Defensive Strategy

Time to Sell Apple

25 Aug 2011  

Yesterday Steve Jobs announced that he was stepping down as CEO of Apple. The news is unfortunate but not entirely a surprise given his ongoing health issues.

The stock is holding up pretty well today, just down a tad. And if I had any stock in Apple, I would sell it.

First, let me note that I’m not a high frequency stock trader. If I buy a stock I usually keep it through all the ups and downs and sell only if I need the cash or there is a compelling reason to believe things are about to get substantially worse. I sold my stock in Borders when I saw that Amazon was pretty much unstoppable and I’m still feeling pretty good about that move.

So the question I think about: is Apple likely to keep going up over the next five or ten years?

And my opinion is that it might, but the odds of this happening are small indeed.

There are two issues. The first problem is of course the loss of Jobs. He is an incredible leader, innovator and brand builder. People note that Apple is full of great people, and I’m certain this is true, but replacing Jobs isn’t an easy task.

The bigger issue, however, is that Apple is in a punishing industry. The challenge in technology is that things are always changing and evolving. What is notable and unique today will be standard in a couple years. This is huge business challenge; companies have to keep innovating. A technology company that stands still will fall behind.

It is interesting to compare the long-term outlook for Coke and Apple. Coke sells Coke. It sold the same product twenty-five years ago, and I’m pretty certain it will be selling the same product twenty-five years from now. Apple sells technology devices. All of these devices have been on the market for just a short period of time, perhaps a year. And I’m very confident that none of the
devices Apple is currently selling will be on the market in three years.

Apple has to reinvent its entire product line again, and again, and again.

Can Apple continue to launch brilliant product after brilliant product? It could happen. But odds are this trend won’t continue.  And the chance that Apple will be able to do this without the input of Jobs seems remote indeed.

For long-term investors, holding Apple stock requires a lot of wishful thinking. This is a good moment to sell.

12 Responses

  1. sander says:

    Apple’s rise to fame over the last decade has been understandable. They had a reputation of making solid products that were known to stand the test of time, and they had an operating system to match. But at this exact moment they have pretty end-consumer products that stop working way before their time. Sound and graphic cards that just stop working and easily friable firewire ports is just the beginning. The amount of money they make due to overcharging for hardware components must be mind-boggling, if not nauseating. So, an understandable rise to fame if you’re selling well designed crap to an audience that doesn’t really care about any of this, as long as it looks good (and expensive) and it’s the same -or possibly better- than the one your friends have. To call Jobs an innovator is stretching the truth. He was an opportunistic entrepreneur, stealing his “game-changing” implementations left and right and making a big deal about it. And the end-consumers blindly opened their mouths and swallowed whatever well-designed load of crap the marketing guru known as Jobs slung their way. It’s a phone, not a lifestyle. And if it was a lifestyle, you wouldn’t have to buy a new one every 2 years. The same can be said about the brand itself. Apple is no longer a company that assembles hardware into computers with a decent operating system, it’s a brand among brands. The social status associated with Apple products will falter, especially in a trend-sensitive society as this. I sincerely hope Apple stock will depreciate gravely over the following decade, slightly coercing them to start thinking from the ground up again instead of “prettifying” things without addressing real issues first.

  2. Apple’s $100 phone in China is a great growth opportunity.

    Bu if I were to bet, Apple will both in the tablet and phone market, much like the PC market, stabilize at a 20-30% market share (with a greater share of the profit pool) positioned as a high quality, high margin luxury product. Microsoft and Google will split the rest of the market, in a TBD ratio, as the open/cheaper platforms.

    If, as I believe, Apple’s stock price incorporates a greater than 50% share of the phone and tablet market, I too believe they are over priced. The question then becomes– are MSFT or GOOG underpriced and positioned to reap the gains?

  3. Dave Borland says:

    Regarding Apple, a warning bell went off in my head a few months ago when I learned that two contacts whose cell phones kept losing sound or dropping calls were using iPhones. Whatever else it might be, it’s not a reliable PHONE. Add in that Apple still won’t handle the internet standard Flash. With certain products, people demand Apple because they’re iconic, not because they’re best. That mismatch can only go on so long.

  4. New innovative devices will not play as critical a role in Apple’s next ten years as it did in the most recent decade. As a shareholder, the question I ask myself is “can they continue to take advantage of market changes more successfully than their competition and new entrants?” Ten years ago they critically identified the market’s inevitable move away from the PC towards mobile computing and seized the opportunity by making a big bet and then executing. That market change was about devices. The next trends are more likely to be about software and value chain disintermediation.

    Mobile payments for example. Will Apple be able to leverage their strong iTunes user base to carve out a competitive advantage in the exploding mobile payments market? They are somewhat behind in the growth markets already on this front. Their recent move introducing the app store into Mac OS was brilliant.

    I’m not ready to sell, I’m more of a “hold” at the moment, but I agree they have some challenges ahead and not having Jobs around is not going to help.

  5. David S says:

    I agree with the analysis and would even push it a notch. I started to consider Apple was on the downward slope when I saw this advertising: (If you don’t have an iPhone). As soon as Apple is comparing itself (Except for PC vs. Mac which is a different market where Apple is still a very small player) to competitors instead of looking at building the next product no one else has, they are losing their edge imho.

  6. Dick says:

    For tech investors there is Apple and there is everyone else in its industry. Should Apple not do quite so well in the future, its competitors will still need to do much, much better to overtake them. And with a stable P/E of around 15, they are not overpriced. Jobs’ departure does not guarantee innovation success at Apple’s competitors.

  7. While I agree with your assessment of Mr Jobs and what he has done at Apple over the years, Mr Cook the new CEO has been in charge now since the illness of Mr Jobs began. Despite the problems that Mr Jobs illness has presented, succession has proceeded and new products continue to be introduced. I have not sold my Apple stock and will not until I see leadership have serious issues.

  8. Jason (@jstulberg) says:

    Nice post – this is definitely a good moment to re-evaluate apple as an investment. However, I wasn’t persuaded by your argument. You seem to be “selling” apple because you don’t believe their good fortune in product development can continue. Two things didn’t sit right for me. First, the company has proven otherwise across several product families and models – it has a track record of product development beyond reproach. Their current core business continues to accelerate in growth and there are other consumer electronic markets for them to enter. Second, I thought the timing of your post would focus on steve leaving, but that felt like an after-thought.
    I’m no expert, but I feel much more comfortable with apples core business and track record of innovation as an investment than coke, with or without steve jobs.

    • Tim Calkins says:

      Jason—I completely agree Apple has an incredible record in terms of innovation. And Apple is arguably far more innovative than Coke. Continuing the innovation success, however, will be an enormous challenge for Apple, especially with Steve less involved.


  9. Eric says:

    Your point about Coke is true and about Apple is part true. However, you didn’t mention anything about the fact that Apple changed how we live. Not just what we drink… They’ve changed the tech industry forever, and their the leader. Without Jobs it may suffer some set backs but think about all the patents they have. They have 25 million register I-tunes account holders. They have 98% of tablet market share (an emerging product category).

    Granted they won’t be selling the same product in 25 years but Coke won’t be selling Coke the same way in 5 years, likely because of a company called Apple.

  10. Professor Calkins,
    I was wondering if the example of some of the fashion houses could support the bullish case for Apple. Given that Apple has now really established itself as a premium quality brand and executed well on delivering a unique experience; would it not be similar to say Versace, which also operates in a cut throat fast changing industry? The death of Gianni Versace was sudden but the brand survived and continues to do well.

    • Tim Calkins says:

      Sultan—An interesting point to consider! Fashion brands frequently manage to survive a shift in leadership, despite having to constantly update the product line. I suspect if Apple continues to prosper it will be in large part because of the power of the brand. Still, technology brands tend to rise and fall; a strong brand in technology isn’t sufficient. Kodak, Nokia, Flip and Sony are all strong brands that have strugged over time.


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