right. Apple’s latest results are mind-bending. In three years, Apple has almost tripled revenues and quadrupled profits, establishing a war chest of $65.8 billion, in cash. On a price-to-earnings ratio of 17 and years of growth all but assured, Apple looks cheap.
But after that a Microsoft-like future awaits; cash-rich but slow, defensive and struggling to innovate.
What investors most worry about — Steve Jobs’ departure — isn’t a huge deal. As Stilgherrian notes, it was Jobs’ control freakery that helped Apple lose its lead in desktop computers to the evil Microsoft in the early ’90s. That same do-as-I-say attitude is all over the new devices. If Jobs has done half as good a job on managerial succession as he has on product development, Apple should be fine. The company faces bigger risks than his departure.
Apple relies on a few key products, all of which require upgrading every 12 months. That’s a horribly short product lifecycle that demands constant innovation. Few companies manage it for more than a decade or so.
In technology, innovation is usually disruptive; CDs replaced tapes, email replaced letters, cloud services are replacing localised storage. But within a company, innovation tends to be linear. It’s easier to build on what a company already does than chuck it out and replace it with something totally different (although Apple is better at this than most), which is why Microsoft bought, rather than invented, Hotmail.
That makes technology a business unlike almost any other. Tech companies rise quickly and fade fast. Google, which replaced Alta Vista, is being attacked by Facebook. Twitter, which didn’t exist six years ago, is challenging both. No one knows what might come next but something almost certainly will. Somewhere, a precocious college dropout is working on it right now.
Unlike banking, retail and almost any other large industry, in technology teenagers can have a crack at a global brand. Barriers to entry are low and there aren’t regulatory regimes that end up serving the interests of incumbents. Even monopoly profits, which is what Apple is making right now, are less easily converted into political power than in banking or manufacturing. Goldman Sachs and General Motors are evidence of that.
Karl Marx would hardly believe it. Technology is one of the few sectors where capitalism actually works as it should, which is why Apple will eventually stumble. The industry all but guarantees it. It’s simply a question of when.