This Company is Bleeding Industries Dry

By Chris Marasco - September 21, 2012 | Tickers: AMZN, AAPL, F, NOK, PG | 0 Comments

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Sir Isaac Newton taught that for every action there is an equal and opposite reaction.  We know that this holds true for phenomena such as gravity and moving mass, but does it also hold steady in the realm of business? 

Let’s use Apple (NASDAQ: AAPL) as an example.  Apple has been on an incredible tear over the past few years, growing its stock price a staggering 508% percent since Oct. 1, 2008 – an annualized return of over 57% per year.  For reference, $10,000 invested at that rate would be $60,757 in four years, and it would compound into $909,606 in 10 years. 

The question is this: Apple has gone forward, so who has gone backward?  Below is a snippet taken from Apple’s 2011 10-k annual filing, and it details where the company has grown during the past three years.  My accompanying commentary explains the implications of this growth.

European Sales

Kudos to Apple.  The company grew 58% then 49% in Europe back-to-back.  Sales growth in this region is impressive because Europe has slowly been declining.  Consumers are spending less on household goods as well as new car purchases, which fell 6.8% this year.

In fact, a slumping consumer market is one reason that Procter & Gamble (NYSE: PG) has been focusing on new ways to target customers.  P&G is adept at researching customers and giving them multiple brands at numerous price points – in essence, insulating itself during a recession.  The company learned this lesson the hard way, but it still seems destined to succeed.  Procter & Gamble could also tell you that consumer confidence is at the lowest in Europe since 2009, and consumers are slashing their grocery bills to save money.

But they still buy iPhones, iPods, and iPads.

Apple is one-of-a-kind.  Its product quality and marketing is such that consumers are willing to buy the high-end products and then skimp on consumer staples and automobiles. 

Ford (NYSE: F) is another company hit in Europe.  Ford lost $404 million last quarter, and the company plans to move its operations away from Europe back to the US.  The move is expected to lower labor costs and plant costs, and Ford even hopes to profit from foreign exchange differences and a weakening dollar.

Of course Europe’s decline is the major cause of this – but if one household buys 1 iPad, 1 MacBook, and 4 iPods, not to mention accompanying accessories, the family could easily spend upwards of $3,000.  For reference, a new Ford Fiesta could cost around $13,000 to $15,000.  The $3,000 spent on Apple merchandise would be a nice down payment on a car or would cover a good number of car payments. 

iPhone Sales and Related Products and Services

Nokia (NYSE: NOK) felt the pinch of Apple’s meteoric growth since 2009.  From 2009 to 2010 Apple boosted iPhone sales 93%, following that up with an 87% jump the next year.  Nokia’s phone and its Symbian operating system have fallen far behind Apple’s iOS, and consumers have taken note.

Nokia’s stock recently fell into the $1 range amid tremendous losses, and the company’s new Lumia 920 and 820 phones, which feature Microsoft’s Windows 8, are far behind Apple’s iPhone 5. Nokia’s new phones won’t be ready until later this year. 

Thus, watch for Apple’s growth to continue.  It won great share by being one of the first to market, and it grew that share – nearly bankrupting other phone makers like Nokia and Research in Motion in the process – by making products that are superior.

In all, Apple snatched the smart phone market and made it its own. 

iPad and Related Products and Services

Some of Apple’s most impressive growth comes from its iPad market.  In 2010 Apple sold $4.96 billion worth of iPads.  In 2011 that number multiplied to $20.36 billion.  Companies like Microsoft, Google, and Barnes and Noble have tried to compete, but to no avail.  Apple has taken run of the industry.

If anyone can challenge the iPad it will be Amazon’s (NASDAQ: AMZN) CEO Jeff Bezos.  Bezos just announced its new line of Kindle Fire products, which range in price from $159 to $599.  Also, Kindle users save $130 per year on data charges if they go with Amazon over Apple, and savings of $400 will accrue to users who choose Amazon’s 4G Kindle over Apple’s comparable product.

I do not expect the iPad to lose much share here – it already has shipped 68% of tablets globally in 2012 – but if anyone can pose a challenge it’s Amazon.

To conclude, Apple doesn’t just disrupt other companies, it disrupts entire industries.  Often these industries aren’t even in areas where Apple competes.  The computer company understands that the consumer purchasing market is a zero-sum game.  Credit card debt aside, consumers have only so much discretionary income.

Apple’s goal: sell you their new iPhone before you can buy any other product.

Compare and Contrast

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