Apple: Dark Days Ahead?

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

In late 2008, Apple's (NASDAQ: AAPL) days were supposedly over. Worse, its premium products would likely fail to maintain traction during the worst economic downturn since the Great Depression. Fearful competitive responses to the iPhone 3G were looming. At that time, Mr. Market sold me Apple for $100. 

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Since then, Apple’s share price hit $700, and is now down to $460. With twelve-month earnings of over $40 billion, Apple's price-to-earnings (P/E) ratio is slightly over 10. Microsoft’s (NASDAQ: MSFT) P/E is roughly 15. With no debt, an impressive ecosystem of highly integrated products, and holding cash equivalents of over $135 billion, Apple's market price today appears more compelling to me than it did in 2008. 

Will Apple maintain its relevance despite fierce competition, as did Microsoft? Or will it go the way of Research in Motion (NASDAQ: BBRY) ? In my view, Apple's ecosystem with iPods, iPhones, iPads, and Macs, alongside its integrated user experience with iTunes and iCloud is a significant contrast to RIMM's singular point of relevance with Blackberry. Rather, Apple has more comparability to Microsoft’s relatively sustainable competitive position. Additionally, Apple’s 10 year track record of subverting well-established products and players indicates that Apple is more likely to be a “disruptor” of established technologies, than it is to be “disrupted.”

A key differentiating factor with RIMM, product quality and features aside, is that Microsoft had multiple points of connection with their users, as does Apple. This provides additional response time to innovate and respond to potentially disruptive technologies. The multi-year lag between Windows Vista’s failure and Windows 7’s relative success was buffered by the relevance of Microsoft Office. This is instructive on the contributions of an integrated multi-product line ecosystem to a company’s economic moat. Reputation adds width, while an ecosystem adds depth. In combination, it’s a moat that is more difficult for competitors to traverse. 

In contrast, RIMM was vulnerable to a single point of failure with their Blackberry smartphone line, BBM network effects aside. Its economic moat was narrow, primarily rooted in its technology, not necessarily its competitive positioning. Users needed only to switch phones and RIMM's single point of connection was lost. Rarely will a user replace its entire ecosystem of technology products in a single year, given the cost of replacing a well-functioning computer, phone, tablet, and dozens of Apps and software programs.

Of course, users will have varying degrees of connection with Apple. Deeply integrated users may add to this list an Apple TV, iPod Nano, iTunes Match, iPhoto, and (oddly enough) Microsoft Office for Mac. Less integrated users might only list an iPad and iPod. In any event, the structure of Apple's competitive positioning shares a closer resemblance to Microsoft's, than to RIMMs. 

When will Apple innovate again? Will it conquer the living room with a Smart iTV in 2013 or 2014? What about an iCar technology? Whatever. In the meantime, Apple pays me a healthy dividend to wait for Mr. Market’s mood to lighten up.

Stalkbench has a long position in shares of AAPL and MSFT. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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