Apple and gravity

So Apple crossed $500 and is seemingly going unstoppably up. I think we’re clearly in bubble territory. It’s not that the product is bad, it’s pretty good. The walled garden is naughty but you can see how and why the customers tolerate or even like it (a bit less junk than on more open platforms).

Let’s review the prospects.

A pile of bricks

User friendly (credit: Lauridsen @sxc.hu)

The product is mature, now the latest iteration of the iPhone has fixed the mediocre camera it has about everything you can expect from a smartphone. The iPad may do with a retina-like display and some slight improvement here and there in the next iteration, but that’s at most one step away from maturity. You could add a device mid-way in screen size between phone and tablet, à la Samsung Note, but that’s not that big a deal and most people won’t get all three sizes. Desktop and music players have been mature for a while. So unless they come up with a magic thing out of their hat there’s no new paradigm shifting product in the pipeline — and that’s harder to pull without a visionary at the helm in any case. So there’s little scope for expansion via product introduction.

Now market share. Many pundits see them gaining market share. The problem here is that it’s a premium product. No premium product gets 80% market share at a premium price, which would, by definition, not be premium anymore. Every hipster and other premium consumer who wants an Apple device already has one, or the whole range. With mature products the renewal rate will slow down, and market share, while it still has a bit of scope to extend to capacity, is pretty constrained. They can sell some to hipsters in Asia, but there’s so many people in developing countries who are going to spend $700 on a mobile phone that has pretty much the same functionality as the $250 competition. What is the average salary there?

The competition might be a bit less slick, and offer a less smooth experience to degree, but they’re basically there on functionality and not that far away on the rest, and they’re eager to catch up and have ample scope to compete on price; which the non-premium crowd, in China or elsewhere, is sensitive to. What can Apple do? Either they compete on price, but then they have to shrink their margins and lose exclusivity premium. It’s not obvious that would translate to increased profit even if they sold several times more units. Or they can remain premium but will stagnate due to market saturation.

Now from the stock market perspective there’s the classic symptoms of idealising a good company that can’t do no wrong, has a tremendous recent financial record, and whose product people who trade the market use (they all used Blackberries a few years ago, and it worked for a while for the stock…). Apple is already the largest company in the US by market cap, and when you’re that big it’s pretty hard to grow. It’s not that the valuation compared to financials is totally out of whack, but it cannot go on forever growing like it has done recently, but in the short term it has hardly anything restraining raw momentum — I feel there’s even a smell of capitulation in the bear camp. Hard to see how it couldn’t be a bubble. As any bubble, it may have some long mileage left in it.

Then there’s the patent troll thing as well. This is corporate hooliganism. If it was Goldman Sachs doing it they’d get much maligned for it, and rightly so. I wish the Occupy crowd would throw bricks into Apple glass stores a bit more often: patent trolling and rent seeking is bad karma, my friends. Though on a financial level, I think it’s a pretty much zero sum game which will be settled to be broadly neutral to all the large parties involved, less lawyer fees.

Disclosure: long Apple option straddle at 500 expiring February 17. (This is a tactical trade which doesn’t really relate directly with the above: fundamentals don’t play out on a weekly time frame.)

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