Apple: a Pick for Long Term Investors?

andy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As one of the world’s most watched companies, it isn’t hard to find information on the recent performance of Apple (NASDAQ: AAPL). There’s no doubt investors have been well rewarded over the last ten years and even year to date it’s up over 30%, despite dropping from its record high of over $700 per share in mid-September. But for long term investors, the attractiveness of a business should be estimated in terms of the durability of its competitive edge. Apple’s stock may be up over 6,000% during the last ten years but that tells us nothing about the next decade.

Warren Buffett once remarked: "If you aren't willing to own a stock for 10 years don't even think about owning it for 10 minutes." Much of Apple's success over the last decade derives from being first to market with game-changing products for which they charge high prices and gain huge market share. This happened with the 2001 launch of the iPod and iTunes, followed by the iPhone and, more recently, the iPad. In each case, Apple revolutionized an industry, earning massive profits with big margins and/or volume. But inevitably the natural forces of market competition appeared as others gained on Apple's territory. This happened with the iPod where sales were cannibalized both by competing MP3 players and smartphones (including Apple's own iPhone), and also with iTunes where Spotify and others have encroached upon Apple's once massive market share.

And now with smartphones, the latest sales figures show Android phones with 70% of the market. Apple's iPhone still sells in vast numbers with robust margins but investors should ask whether they will have 50% margins on iPhones in, say, 5 years' time. It’s possible that by 2017 numerous competitors will have products that are comparable to the 'iPhone 10', in which case it would be doubtful whether Apple could sustain both its profit margin and earnings power.

It’s a similar situation with the iPad. Again, Apple was first to market with a trend-setting, revolutionary product and currently benefit from considerable market share and margins. But increasing competition will inevitably reduce Apple's margins over time and already, some very good, inexpensive tablets from Amazon and Google have emerged. For Apple to maintain its fat margins and mammoth profits, they must continue to innovate with new concepts and products. It will surely be difficult to persist with past practice of inventing or re-imagining some incredible new consumer product every few years. If they did (some kind of Apple TV is rumored) then yes, they might well continue to generate massive cash piles but investors must at least question whether any company, even Apple, can keep up with this extraordinary pattern of success.

This, of course, is one of the problems with investing in technology. It’s difficult to create a durable, competitive advantage, and it's one reason why Buffett largely avoids the sector. For Apple, significant strength exists in brand loyalty, a fairly captive 'ecosystem' of interdependent services / products, and inventive design teams. But is this a strong enough ‘moat’ to sustain their history of groundbreaking innovation and impressive growth? Apple isn't expensive in terms of common valuation metrics such as P/E or P/CF, and its massive cash horde gives potential for substantial dividends or buybacks, but it remains difficult to gauge the company's probable place a decade from now. 

And some food for thought: think Sony (NYSE: SNE). Once the giant of consumer electronics, they created innovative concepts as the Walkman, the CD, Trinitron television sets, and other huge sellers like the PlayStation. But they couldn't keep inventing new concepts and today, the business is struggling and routinely loses money, including a whopping $5.5 billion loss in FY2011. Sony’s share price today (in ADR terms) is around the same as it was in 1981.

None of this suggests that Apple will suffer a similar fate. If any company can continue innovating and creating world-beating products, you’d bet on Apple. Unfortunately, recent history and contemporay results don't guarantee long term outperformance and while there are many worse stocks than Apple, its sustainable competitive advantage is difficult to assess. Without enough long term predictability, it's not on my investment wish list, although it's definitely on my most admired company list.

Andy Cheung has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus