Apple has always produced some of the most fascinating gadgets. Between the revolutionary iPhone, beautiful laptops and industry-changing MP3 Players, Apple truly produces a treasure trove of creative and reliable products.
Apple has this unique charisma that draws both consumers and investors alike. And why not? The company has plenty going for it.
Innovation
Apple has quite a legacy of innovation. As the company who invented the personal computer, revolutionized the use of MP3 Players and helped dethrone the desktop as the most popular type of computer, Apple has quite a few notches on its belt when it comes to creative, game-changing products.
Operations
Any Apple product you purchase uses the absolute minimum amount of packaging material. The company goes through great lengths just to shave an extra millimeter of paper or plastic off of its packaging.
Apple’s software and hardware is designed to be as reliable as possible, retail stores use iTouches for cash registers and receipts are encouraged to be emailed to buyers in order to conserve paper. If this isn’t operational perfection, I don’t know what is.
Financials
Not only does Apple run a tight ship in the realm of Operations and Product Development, but their financials are also quite impressive.
As of December 2009, Apple has $7.6 bn in Cash and Cash Equivalents, while carrying $0 Short Term and Long Term Debt. The company also carries a healthy 25% profit margin.
Compare that to HP, which has significantly greater market share: $13.5 bn in Cash and Cash Equivalents in January of 2010 with a Short Term Debt of $1.86 bn. They carry a profit margin of around 5%.
While one would think HP has economies of scale over Apple, Apple still is able to produce products that bring a higher profit margin than that of the computing behemoth.
Top Executives
Let’s not forget the top quality management that Steve Jobs and Tim Cook offer the company. Jobs has a tyrant-like grasp over the Cupertino company while maintaining an unrivaled creative genius. His vision has led the company to produce some of the most well known and revolutionary products of our time.
Cook on the other hand, is an operations whiz and quite the opposite of Jobs in many respects. The aforementioned product packaging, retail store efficiency as well as their supply chaining is all thanks to Cook’s engineering. If you take a second to think about this, Cook’s feats are extremely impressive.
However, while Apple may be an incredibly well-run company in every respect, many of its inherent industry risks make Apple a poor long term investment.
Apple as a Tech Company
As a member of the tech industry, Apple suffers from many of the risks associated with tech companies.
Technical Obsolescence
Apple is prone to the risks of obsolescence. In a matter of months, a piece of Apple software or hardware can be rendered obsolete by newer technology.
Take the iPod for example. While considered extremely innovative at the time, this product is slowly but surely being replaced by multiple use devices such as the iPhone and iTouch, which have the iPod function built in.
Older versions of Apple’s Operating System (ie: OS9) is another example. Tech companies have to constantly invest in R&D to develop newer versions of their software in order to keep up with emerging technology, while also staying competitive.
Both examples result in lost revenues for older products as well as high costs associated with producing new ones. Thus, the tech industry is in a constant state of flux where new products are constantly hitting the market while older products are rapidly exiting. It is rare that a tech company has one stable, constant product since even flagship products such as the MacBook are constantly being updated.
User Privacy
This issue has been of huge concern to customers as of late. Recent problems with Google’s new Buzz service, as well as Facebook’s use of their user’s content are perfect examples of the cost that comes with the issue of privacy.
One mistake in a tech company’s privacy policy can lead to a deluge of legal costs and loss of consumer trust.
Privacy is especially prevalent to tech companies due to the increasing amount of communication, commerce and sharing taking place online. Even if a tech company isn’t involved in social networking, it is still vulnerable to the risks associated with user privacy.
Security
Patching security bugs is expensive. If you consider losses to consumers due to software security flaws, as well as the expense of fixing the security bugs, tech companies have yet another costly and risky undertaking. Furthermore, a serious enough security flaw will get an enormous amount of bad publicity that can permanently damage a company’s reputation.
While Macs have historically been secure, the increasing amount of Mac users will only make the Mac more of a target to hackers and malware in the future. Also, just because Macs have a history of being safe doesn’t mean they will continue to be safe in the future.
Bugs and Defects
Serious bugs or defects can significantly harm any company’s reputation (just look at Toyota). The presence of bugs can cause a huge depression in sales until the bug is fixed, and maybe even long after that. It also costs a lot of money to fix the bugs in the meantime.
Similar to security, just because Macs have historically been very stable doesn’t mean they will continue to be in the future. A change of just one executive at Apple (especially Jobs or Cook) could change all that in a matter of months.
Competitive Technology
Between multi-touch surfaces, touchscreen phones and MP3 players, Apple has always been at the cutting edge of innovation.
However, competing companies are catching up to Apple’s creativity and are continually biting at Apple’s heels to outdo the iPhone, iTouch or Macbook.
There are are also quite a few technologies where Apple is behind: tablet computers (it has taken years for Apple to finally develop the iPad), the Mighty Mouse (which was significantly lacking in usability) and the Apple TV.
If Apple can drop the ball on innovation in any one of these areas, it can certainly slack off in the development of future iPhones or laptops.
Competitors
With the advent of netbooks, Linux has grown increasingly more popular. Google is developing a ChromeOS for these type of computers, and Windows XP has seen a second wind due to its lower system resource footprint.
What about phones? The quest to beat the iPhone is getting increasingly intense, especially with the entrance of the Nexus One.
All this amounts to increasing competition to beat Apple at the innovation game, make them that much more risky of an investment.
Apple as a Fashion Company
Apple isn’t just a tech company, but a fashion company as well. People don’t just buy Apple products because of how well they work, but also because they are trendy. Consider the sales of Sony Walkmen versus an iPod or iTouch. Why does the iPod or iTouch beat out the Walkman? Partially because iPods are much more fashionable products. As a member of the fashion industry, Apple suffers from the same risks as its other members.
Trends and Fads
Just as tech companies are in danger of experiencing technical obsolescence, fashion companies are in danger of experiencing style obsolescence. Apple could easily lose ground as a fashion icon, should consumer tastes change.
If Apple fails to predict customer tastes for even one year, its sales and popularity could be permanently damaged. This has happened in the past, while Jobs was working with NeXT and it could happen again.
Loss of Vision
While Apple is currently a trend setter, it is possible that the company can lose it fashion genius. If this were to happen, taking chances on product design becomes that much more risky, since the company would be more prone to creating designs that don’t catch on.
Undiversified Creativity
Steve Jobs is the key driver to Apple’s creativity. He has continued to push the envelope on both technical innovation and product design. With Jobs’ health a recent concern, this alone creates some inherent risk on the company’s ability to continue to produce fashionable products.
But lets pretend Jobs’ health isn’t a concern. He will still one day retire. He could also face a creative block or just lose his innovative touch. Should any of this happen, this will serve as a major detriment to the company’s ability to create fashionable products.
Apple’s creative genius is very much undiversified. That’s not to say Apple doesn’t have many creative geniuses. However, it’s chief is a huge driver of creativity and his absence would create a tremendous void should he leave the company.
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These two risk categories make Apple a pretty risky company to invest in. While including Apple in a diversified stock portfolio is perfectly reasonable, choosing Apple as a single stock would not be a safe long term investment.
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