$Apple(AAPL)$ has been one of the most successful companies on the market over the past 30 years. Since Steve Jobs returned as CEO in 1997, the stock turned $10,000 into $17.85 million! So, why did I sell all of my Apple stock last year, and why do I see this as one of the most overvalued companies on the market?
I’ll get to that below.
As for the market overall, trading has been up and down few weeks and has recovered to a slight gain for the year. As I wrote last week, the rubber hits the road later this year as the impact of tariffs, AI, and higher interest rates will be felt more broadly. Expect some turbulence along the way.
Apple’s Disruption & Disrupting Apple
Apple has a big week ahead. The company’s WWDC keynote is tomorrow, and investors are wondering what the company will say about AI. It may not seem like it now, but this is a pivotal moment for the company.
Apple’s rise wasn’t just about the popularity of the iPhone, it was about the business model and strategic positioning of the iPhone as the most powerful platform in the world.
The iPhone became the leading global smartphone starting in 2007.
The iPhone’s popularity and ensuing App Store allowed developers to build apps for the iPhone, creating a network effect and a platform for Apple.
More Users → More Developers → More Users → More Developers
A small product lineup and economies of scale allowed Apple to improve each device faster than competitors at higher margins.
Apple’s user base and controlled ecosystem allowed Apple to leverage distribution points like Safari’s default search engine $Alphabet(GOOG)$ $Alphabet(GOOGL)$ to generate tens of billions in additional profit each year.
Incrementally, Apple tacked on more products like a credit card, headphones, cloud services, streaming, and more to improve the profitability of the iPhone ecosystem.
The iPhone is the most profitable product ever made. And it’s at the center of everything Apple does.
The iPhone was disruptive to other hardware companies.
It was disruptive to telecom operators.
It was disruptive to developers.
The iPhone drove the SaaS explosion in Silicon Valley.
But are Apple’s disruptive days over?
Disrupting Apple
Disruption is one of those things that seems obvious in hindsight, but in the moment, it’s less clear. A company’s downfall doesn’t often look like Blackberry’s (an almost overnight collapse driven by one company); it looks more like $Intel(INTC)$ fall. Slowly, then all at once.
The seeds of Intel’s downfall weren’t sown in 2021, they were in place even before 2015. But Intel was able to paper over the loss of Apple as a customer, market share losses in the data center, and missing mobile entirely by relying on the momentum of its core business.
It was the tipping point of those missed opportunities and missing AI entirely that exposed everything wrong with the company.
Apple looks a lot like Intel from 2015 to 2020. There’s rot showing, but we can overlook problems because we always overlook the decaying business fundamentals of iconic companies until they become obvious.
But the problems are clear.
Apple’s hardware operations look worse than Intel’s did five years ago. It’s easy to say Apple has a dominant market share in smartphones and overlook falling revenue for every product category. But will a $1,200 smartphone matter when AI is more important than the latest camera update?
Investors are willing to overlook the decline in hardware because Apple has become a services company. $20 billion for Google being the search default (forget the lost court battle that puts this revenue in question), plus 30% of every app store transaction (never mind the court losses in the U.S. and Europe related to this), and you have a great business.
Squeezing ever more out of customers through transaction fees is a recipe for keeping investors happy…for now.
But think about where Apple sits when it comes to an AI future. It may be the device we all use to access AI, but does that make it Gateway circa 2000? Or Nokia in 2006?
That’s not a great place to be!
We don’t know what AI is going to be yet, but it’s going to be something. And Apple doesn’t have anything compelling to show us, despite over a decade of effort.
Siri has been a failure.
Apple Car was shut down.
Apple Intelligence was mostly vaporware, and what did work was so bad I turned it off almost immediately.
Ads about future AI stuff have over-promised and under-delivered.
Apple is floundering as the world figures out what an AI future looks like.
Apple is playing defense while OpenAI, Anthropic, Google, and even $Meta Platforms, Inc.(META)$ play offense.
That’s what makes WWDC so important tomorrow.
Apple needs to convince developers that it has the best platform to build on.
Apple needs to convince users that the Apple ecosystem is still the place to be!
I just don’t see how that’s true with Google’s models improving almost daily and startups running circles around Apple. A new device paradigm — like the one Sam Altman and Jony Ive envision — would sink Apple.
All of this disruptive pressure and Apple trades for over 30x earnings, a multiple 50% higher than Alphabet.
It’s crazy!
Playing Offense vs Playing Defense
I think Apple’s current position is a great example of why I tend to shy away from incumbents and instead invest in disruptors.
Who is playing offense?
And who is playing defense?
When a company is on offense, the future is exciting. They have strategic options and upside we haven’t considered yet. And that growth and optimism are infectious for employees, partners, and investors.
Playing defense is no fun in business. It’s not enjoyable to go to work wondering how you can gain back the market share you’re losing. The best employees leave. The ones who are left are demoralized.
The excitement in Silicon Valley seems to be with everyone but Apple right now, and if tomorrow doesn’t bring something big, I worry it may be too late for the company. A decade of wandering the wilderness may be ahead.
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