DISCLAIMER (1): All writings were done at the time of the event/research. The view offered does not limit the writer from possibly taking other perspectives in the future.
DISCLAIMER (2): ALL STOCK ADVICE WAS OFFERED WITH THE MOST RECENT INFORMATION AT THE TIME OF THE WRITING. BE WARE THAT THE MARKET CONDITIONS DISCUSSED COULD POSSIBLY NO LONGER HOLD.
Thesis: Apple is a great brand, that is transitioning to a socially and environmentally responsible company. However, the lack of innovation in the recent years and the loss of brand niche, worsened with a confusion of developmental focus has made the once most attractive company in the world much less impactful. I believe unless a revolutionary innovation occurs once again to lead a generational trend, the company’s best days are behind it.
(About 70% of Apple’s revenue comes from its iPhones, to which is the focus I dedicated this article. I will continuously analyze other business aspects of Apple with different focuses later on.)
- Loss of Innovative Lead
- Bandwagon Effect vs. Snob Effect
- Going Forward
I realized that Apple stock has indeed declined sharply in the recent weeks. It seems like I am just like a typical Wall-Street analyst: pouring fuel on fire. However, let me clarify for myself. I have been bearish on Apple for more than a year now. I once owned Apple stocks before it split shares in 2014, and sold following the split. Since the beginning of 2015, I have been quite skeptical about Apple’s development. I have officially developed my bearish sentiment when recently Apple released its newest product: iPhone se. At the time, (late March 2016), I was swamped with preparing my final exams and could not find time to argumentatively construct my analysis, also I had not started writing on my blog. Thus, I was in fact telling people around me that I thought Apple was a clear short from this point on. Next thing I know, the company slid under in a major way.
Worry not, I actually think that writing this now is a much better idea than if I wrote it a month back. If I wrote it a month back, I would have gotten lucky and claimed the credit. I would not have taken a further look at the business and its future. However, now that the stock has already gone down, the question has become: is Apple a buy now? I will try to answer this question here and explain why I would not considering buying Apple shares now.
Loss of Innovative Lead
The story now is that the company released its quarterly in late April and it showed the sales has fallen from 58,000 to 50,500 from the same quarter last year. This is the first time the sales has decreased in 13 years. Wall Street freaked out and started selling shares. I will not repeat too much numerical information in this article; instead, I will analyze the long-term future of the company. I do not know, nor do I care where the share price will go tomorrow or next quarter.
It is safe to say that Apple has stopped innovating. Although it is a common practice in the smart phone industry to frequently come up with new products and models to push for more sales, Apple is clearly losing its lead. When Steve Jobs released iPhone 4 and iPad in 2010, the tech giant was not only just a step ahead of its competitors, it was lapping others who were running in the same field. Its products allowed users to do so many things and it really opened a new era of technology. The functions that we take for granted nowadays, such as a mind-boggling number of third party apps, music services, and top quality cameras, all started with the early iPhones. More importantly, iPhones weren’t just top quality. They were slick, simple, and just cool. I remember seeing classmates with iPhones at the time in China, and just being in awe, “Wow, that is something cool!” For years to follow, other companies were trailing behind. Samsung was ignored for long periods of time and in fact was near bankruptcy until it was saved by its Galaxy S4. Nokia was simply pushed off the market with the dominance of iPhone; and to me, the last Nokia phone that made any global impact was the N8, and that was in 2010, the year Jobs released iPhone 4 and iPad.
Everything changed, not in a hurry, but incrementally overtime. Apple has lost the edge; then ironically and literally Samsung gained the edge. So what happened? In simple terms, Samsung was a fast learner. Apple would be in agreement with that as well. In fact, Steve Jobs hated Samsung and believed that it copied everything from Apple, so much so that he focused a great deal of time and energy just on suing Samsung. Did Samsung really copy everything from Apple? I cannot possibly answer that question. But what I can say is I don’t think Samsung would have improved as fast and dramatically as it did in the recent years if Apple never took the lead. To a great extent, Apple showed the way to its competitors on what the consumers wanted. It was then up to the competitors to watch and learn.
We cannot take credits away from Samsung. It is easier said than done to catch up to a company with unbelievable cash power and brand recognition. However, in general, to me, someone who only holds moderate technology knowledge, the style of Galaxy phones have uncanny resemblance to that of iPhones, which reasonably angered Jobs. The users can access and perform almost all functions on an Android phone the way they would on an iPhone. In fact, it is easier for third party applications to be made for a Samsung Android phone than for an iPhone. As a result, users find themselves just convenient, if not more, on a Samsung Galaxy. Additionally, Apple’s music service is being taken over as well. In the Jobs era, iTunes was reigning over the music territory. Users were purchasing albums from their favourite artists for a one time fee. That was the way it worked. However, it all seemed quite ridiculous now and the common practice nowadays seems to be paying a monthly fee to acquire the access to all music for a period of time. The leaders in this industry are Spotify and Pandora. In fact, Apple has shifted its own music service to a subscription structure. Finally, iPhones killed the compact cameras. Prior to the advent of iPhones, people were hanging compact cameras on their chests. Phones had cameras but the quality just wasn’t enough. However, Jobs showed the world that it was possible to reduce the pack load and simply put a quality picture taking capability into a phone. Fast forwarding to today, Samsung is leading the camera qualities in their battle against the iPhones. Therefore, my point is that iPhones lost the main competitive lead against its competitors, in particular Samsung. Apple was the innovator when it comes to music service, in-phone apps, and camera qualities, but now it is mostly trailing behind in almost all categories. Over the years, Apple still has been improving on its existing line ups, but on an innovative level, it has been stuck. In an open battlefield with almost equal opportunities of advancement, Apple finds itself threatened and attacked on multiple fronts.
Bandwagon Effect vs. Snob Effect
Bandwagon effect refers to a situation when one buys a certain good or selects a particular brand because that other people have selected it.
Snob effect denotes an opposite phenomenon when a person chooses to buy a certain good or brand, because that few have selected this way.
Both effects are easy to spot in every economics. The most typical bandwagon effect is the gaming console market. No one ever, in the history of gaming wants to be the only user for a certain console. Given equal preference between the PS4 and the Xbox One, a person will choose the one that is most chosen by the market, and most chosen by his/her social groups. This is simple to understand because more buyers in general means more players on the network. Other examples of bandwagon effect are concerning food/beverages, and medicines. No one wants to be the one that says, “Look at me, I am taking this cool medicine that the world doesn’t even know of.” Similarly, if you dine at a small shop in a third world country, you rather order the Coca Cola than another soft drink that you have never seen.
Snob effects are found in fashion. People want to de dressed uniquely and differently. Very few people would go into a store and deliberately buy a shirt just because the majority of the world owns it. A different example is house decorations. People have a tendency to choose things that express their uniqueness and would generally want to avoid the mainstream style.
To summarize the causes of the two effects: when the buyer does not trust his/her ability to determine the quality of a good and a potential poor quality good can seriously damage the health and happiness of the buyer, the buyer will look to the mainstream and bandwagon. In addition, if others’ consumption positively affect one’s consumption, then bandwagon will also occur. To the contrary, if the buyer to a great extent holds what he/she believes to be a solid understanding of the good and the good can express certain personality traits about this person, then the buyer will try to be different.
Which category does a smart phone fall into?
Smart phone market possesses four key characteristics:
- Others’ choices matter. If you are the only user of an operating system, you will have no applications readily for use unless you are the one to write the codes. Thus, users want to find a popular operating system and brand. (Bandwagon effect)
- A wrong selection is not impactful. With new models coming out every half a year, even if someone buys a phone and instantly regrets it, he/she will not be affected negatively apart from some possible temporary mood swings.
- A person’s phone can be a great expression of his/her identity. The different apps, theme colors, as well as layouts can go a long way to show a person’s personal preferences.
- It is relatively easy to find information about phone models and make comparisons.
As a result, smart phones experience both a bandwagon and a snob effect. Users desire convenience and a large variety of choices, which leads them to choose a brand that already has a solid market presence. In this sense, once a brand becomes relevant, it enters into a phase of positive cycle. Users will buy into the product because others are doing so. The opposite is true. Once a company that dominates the market starts to give up market share, it enters into a negative cycle as it loses the bandwagon effect. I do not believe that this is what is happening to Apple as it is still grossly present. Blackberry, on the other hand, is a clear candidate for being on the wrong side of the bandwagon effect. At the same time, users also value uniqueness, in a different term: customization. The beauty of iPhone is simplicity. However, after a while, simplicity starts to be taken for granted and people start wanting to be different. Samsung and Android accurately tap into the need for customization. Users share the same platform but can sufficiently set themselves apart by fully making the phone his/hers.
Therefore, economically, examining from a bandwagon vs. snob effect perspective, Android phones, again led by Samsung are fully taking advantage of the freedom of customization and a popular platform.
Tim Cook and companies are a bunch genius businessmen. They truly know how to run a business. Apple shareholders could have been in an infinitely worse place in the hands of another executive team. The stock buyback program, 1-7 share split, dividend increase all tremendously boosted the share price. In addition, Cook is envisioning a socially and environmentally responsible tech leader. Regarding this, I salute with maximum respect.
Apple still has tremendous amount of cash and it is foolish to say it will lag behind in the global smart phone market. Even if it shifts from an innovative leader to being the follower, it can still ensure it stays within a leg’s length with its opponents. Finally, we see an astronomical level of brand loyalty with iPhones. iPhones fans often voluntarily and consciously stay updated and chase the first opportunity to acquire any new models. This sort of brand loyalty is rare in any market, not just smart phone.
Therefore, I would not short Apple’s for two reasons: 1) Shorting one of the largest corporation, one with the best brand recognition in the world simply because it currently is not innovating is foolish. 2) I’d like to see more encouragements for companies to become socially and environmentally progressive and responsible.
However, let’s be 100% clear. If you are expecting Apple’s revenue to recover, or possibly peak again, you might not see the day. With evidence from the past and the market becoming ever competitive and crowded, I believe Apple is a mediocre stock at best. If you want to make money and get returns, I would highly suggest staying clear from Apple. Lastly, I want to ensure full understanding of my statement. I do not mean Apple might never go back up again, in fact, I am 100% positive that it will go up and down like it always did. My analysis is coming from a long term point-of-view. I do not know, nor care where the stock will go tomorrow, or next quarter.