What will kill Apple?

Berkshire owns over $150 B worth of Apple. More than 20% of Berkshire value is tied to Apple. What will kill Apple profit machine?

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Berkshire owns over $150 B worth of Apple. More than 20% of Berkshire value is tied to Apple. What will kill Apple profit machine?

I have no idea what will kill the Apple profit machine, but since you asked, here are some possibilities.

1.) An upcoming generation will be so uneducated that they are not able or interested in buying computers as such. They will just thumb their cell phones. All very well, but they will not have enough money to buy Apple products (this seems to be beginning already, some getting free government issued cell phones).

2.) Some foreseeable or foreseen events.
There were a large number of canal companies that disappeared with the arrival of railroads.
There was a huge number of railroads in USA that have dwindled to five or six.
There was a large number of automobile manufacturers that dwindled to about three in USA (if any: depends on how you count them).

3.) The unforeseen: consider the following companies. They were very important in their day. Some were in the DJIA.

Atwater-Kent, makers of radios.
Pierce-Arrow, makers of automobiles.
Nash Motors, makers of automobiles.
Eastman-Kodak, makers or conventional film, paper, and low-end cameras.
Polaroid-Land, makers of instant film and cameras.
General Railway Signal Co, makers of railway signal systems.
Union Switch and Dignal co., makers of railway signal systems.
American Locomotive Co., makers of steam railway locomotives.
Baldwin Locomotive Co, makers of steam railway locomotives.
Central Railroad Co of New Jersey
Delaware, Lackawanna, and Western railroad.
Erie railroad.
New York Central railroad.
Pennsylvania railroad.
Reading railroad
Sears Roebuck & Co.

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A lack of creativity.

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China risk. Invasion of Taiwan. Semiconductor mfg. takeover

China unhappy with Apple for whatever reason and banning product sales and manufacturing. Very low odds on that. Higher odds on Taiwan invasion IMO.

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Well run companies reinvent themselves to keep up with the times. Apple has done that repeatedly with MacIntosch, iPod, iPad, and now iPhone. They have not always been successful with new products, but creativity is engrained in their culture. AppleCar anyone?

Contrast that with companies where leadership is tired and unwilling to take risks. Sears-Roebuck could be the modern Amazon. They were the leaders and blew it.

Not likely to happen to Apple in the near future.

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China risk. Invasion of Taiwan. Semiconductor mfg. takeover

It makes some sense that that’s the big one. 20% of revenues in “greater China”, something like that?
Or closing of the app store, unable to get any manufacturing done due to chip embargoes, and so on.

Here’s a different tack:

The slow creep of improvements by others.
Much as we like to think otherwise, it’s the profit behemoth it is because of networked pocket computers.
No other product can or will replace that–it’s the most profitable produce line in the history of humanity.
The pace of innovation has slowed because there are only so many new features one can add, and still be meaningful.
That makes it hard to stay perceived as the better product. But let’s assume Apple keeps their quality and price lead.
But alternatives will be almost as good, and among themselves very very competitive.
If alternatives are almost as good, and price keenly, it’s hard to support a big price premium, so that will erode.
Or, if they keep the big price premium by fleeing up market, the market share falls a lot.
It’s then a delicate balancing act of elasticity, because without the huge market share and concomitant installed base, the services revenues fade.
So, the risk is that they fall too far to one side of the current precarious balance.
Accelerating fall in market share or accelerating fall in margins.

Another vague risk is simply no longer being cool and/or trusted.
It’s not that hard to destroy a reputation, and maddeningly hard to rebuild it.

Jim

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Hard to see Apple being stopped for a long time.

An extension of our consciousness at this stage…remarkably utility, brand, network, product quality…

Even the serious negatives of over use, which I can attest to over recent holiday period. It’s like McDonald’s and tobacco. The average person just can’t escape the pull.

Even if it was taxed heavily it would still be hard to resist.

Relearning a new complex device. Most people will do anything to avoid that.

I suppose if there was some kind of leap to the next generation of hardware that enabled access to the digital world without an iPhone, watch or glasses. That was created be someone else maybe eventually Apple looses its franchise. Seems a long way of but things do eventually change.

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But alternatives will be almost as good, and among themselves very very competitive.
If alternatives are almost as good, and price keenly, it’s hard to support a big price premium, so that will erode.

I knew two young (under 30) women who were frequently homeless for various tragic reasons, and for extended periods of time. Under those circumstances, they needed a reliable telephone number for social service agencies to get in touch with them. Since they often sheltered in abandoned houses or apartments, a regular land-line telephone number would not do, since even if there were telephone service in those buildings (there never was), the number would change from day to day.

It turns out that Apple cell phones were not the answer because of their high status, so they got stolen much more often than other cell phones. An Apple seldom lasted six months, where a “lesser” brand sometimes lasted almost a year. So in those circumstances, the cheaper in terms of price phones were of greater value than the Apple ones.

Unfortunately, life was too much for them and one hanged herself and the other died of drug overdose. I do not suppose any of the cell phone manufacturers are after that class of clientele, but they are out there.

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Apple has done that repeatedly with MacIntosch, iPod, iPad, and now iPhone.

Eh, I think it was terrible in the 1995 to 2000 time period: An Apple machine couldn’t play video games like a Windows machine, and it wasn’t the standard business platform like Windows either. Remember the Mac vs PC commercials? There’s a reason they needed those.
I think the Mac market was just not big enough for the video game creators to program for it, which highlights the fact that the market penetration drives a lot of the reasons for continued success.

Apple cell phones were not the answer because of their high status, so they got stolen much more often than other cell phones.

I’m surprised at this. Not at the high status, but the theft. If someone steals my iPhone they’ll get a $15 cell phone case, and tracking hardware that will let me find them. Everything but the flashlight and time requires unlocking.

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Apple cell phones were not the answer because of their high status, so they got stolen much more often than other cell phones.

I’m surprised at this. Not at the high status, but the theft. If someone steals my iPhone they’ll get a $15 cell phone case, and tracking hardware that will let me find them. Everything but the flashlight and time requires unlocking.

The thief may not get a cell phone (s)he could use, but (s)he could sell it to one of the creeps repairing cell phones in shopping malls. They can use the screen, for example. Possibly the battery. Maybe memory chip. Not as valuable as a working phone perhaps, but it might pay the next drug hit or something.

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If I had to look down the road… Neuralink could dent them.

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Here’s a different tack:

The slow creep of improvements by others.
Much as we like to think otherwise, it’s the profit behemoth it is because of networked pocket computers.
No other product can or will replace that–it’s the most profitable produce line in the history of humanity.
The pace of innovation has slowed because there are only so many new features one can add, and still be meaningful.
That makes it hard to stay perceived as the better product. But let’s assume Apple keeps their quality and price lead.
But alternatives will be almost as good, and among themselves very very competitive.
If alternatives are almost as good, and price keenly, it’s hard to support a big price premium, so that will erode.
Or, if they keep the big price premium by fleeing up market, the market share falls a lot.
It’s then a delicate balancing act of elasticity, because without the huge market share and concomitant installed base, the services revenues fade.
So, the risk is that they fall too far to one side of the current precarious balance.
Accelerating fall in market share or accelerating fall in margins.

Well, that argument has been around for at least a decade. Thing is, not only has this not been happening at all, the divide has actually been widening…Apple is taking share, at least in it’s most lucrative market, the U.S.

Many made same arguments about Mac vs PC. Yet Macs have steadily gained market share for years and years, and premium pricing has held up.

As one who personally has owned iPhone from the start, and has frequently upgraded, Apple still surprises me on how much better each generation is from the prior one. True, most of the terrific improvement has been in the camera–though this is no small matter for most.

Furthermore, Apple has somewhat dealt with the problem by having offerings from relatively cheap up to super-premium. So few have to leave Apple just due to price.

The bottom line is that our personal pocket computers have become the most important product that most of us own and use, that Apple makes what a large share of the higher-income types view as a superior offering, and that for what it does for its owner, the price is quite cheap compared to most other things we spend money on.

To me the only catastrophic threat to Apple is China. While not likely, a war between China and U.S. would cause unimaginable trouble for Apple.

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Big headline on the BBC about Apple being the first $3trn company, Barrons leading on Berkshire, record Shiller PE and price to GDP valuation. It’s all sounding a bit “toppy” :thinking:

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"Well, that argument has been around for at least a decade. Thing is, not only has this not been happening at all, the divide has actually been widening…Apple is taking share, at least in it’s most lucrative market, the U.S.’

Precisely. The walled garden is growing very well and I am happy to be inside as are 99%+ of apple’s customers.

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The slow creep of improvements by others.
Much as we like to think otherwise, it’s the profit behemoth it is because of networked pocket computers.
No other product can or will replace that–it’s the most profitable produce line in the history of humanity.
The pace of innovation has slowed because there are only so many new features one can add, and still be meaningful.
That makes it hard to stay perceived as the better product. But let’s assume Apple keeps their quality and price lead.
But alternatives will be almost as good, and among themselves very very competitive.
If alternatives are almost as good, and price keenly, it’s hard to support a big price premium, so that will erode.
Or, if they keep the big price premium by fleeing up market, the market share falls a lot.
It’s then a delicate balancing act of elasticity, because without the huge market share and concomitant installed base, the services revenues fade.
So, the risk is that they fall too far to one side of the current precarious balance.
Accelerating fall in market share or accelerating fall in margins.

I think this dramatically underestimates Apple’s moat. The iPhone has proven itself dissimilar from TVs or similar. Big network effect and perceived or actual switching costs in addition to the great brand. I don’t think an “almost as good” competitor is a threat. Even an “as good.” I am not representative of the marketplace, but isn’t Samsung’s Galaxy as or almost as good? I thought the Galaxy has been ahead at times, such as with water resistance.

It is a huge uphill battle to convert users away from the iPhone. I don’t think simply as good, but cheaper or a bit better at the same price does it. Maybe a bit better at the same price doesn’t do it, but compellingly better at the same price. Let’s say that’s the case. How does a competitor offer something compellingly better at the same price? Beats me. I think it beats them as well.

I think Apple’s competitors also figure they need something more than just as good as Apple. That’s why Samsung gave foldable an early shot. Probably saw that as an opportunity to offer something compellingly different. Maybe they’ll get there and that’s a threat. The problem for competitors is that even if they find some compelling improvement, Apple can be a quick follower. A quick follower with massive resources.

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It is a huge uphill battle to convert users away from the iPhone. I don’t think simply as good, but cheaper or a bit better at the same price does it. Maybe a bit better at the same price doesn’t do it, but compellingly better at the same price. Let’s say that’s the case. How does a competitor offer something compellingly better at the same price? Beats me. I think it beats them as well.

I think Apple’s competitors also figure they need something more than just as good as Apple. That’s why Samsung gave foldable an early shot. Probably saw that as an opportunity to offer something compellingly different. Maybe they’ll get there and that’s a threat. The problem for competitors is that even if they find some compelling improvement, Apple can be a quick follower. A quick follower with massive resources.

A TRANSPORTER PORTAL?

A few thoughts.

  • I don’t think switching platforms is as big of moat as people think - its just that AAPL has done an excellent job keeping up with trends such that switching isn’t even a thought for most people.

  • There don’t appear to be any immediate threats to the AAPL business model - however some are emerging.

  • I think the biggest issue is a slowing down of the upgrade cycle. If 75% of AAPL customers added 1 year to their upgrade cycle it would have a material impact on the business.

  • A changing of consumer behavior would also be a big threat. Right now we use our phones for almost everything; but that could change. If the meta-verse thing starts to take off, or if for instance cars became linked to your phone and another vendor (GOOG for example) had a better “car experience” I think that could siphon off some users.

  • A home robot that that used a different platform would be a game changer and probably get people to switch.

  • Some advanced AI would also create problems for AAPL (I don’t know what these use cases might be; but there will be some for sure).

Most of these can be mitigated by AAPL keeping up with trends - which they have done very well; but a slip up in execution could put some pressure on the business model - which would probably cut valuations by 50%. I don’t see this as very likely however.

tecmo

PS: What is more impressive; Jobs getting AAPL to $300B or Cook getting AAPL to $3T?

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PS: What is more impressive; Jobs getting AAPL to $300B or Cook getting AAPL to $3T?

what’s more impressive; lifting 100 lbs. when you’re 8 or 300 lbs. when you’re 22? : >)

happy new year to all!

best,

mike

Here’s a different tack:
The slow creep of improvements by others.

Nah. There are a few brands which, for whatever reason, manage to persist with premium pricing even as competitors ‘catch up’ in the product offering. Coke and Pepsi come to mind (even tho as a duopoly it doesn’t exactly fit) with their lock on distribution, control of the supermarket shelves/vending machine trades, and yes, great quality. But there are probably 20 look-alikes with far better pricing (Sam’s Cola, etc.) which barely make a dent, and that’s been true for a century.

Frito-Lay is another which controls distribution and marketing and keeps 80-90% of the shelf space even though there are dozens of regional competitors with similar, sometimes superior quality. In manufactured products you could point to long standing luxury lines like Mercedes, Tiffany, Nike, Levis, Rolex, Armani, etc. as examples where “slow creep” hasn’t harmed the leader.

Apple’s advantage isn’t distribution, of course, it’s perceived quality and so long as they don’t screw that up they’ll be good for a long while.

One thing unmentioned so far that I think could derail them is regulation. There’s a lot of chatter about anti-trust these days, particularly with regard to tech, and especially about Facebook, Google, Apple, and Amazon. Some of it is likely justified: there is no reason Facebook should also own Instagram and What’s App, for instance, except to make it harder for advertisers to price shop on reach and delivery of audience. I find no reasons those businesses couldn’t be severed without harmful effects for either consumers or advertisers.

Google has a bunch of intertwined businesses, but certainly reaches the threshold of what has traditionally been considered a monopoly. How and which it could discard I haven’t thought much about but I suspect many of the complaints of smaller companies are valid (scraping Yelp reviews makes it unnecessary for people to visit Yelp, making it harder/impossible for Yelp to monetize eyeballs, for instance).

Amazon may or may not be guilty of some practices; certainly “Prime” gives them an advantage over other online sellers, whether that is legally indefensible I don’t know. And Apple has, by its own admission, engaged in anticompetitive behavior (the no-poaching deal with Google) and may have other issues (the non-negotiable skim from the App Store, perhaps).

It is hard to envision the separation of some/many of Apple’s various ecosystem components without harming the parent, but I can see Apple getting swept up in the zeal over Facebook and Google, even if it doesn’t belong there (I am not taking a side here). Just noting that regulation is a risk.

A note: being a monopoly is not per se a violation of antitrust. It is the abuse of the monopoly, unwitting or not, which gives rise to the introduction of legalities into the economic system.

Anyway, I would put “China” as the most likely, whether it’s invasion of Taiwan, some Apple VP calls Xi a tyrant, or some sort of tariff or other issue. But I would put “regulation” as the second most likely cause to impair Apple and bring it to a slow griding deceleration.

One hopes that neither of those comes true, of course.

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I think that little can kill Apple. They have a very wide moat, enough that I would deem them Steadfast (meaning that they are still around after 20 years, and their earnings predictable to be above some lower bound after 10 years).

I posted a thesis about Apple in 2012 which underlined engagement of developments as important (similar to what caused DOS to remain dominant for ludicrously long despite the technology literally a decades behind competitors) and these developers having a large learning curve and career-destroying switching costs. Unknown to many, this is still the main reason Apple is doing so well today. They have a pretty good phone product on top, but the size of the developer community is ludicrously large - and deeply dependent. The product could falter far longer than people imagine (look at DOS vs the other extremely more advanced OS environments around at the time), and they will still retain the developer partnerships and be completely dominant in software for a long, time. Don’t compare this to Nokia as their development community was a joke. Google would be a threat, except that if they heavily marketed their own phone, hardware competitors would jump ship (it would be like Microsoft bringing out their own PC, which would kill DOS, and they were smart enough to not do that).
https://discussion.fool.com/intrinsic-value-29846517.aspx

I wrote a 6 part thesis in 2012 for which this is just one part and I strongly encouraged purchasing. I predicted that earnings in 20 years (that is 2022, so now) would move towards services, and even from here I think it will be important for Apple when looking out to 2032.

Even whilst nothing “kills” Apple, some investors might be overconfident about how much higher Apple’s earnings will be ten years away. They’ll be higher, but there is only so much $$$ you can extract per customer once you have near market saturation.

A good argument for Apple’s having no problems with per-customer a spend ceiling is that most people consider what they get out of using their phone to be far higher than the dollars they are spending each year on the phone.

This bodes well for the future, not only related to the phone, but related to what we spend for our mobile access to the internet generally, for which the product will vary over time but we will still want to have the best version available, and won’t want second best. There will be a market for “nearly as good, but cheap”, but there will also be a market for “only the best”, and you can think of the markets as distinct, the latter never going away or being replaced with the former.

I think Google is a much better investment than Apple, though, and that mostly because of Apple’s relatively high multiple right now (32x). They will unlikely grow earnings as fast as Google over ten years, so should have a lower multiple than Google’s (28x), not higher.


Apple
Normalized earnings per share	5.6
Average earnings per share	9.74
Earnings multiple at year 10	20
IV10   				277.56
Price today			179
IV10/Price			**1.6**
		
Google	
Earnings per Share normalized 	95
Average earnings growth rate	13.00%
Earnings per Share at year 10	322.48
Earnings multiple at year 10	25
IV10   				8062.1
Price today			2900
IV10/Price			**2.8**

IV10 defined (in 2022) as the worst-case estimate of intrinsic value of a company in 2032, no inflation adjustment or earnings discounting. For most firms this is close to $0 as our worst case is a wipeout, so this only works for firms with extremely strong moats.

Berkshire’s IV10/price today stands at 2.4, which is higher than Apple’s 1.6. Selling Apple would not be profitable in done in isolation, but a combination of selling Apple and buying back Berkshire shares would be. Replacing with Apple with Google would be even better.

  • Manlobbi
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