Is Apple the Dark Lord of the Financial World?
Nikhil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You know how in Harry Potter 5, the entirety of the magical world was in denial about the inevitable rise of "You Know Who"? Having already risen into the hearts and minds of the whole world, it was impossible that The Dark Lord could get any scarier or any more powerful. By the end of the book, however, it was clear that the impossible had become possible, and the lives of Harry Potter and Co. were in some serious danger.
Apple(NASDAQ: AAPL) is no villain(Foxconn Labor Agreements don't count!), but the company manages to strike fear, or maybe just extreme awe, into the hearts of the financial media in much the same way as "You Know Who" does in the Harry Potter world. A Trillion Dollar Company? Impossible! You talk about the dangers of corporate power...a Trillion dollar company just couldn't happen! And yet, as David Einhorn says in his recent quarterly letter: "We’ve scoured the Nasdaq listing rules, reviewed the Securities Exchange Act of 1934, and engaged a leading numerologist. We can’t find any prohibition on trillion dollar market capitalizations."
The Company With Many Faces
The fact is, Apple is growing much faster than its valuation allows. At 13.7x earnings, Apple expects a nice 18% growth rate in the next few years due to a mixture of China and growth of the iPad/iPhone. But Apple's similarities to Voldemort(Ouch! I said the name!) go further than that. The story goes that The Dark Lord had many names: "Tom Marvolo Riddle", "The Dark Lord", "He Who Must Not Be Names", "Other Scary Title." Similarly, Apple has moved from "iPod" and "iTunes" to "iPhone" to "iPad" and "iCloud" and soon maybe even "iTV." Innovation is Apple's namesake, and it's not hard to believe the corporate culture will inspire further growth. Will the Tim Cook change things? He already has with a new dividend and stock repurchase policy, but Fortune says, "Cook goes to great pains to pledge allegiance to the corporate culture Steve Jobs created."
Apple: In a Different League
On the other hand, I would be wrong to characterize Apple as a creator of fear and awe alone. Apple has quite a few tangible business characteristics that make it different from all others, aside from the fact that it threatens the trillion dollar mark.
In a world strife with conflict between companies such as Microsoft(NASDAQ: MSFT), Google (NASDAQ: GOOG), Dell (NASDAQ: DELL), and Research In Motion(NASDAQ: BBRY) Apple differentiates itself from the crowd with competitive advantages that threaten competition from every angle. Pat Dorsey says that there are 5 types of competitive advantages (Intangible Assets, Switching Costs, Network Effect, Cost Advantages, and Efficient Scale). Of those five, I would argue that Apple has at least 2 and is working towards 3. The first is Intangible, it's the Apple brand. Known for ease of use and suave consumer design, Apple products have hordes of worldwide fans that give its products a premium price. Compare Microsoft or Dell's brand loyalty to Apple's in the computer industry and there's no competition. In the smartphone area, however, Google is giving Apple a run for its money with the Android operating system which has more market share and seemingly more firepower, while it has been argued that loyal Blackberry users refuse to switch the the iPhone's touchscreen interface. Recently the power of Apple's intangible brand advantage has been evident as Apple has gained much more ground in recent smart phone acquirers.
More telling is this recent article that shows that iPhone brand envy continues as 38% of iPhone buyers were previously Android or Blackberry users.
Second, Apple has an advantage in Switching Costs. David Einhorn says, "A consumer with one AAPL product tends to want more AAPL products. Once the user has a second device, AAPL has captured the customer. At that point, a future competitor has to make a product that isn't just a little better, but a lot better to get people to switch. The high switching cost makes AAPL's business much more defensible than that of its predecessors." While competitors like Dell are "one trick ponies," Apple's versatile product offerings are an advantage in themselves.
Finally, I believe that Tim Cook is bringing in a new competitive advantage to the Apple's dark fortress: Cost Advantages. Tim Cook seems to be looking to give Apple a sort of Vertical Monopoly by gaining control over its own supply chain. You have to admit, if there was ever a company with the funds to do this, it would be Apple. As Connie Guglielmo mentions in this article, owning control over their supply chain would take a lot of volatility out of their business.
Don't Get On The Wrong Side Of Apple
As an investor, with all of Apple's competitive advantages and growth opportunities, it would be a very bad decision to ignore Apple's potential due to unreasoned paranoia. You don't need to fear Apple if you join Apple. In the long term the market is a weighing machine, even if that weight is a trillion or higher.
*Here is a link to David Einhorn's Q1 Shareholder Letter which I quoted so often.
shamapant owns shares of Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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.