Long AAPL (Sort of)

  Apple logo in Chicago 
  Originally uploaded by Nicolas Gompel.

Back in the spring of 2004, Jessica received a bunch of cash gifts for her bat mitzvah. We encouraged her to give some to charity and invest the rest. She wanted to buy Apple stock (AAPL). We agreed that was a good idea and she bought shares at $25/share. The stock has split 2/1 since, reducing her cost to $12.50/share and it currently trades at $75/share. That's a sweet 6x in 2.5 years and Jessica is convinced she's going to be in the hedge fund business when she gets older. I have to remind her that her other three picks (NOK, TWX, and GPS) have not exactly outperformed the market.

When Emily found herself in the same place, she also chose to buy AAPL although she went with some other picks for the rest of her investment cash. She thinks Apple is still a great company and a great stock. I tend to agree.

I myself don't own AAPL but I did convert from a ThinkPad to a MacBook Pro in the past six months and I generally lean toward Apple products when I have a choice. Steve Jobs is one of those entrepreneurial CEO/owners who lead their companies with intensity and vision. Bill Gates used to be like that. Rupert Murdoch still is. Sergey and Larry might be on that list too.

But I have a number of misgivings about Apple the company that keeps me from being a bigger fan of AAPL the stock. As brilliant of a marketer as Steve Jobs is, he's also from the "control everything" school of technology architecture. OSX only runs on Apple hardware. You can't play music bought from most online music stores on the iPod. And .Mac is the only online service supported by the iLife suite of products. What if I'd rather send my photos in iPhoto to Flickr? I can do that but not nearly as easy as I could send them to .Mac.

For now, that approach doesn't seem to be causing any problems for Apple, but I think openness is the winning strategy in the long run. Google is way more open with their technology than Apple is. And I think Google gets a lot of value out of that approach. Maybe Steve Jobs will wake up and smell the coffee, but somehow I doubt it.

The reason I bring this subject up is AAPL is the stock of the day at Wallstrip (if you are reading this in my feed, click on that Wallstrip link). Howard thinks that the growing retail empire is the catalyst that's causing the stock to be at its all-time high.

I think the retail stores are another stroke of marketing genius. The stores in NYC are always mobbed. They are the closest thing to disneyworld in New York City. But the stores are full of people checking their emails and it's not that easy to actually learn anything about the products there. I'd go to Tekserve or Digital Revolution over the Apple store for sure if I wanted information. And I'd much rather buy something at the Apple webstore than wait in the huge lines at their physical stores. That's exactly what we did with Emily's new MacBook. We picked the one she liked at the store in Soho and then left and bought it online later. So I am not sold that the retail stores are much more than a marketing expense for Apple. A smart one for sure. But maybe not the driver of growth that Howard thinks it is.

So back to AAPL the stock, I think its certainly a good stock to own and I am happy that my kids are Apple shareholders. But I worry about the long term sustainability of the current momentum the company has. Is the iPod franchise at risk of being commoditized by low end players? I think eventually it will be. Is the web going to eventually be the OS? Yes, I think it will be. Will Apple be cool forever? Who knows.

So I am long AAPL, sort of.

Comments

[kip]

Not to mention the little options SNAFU they are having there as well. Will be interesting to see how that pans out as they have some nice momentum with the holiday season coming.

[Jim Eiden]

I do not own AAPL, but I have been watching the stock for 6 months. I do need a tech stock for my IRA portfolio, and am looking at AAPL, BBOX, and some others. But that is not my point.

My Point is this:

In 1991 - 1992, I was a recent college grad with a marketing degree with no hope of becoming a marketing rep for a beer company as all other marketing grads are had the same idea. There was no internet back then so you had to send your resume out the old fashioned way. Rather than wait around for the phone to ring, I would put on my suit, take my leather folder with 100 resumes and go door-to-door at all of the Hotels industrial parks, office centers, and office buildings. This was in the Chicagoland area and I canvassed Oak Brook, Schaumburg, Naperville, Elk Grove Village, and eventually I started going door-to-door downtown Chicago.

I was at the Hyatt O'Hare Hotel when Apple was having a conference. I gave my resume to one of the Apple Employees at the door of the seminar. 2 days later, I got a phone call from Apple for an interview and an offer to work as their mailroom temp in downtown Chicago. I would be the only Mailroom person supporting an office of more than 150 people.

My job there was to handle all incoming and outgoing mail and shipping. In addition, I was responsible for all office supplies, stocking the refrigerators, changing light bulbs, making all copies and faxes and sitting in for the receptionist and handling the switchboard when she went on break. This led to another opportunity when my temp assignment involving traveling around the country and putting on Apple seminars.

During this time, Apple was going through some major turnover. Steve Jobs was gone, and his replacement from Pepsi had just resigned. Windows was beginning to spread throughout the PC world, and due to Apple's hypersensitivity of having a proprietary product, they lost out on a huge market.

I'm hoping the Apple learns from their past in the respect with their current and new technologies.

I wonder if Apple's shift to using Intel processors in their new machines might be part of a big picture / plan to make Macintosh's more mainstream. I think the Apple vs. PC ads is part of that.

I wouldn't write off Apple just yet.

[Michael J.]

> The stores in NYC are always mobbed. They are the closest thing to disneyworld in New York City. [...] So I am not sold that the retail stores are much more than a marketing expense for Apple.

IOW, "No one goes there anymore, it's too crowded."

Your behavior (review products in store, buy on web) is exactly what they want. The stores are selling an experience.

[steve]

if its possible to set aside the recent powerful apple magic -- the seemingly unbeatable marketing and always cool product design -- alas, isn't Apple a hardware company? in a painfully, increasingly competitive low-margin commodity business? would Union Square or any VC back a hardware company today? somehow i doubt it.

steve jobs is a genius. period. apple attracts the best of the best engineers and product designers. period. they got smart/lucky and somehow grabbed and branded the digital personal stereo business for a few minutes and are making brilliant huge amounts of hay in a glorious period of seeming -- seeming -- ownership. but does anyone really think the current fabulous iPod era will last long? how can it?

apple is a toaster company. maybe the best ever, but a toaster company. like sony. samsung. matsushita. etc. but apple's fanatical devotion to closed/proprietary systems and architectures seems unlikely to be a good long term bet.

[hello]

Okay, I'm confused by the statement:

"...that approach [control everything] doesn't seem to be causing any problems for Apple, but I think openness is the winning strategy in the long run. Google is way more open with their technology than Apple is."

I use both Apple's and Google's open source/APIs/services regularly. I'd have to say that there are significant differences in the approach for both companies.

Given, I'm a software developer and not an investment guru; perhaps we have a different perspective and/or definition of "open". I'd like to hear more about your approach, I'm learning a lot from your blog, and I'm willing to learn more.

Here are my thoughts vis a vis Google, Apple and "openness":

1) Neither Apple and Google are completely "open source", even in the broadest sense. However, Apple has done a fine job of making core components of OS X are available as open source on multiple OS's, with a variety APIs for diverse programming languages; Google much less so. The biggest difference between Apple and Google (from a developer's perspective) is the quality and quantity of documentation, and the level of customer service /support. Apple is the clear winner here; most if not all all of their "open source" stuff, is carefully and conscientiously documented. Support is readily available from Apple corporate, and from the developer community. Google has a long way to go here... my biggest beef with Google's services is the complete absence of a customer service/suppport model.

2) A better comparison for Apple's "openess" would be IBM. Both companies use software services/support to drive hardware sales. As far as releasing intellectual property in the "open source community", IBM trumps any and all commercial vendors. Again, all of IBM's open source projects (especially the R&D) are carefully documented. In my experience, many of the original developers from the IBM development labs are readily accessible -- even excited, when you use their technology in an enterprise initiative. Apple does okay in these respects also, however, Google *completely* falls down of the job.

3) A better comparison for Google's "openess", would be Amazon. Again, one of the biggest differences ("low hanging fruit") would be quality and quantity of documentation, and access to customer/service support. Overall, Amazon is so far ahead of Google from the web services perspective, it's not even funny. I'm still waiting for the mythical Google OS, and GDrive may not launch until 2007. Meanwhile, I configured/installed/deployed a test application on Amazon S3 over a weekend, and will integrate the same test application on Amazon EC2, as soon as I have another weekend free.

As I stated above, I'm just a software developer/architect/whatever, but my role in a "corporate setting" has always been to perform technical/evaluation/due diligence on emerging technologies. I've been surprised at investment decisions by my employers, especially during the last "Internet boom", and the current Web 2.0 craze. Obviously, not all of my previous (or current) employers were "clueless" or "stoopid"; clearly there's a degree mitigated risk involved in many of these emerging technology transactions. However, I've survived enough of these emerging technology partnerships and/or acquisitions to realize that very few executives heard or listened to the techies when we said... "We can do this, but it's gonna cost you downstream."

Clearly, I'm missing something from the investment guru perspective, and I'm more than ready to learn. Please keep the "financial speak" simple and in plain english, if possible :)

As for the iPhoto/Flickr integration, there's a couple of iPhoto plug-ins that work quite painlessly -- this one is super easy-to-use: FlickrExport: http://connectedflow.com/flickrexport/ .

[David G]

"Is the web going to eventually be the OS? Yes, I think it will be."
>>
Fred, I know what you're trying to say here i.e. that all applications will run on the web, not on the device - or rather, not on the device's OS but that does not change the fact that all programmable devices will always need to have an OS, so, no, the web will never be the OS - but, as more applications run on the web, the relationship between application and hardware will become looser - which actually works for apple, not against it.
>>
I'm trying to decide whether to dive in before Wednesday - I made the wrong choice before the last earnings announcement.

[craigbuj]

the real question is what is not known that can impact the stock… In other words the consensus view is X, what can happen that could impact X. I think the impact from retail stores is well mapped out by consensus (aka the street) in terms of potential impact to the P&L the next 2 years.

If ultimately you think earnings drive the stock price (I do…) - what impact does the iPhone launch have to AAPL’s ‘07 and ‘08 earnings power? Do they get the right form factor and sell 30m units or does it flop and only sell 3m units? Clearly the market for mp3 players is slowly shifting over time, and AAPL’s core franchise is under attack as high end feature phones move mainstream over the next 3 years as price points come down for mp3 phones and assuming they get the UI correct (ie. LG Chocolate, Sony/Ericsson MP3 walkman phones)

In terms of iTunes - how does streampad, finetune, and others change the game for APPL? Do end users shift how they consume media? I think the answer to this is clear via the success of youtube… maybe we finally get GoogleTunes in mid ‘07?

The U.S. market for AAPL is well known, what is not as clear is the iPod and halo effect outside the U.S. Incremental unit growth oppty for iPod & Mac in less saturated mkts?

Lots of opportunities as well as risks, but in the end if you model out scenarios and make some best/worst assumptions to understand APPL’s earnings power over the next 12-24 months then you place your bets.

[howard Lindzon]

Wow- great conversation indeed.

The market will tell you ahead of their real problems so its all speculation until than and the trend is clearly up fro now.

[Marco Argentieri]

You can't judge the retail store experience by the Manhattan stores. You are exactly right, they are like Disneyland, drawing in street traffic (and plenty of tourists) that are more interested in the cool store than in buying computers. Check out an apple store in a mall and it will really drive home what a powerful environment for selling they've created. The stores are crowded, but pleasently so. The staff is incredibly knowledgable and not constantly overwhelmned, like in Manhattan. You feel like a loser if you walk out of there without buying something. You right Fred, the Manhattan stores are liitle more than billboards. But the stores out there in the real world are completely different. I'm not sure what their penetration is now, but I see no reasons why their wouldn't be a store in every mall in America in the very near futures.

[candice]

Posting about your kids' stocks is cool. It's great that you get them into it so young. It reminds me of a friend of mine from highschool who financed his college education by buying dell in 96-97. (Went to Duke, no less.)