Apple Is Not Magic

As you may have noticed by now, we're in the middle of Apple Week here at the Fool. Over the past several days, you've learned about why Apple (Nasdaq: AAPL  ) should pay a dividend or use its cash hoard to make a major acquisition. But out of the several articles that have already run, the one that impressed me most was the very first: Better Buy: Google or Apple?

Problem is, what impressed me -- and I mean no offense to my Foolish colleagues or to Apple aficionados when I say this -- was the sheer, blinding force of the faith investors are placing in Apple. Consider just a few of the comments made in the company's "defense":

  • Eric Jhonsa: "The easy money has been made in Apple."
  • Rick Munarriz: "I love Google, but Apple is the real prize. They're both trading at next-year earnings multiples in the teens, but Apple's the one growing faster these days."
  • Alex Dumortier: "As I began comparing Apple and Google (Nasdaq: GOOG  ) , I was struck at how similar their numbers look, in terms of expected growth ... (16.5% for Apple vs. 18.5% for Google), valuation (forward price-to-earnings multiple: 16.1 vs. 15.1), net cash position ($23.2 billion vs. $26.5 billion), and profitability (net income margin: 21.1% vs. 28.3%)."

Bedazzled by Apple
Now here's the weird part: Eric and Rick both prefer Apple over Google. Yet Eric says the easy money has been made on Apple. Rick says Apple is growing faster, but then Alex points out that it isn't, really.

To the contrary, Alex cites a whole string of numbers that show Google is growing faster, is priced more cheaply, has more cash, and earns more profits per dollar of revenue. Yet he's the most pessimistic of the bunch, hedging that "both stocks look reasonably attractive at current levels."

That sounds crazy -- but not uncommon. It's almost as if my fellow Fools have been bewitched by the company's story, or perhaps brainwashed by the relentless beat of the iPods drumming their eardrums. By any metric you choose, Google beats Apple hands-down ... yet people still insist that Apple's the better investment.

Apple is not magic
News flash: It's not. Apple may have cast a spell over investors, hypnotizing them into believing it can do no wrong, not now, not ever -- but history begs to differ. History, you see, is replete with examples of do-no-wrong stocks that went nowhere but up, until they came crashing down. Companies like:

UnitedHealth Group (NYSE: UNH  )
UnitedHealth redefined health insurance. It rolled up tiny players into an industry behemoth and created scale advantages never seen before. But ultimately, UnitedHealth and its CEO were undone by greed in its stock-options backdating scandal. The company hasn't been the same since.

AIG (NYSE: AIG  )
Like UnitedHealth, AIG once seemed to occupy the right spot at the right time. For decades, its business only got bigger, and its stock price went nowhere but up. AIG even held pride of place as a staple investment of legendary value investor Shelby Davis. However, as so often happens, the company overreached for profits, and the whole company came crashing down.

Microsoft (Nasdaq: MSFT  )
Back in the tech arena, Apple's lately been crowing over how it vanquished Microsoft in the market-cap race earlier this month. But there, too, lies a tale. It's a tale of an industry giant that got too big and too powerful, and painted a bull's-eye on itself in the eyes of regulators, competitors, and plaintiffs' attorneys alike. Microsoft mocked Apple for its tiny market share and insignificant products, only to find that its own size had made it the favorite target for attacks from the Vast International Hacker Conspiracy, while "insignificant" Apple was given a pass.

It was in Microsoft's own success that the seeds of its downfall were sown.

Bigger is badder
I could go on, of course. I could describe to you how Google itself has run into similar troubles with regulators as it waxed dominant in search, or how Intel (Nasdaq: INTC  ) was caught abusing its own power and ended up paying a hefty settlement last year to archrival Advanced Micro Devices (NYSE: AMD  ) to atone for its sins.

But I think you get the picture. I don't know exactly what will trip up Apple, but odds are, something will, eventually. As Microsoft's market share wanes, and Apple's waxes, cracks in the latter's security armor are emerging. The stench of monopolism in the iMpire has antitrust vultures circling. As for CEO-specific risk, Steve Jobs nearly got stuck himself in the backdating swamp. And of course, there are all the concerns over the state of Jobs' health -- and less-than-candid disclosures relating to it.

Foolish takeaway
And that's my bear thesis in a nutshell: History repeats itself. Those who fail to study it, and who place blind faith in an Apple that can do no wrong, insisting it's as good an investment as any other, when the numbers loudly shout that it is not, are bound to lose money.

Apple is not magic. It's only tech. And all tech ultimately fails.

What's your best defense against black magic? A good-sized margin of safety. Learn how to find it.

Related Foolishness:

Intel, Microsoft, and UnitedHealth Group are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Apple and UnitedHealth Group are Motley Fool Stock Advisor recommendations. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended buying calls on Intel and a diagonal call position on Microsoft. The Fool owns shares of UnitedHealth Group. Fool contributor Rich Smith owns shares of Google. The Fool has a disclosure policy.


Read/Post Comments (19) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 17, 2010, at 12:05 PM, bsimpsen wrote:

    "And all tech ultimately fails."

    It's statements like these that discount your position.

    " I don't know exactly what will trip up Apple, but odds are, something will, eventually."

    Yes, yes, yes. This was the same tired argument trotted out before every Pixar movie. They're about to go 11 for 11.

    Is Apple magic? Of course not. No company is and I think you'd have a very difficult time proving that any of the people you mentioned believe it is. You however believe that mystical idea that history repeats itself. I'm with Twain in thinking it merely rhymes.

  • Report this Comment On June 17, 2010, at 12:13 PM, shanghaid wrote:

    Your analysis is all true. Yet I have picked up Apple and avoided Google because I simply understand Apple. I know and use the products, how they make money, where near term (2-3) year growth drivers are and can put my own stake in the ground "I believe iPhone sales will grow xx%, iPad yy%, et.c.". The Peter Lynch - buy what you understand - method. I also understand they manage costs through a spartan product line and they lock in large quantities of components from suppliers to gain preferred cost positions and long term supply. So that equals margin. I get that too. Finally, I can also read a basic earnings report and see Apple has grown consistently in recent years, as opposed to Google being impacted by the advertising recession. So currently they are executing well.

    In contrast, although I use Gmail and the Google search engine, I really do not understand the internet advertising business and actual mechanics of how Google makes money. How the "free" Android operating system will enable mobile ad revenue for me is a mystery. They are constantly launching new initiatives to bind customers to their search products, but the direct tie to revenue growth is unclear. So, yes, they are a great company with great prospects, but I cannot tease out the details to put my money behind them. It is easier for me to see that oil stocks will continue to be good investments over the long term. I understand their value proposition, how they make money, what affects their cost structure and how there can be a good near term buying opportunity.

  • Report this Comment On June 17, 2010, at 12:15 PM, millsbob wrote:

    another clueless tech artlcle from TMF, who think that Apple is (choose one): (1) a mobile phone company, (2) a maker of mp3 players, (3) a computer company, etc.

    what TMF and most analysts don't get is that Apple isn't any one of these. and the rest of the analysts don't get that Apple is also not just the sum of these parts. in fact, the company's mission has Nothing to do with any of these.

    Apple is a tranformative technology company. when your robot brings your iced tea in July of 2017, you can bet he'll have a Cupertino accent.

  • Report this Comment On June 17, 2010, at 12:21 PM, MurderMostFowl wrote:

    I disagree.

    If anything, Google is the magic one for convincing people they have products, when they really only have one successful business... search and analytics. They hardly make money on any other segment, except perhaps their licensing of google maps.

    What Apple has behind it is actual physical products. Surely Motley Fool, a group founded on understanding the real value of a company can see this. I think one of the original investment questions Tom (Gardner ) asked us to ask ourselves was "Can you understand their business?" ( somewhat like Peter Lynch's "invest in what you know" statement ).

    Apple's business is very straight forward and easy to understand the factors that determine its success. Google, on the other hand, is magic.

  • Report this Comment On June 17, 2010, at 12:27 PM, Turfscape wrote:

    The easy money HAS been made in Apple...past tense. The hard money is what lies ahead. Easy to go from bad to good. Hard to go from good to great. Nearly impossible to go from Great to Best Ever. And that's where AAPL currently stands. It's a great company. It's been a great stock. Is there still growth ahead? Yeah, some. But not 200% growth. Probably not 30% growth.

    I think the same can be said of Google, though. Google has been a great stock. But the greater difficulty lies ahead in continued growth at such a pace.

    But, by my estimate, AAPL will continue outperform the S&P index, if only by a few points, for the 2-3 year time period.

  • Report this Comment On June 17, 2010, at 12:31 PM, Turfscape wrote:

    MurderMostFowl wrote:

    "If anything, Google is the magic one for convincing people they have products, when they really only have one successful business... search and analytics."

    But where Google is succeeding is in redefining what search IS. They've applied their theory of search to multiple platforms, and it's working. After all, what is business organization but efficient search for data and info? What is communication but search for thoughts, comments and interactions?

    Both companies are playing to their strengths in an effective way...and where those strengths are crossing over is a fascinating game field right now!

  • Report this Comment On June 17, 2010, at 12:43 PM, samkass wrote:

    I don't own either Apple or Google, but I think an important aspect that has been left out of the analysis in this article is the percentage of untapped addressable market. Apple doesn't have more than a 20% marketshare in any of their growing businesses. Google (and Microsoft) have essentially been locked into the growth of the overall industry for their own growth because of their overwhelming market share, while Apple has quite a bit of room to grow in almost all their segments. Thus, I would expect Google (and Microsoft) to rarely beat the market while Apple has the opportunity to significantly outperform.

  • Report this Comment On June 17, 2010, at 1:01 PM, counturmoni wrote:

    That nothing lasts for ever is stating the obvious and therefore of little value. That companies are something, and that Apple is a company is hardly an improvement. Those who invest based on that argument missed the multi-bagger moves on both Apple and Google, and stand to miss further gains going forward. What's needed is concrete reasons for selling or buying. Saying "I told you so" if and when the company eventually does stumble won't put money in your pocket, and it might stumble way north of its current market value. I had good reason not to buy Apple, they turned out to be wrong, but at least it wasn't "cuz nothing lasts forever", geez!

  • Report this Comment On June 17, 2010, at 1:28 PM, Tim1T wrote:

    When a financial story compares Apple to AIG or UnitedHealth, you know the writer is stretching. I guess Rich is right in that these companies were also big successes once upon a time. But that doesn't tell us much about Apple.

    The real issue is: will Apple and/or Google continue to create successful products. When I look at the Apple product line, I can see plenty of room for growth. The new iPad is a product that may well redefine consumer electronics. The new iPhone is a huge hit and hasn't even been released yet.

    Apple has also shown that they know how to make sure their third or fourth gen products as enticing as their initial offering. And that is where I wonder about Google.

    Google is still a bit of a one-trick pony. Their phone has been mildly successful. But the only home run they've had aside from their search business has been the Android OS. And I'm not sure how much of a money maker that is for them.

    Google has talked up some other potential markets recently. But so far that's all it is, talk. I want to see if they can follow through.

    It's clear to me that Apple's road map is solid at least for the next couple of years. And my guess is that the iPad will outstrip their computer business by 3 to 1 in the next few years. But it's also clear that Apple's phone and computer businesses have tons of room to grow worldwide.

    So to me Apple continues to look like "easy money." But before I bet on Google, I want to see if they can generate sustainable products over 2 or 3 generations.

  • Report this Comment On June 17, 2010, at 1:45 PM, PsychPlayer wrote:

    TMF you're writing like a long term investor, kudos.

    After you've worked in high tech for decades at different companies, you can see the raw truth that they all do fail, and a lot quicker than one could really imagine. Tech may produce important products for civilization, but they are terrible long term investments.

    Dispute this to your peril.

    The market size that Apple has gotten to has almost assuredly marked its doom, as it faces the world as a different player than it wants to be perceived as.

    I would say that in a world with Apple, and only Microsoft, without Google, that Apple had a chance to stay dominant for another 5 years, as Microsoft has no competitive edge in innovation at all any more, for the reasons you mentioned. Google however has in my opinion a greater ability to innovate in software, algorithms, and lines of business than Apple does. It doesn't quite have Apple's remarkable consumer marketing touch, but head to head, Google is going to beat them out in a bad economy and a lot sooner than many believe.

  • Report this Comment On June 17, 2010, at 4:00 PM, TMFDitty wrote:

    @all: For the record, I did not expect this Comments section to show widespread agreement with my argument. (Apple's a popular stock, after all, and that's kind of the point of musing about it's eventual downfall.)

    But I must say, neither did I expect the disagreement to be of such high quality. Kudos to everyone who's chimed in already, and keep the comments coming.

    Foolish best,

    TMFDitty

  • Report this Comment On June 17, 2010, at 4:33 PM, negrodamus wrote:

    The biggest problem with Apple as an investment in Steve Jobs. He *is* your investment. There is no other (large) company that lives and dies by its CEO. Sure, there are important/influential/charismatic CEOs out there, but should Steve ever step down (voluntarily or otherwise), AAPL will be a quarter of the company it is now. One may argue that this won't happen any time soon, but consider the *investment* proposition that AAPL is:

    1. You can't really say that it's a serious "growth" stock - for crying out loud, just to double your investment, APPL needs to either a) become a $500B company, or b) buy back $125B worth of shares. Neither of which is very likely... all in all, there are way better growth stocks out there.

    2. But it's not a safe, boring, stable long-term investment either. No dividend (yet at least), not in a mature, established industry, plus guaranteed massive haircut when Steve can no longer be the CEO. Again, there are way better stable, dividend paying investment options out there.

    I love Apple's iProducts, but I can't justify investing into their stock at the moment.

  • Report this Comment On June 17, 2010, at 5:19 PM, pberk wrote:

    My bet is on Apple…

    If you look at the history of leading edge technology running smack into an economic recession going back to the 80's, the companies that fail during the tough times are those that lack a sufficiently sizable installed bass of users and have relied instead on early adopters to tout and mainstream their products. This kind of innovation requires that you create the consuming community, by educating and persuading the marketplace to create an audience for your product - a very expensive marketing proposition compared to selling into an existing market. Innovation is usually pricey, so come the first signs of hard times and your premium buyers and marketing dollars disappear, leaving your early adopters stranded in the marketplace with abandoned technologies and no one to tout to. When the hard times ends, the leading edge technologies are widely seen as failed innovations in the marketplace with the installed base having coalesced around the cheaper "least common denominator" products that were more affordable. So much for "build a better mousetrap…"

    Apple's innovative product development is incremental - generally speaking, they don't release products that require them to educate the potential user base. They don't go out to the market to convince you that you need a cellphone - they target those who think they can't live without one, and hand them a better one. (A recent exception is perhaps Apple TV, but they haven't put that much behind it -- it basically repackaged their existing technologies.) I think Apple learned how to do incremental innovation profitably and securely from their own earlier mistakes… the Newton and even the first Mac. And they've come to realize the importance of aftermarket sales, e.g., the iTunes and App Stores, in monetizing their innovations over the longer term and building long term profitable customer relationships that go beyond the customer's initial investment in Apple.

    True, they always throw in a treat or two to keep the buzz and early adopters coming as well, but iPhone 4 certainly won't fail if Face-Time video calling doesn't catch on - it's not that central to the product.

    I think Apple's high-priced strategy helps as well. You're far more likely to toss a $600 Dell that won't handle the latest operating system upgrade after 2 years and potentially switch hardware brands, than a $2,500 machine. So Apple's always over-built their hardware for a longer term need, anticipating that the software would evolve and need more support form the computing infrastructure. In this respect, it certainly doesn't hurt being the only vertically integrated hardware/software company left on the planet.

    And don't discount their remarkable consumer marketing savvy. History is littered with innovative products that companies couldn't figure out how to mainstream. Motorola, which actually got its name because they introduced the first car radio; Magnavox introduced Pong, the first "video" game that ran on a television; what about laser disks for home movies - all of these products were mainstreamed successfully by others, but not one of the innovators who didn't quite get their marketing right reaped any long term benefits.

    As far as Google goes, I think they are much more vulnerable. If a better search vehicle comes along, how long do you think it would take for surfers to switch search providers. Yahoo owned the search territory for a long time… the day Google showed up with a different type of search result, users switched service providers en mass relatively quickly without giving it a thought - there was no investment in Google search, nothing to lose by switching and it doesn't cost to use both. The advertisers followed.

    I don't think anyone is showing up tomorrow with a better web-based search service, but that's because i don't think there's such great long term growth in it. Every quarter a larger and larger proportion of internet "requests" are coming from mobile handheld devices. [ I saw a report a couple of months ago that said fully 50% of all internet requests worldwide were coming from iPhones!] Web-based search was great because it was platform independent and convenient for a desktop-bound audience. But with internet activity trending toward the mobile world, advertising may once again become platform dependent. And more and more, people use dedicated apps on their phones for searching… apps that narrow down results, deliver them with location specificity and include transactional capability.

    So enter Android, Google's bid not to be left out of the ad providers mix when that happens. But I think Google made a Microsoft-sized mistake - Android is a business to business product. Google is at the mercy of cell phone manufacturers on User Interface issues, marketing priority and their abilities to turn out hardware the consumer wants. The best mobile OS in the world doesn't help unless the package is up to the challenge. Now there are reports of Asian companies producing cheap "smart" phones with "simple" versions of Android… so it looks like we'll have smart phones and not-so-smart smartphones. This will give Google more ad-catching devices to shore up some of the fall-off from their web-based search advertising, but it will cannibalize and dilute the Android brand in the marketplace at the same time.

    And Microsoft is aiming squarely at the same OEM phone audience with its release of a totally overhauled Windows Phone 7 mobile OS in time for the holiday season. Google is focussed on besting the iPhone's installed base for the platform dependent ad revenue, but my bet is that they will be hoping to find a MicroSoft fly swatter under their Xmas tree.

  • Report this Comment On June 17, 2010, at 5:33 PM, Turfscape wrote:

    pberk wrote:

    "Google is at the mercy of cell phone manufacturers on User Interface issues, marketing priority and their abilities to turn out hardware the consumer wants."

    But, by building a robust, yet efficient (as opposed to MSFT bloated) OS, Google has all but assured that the handset makers will provide a top-tier UI. And, Google has kept itself in the mix for marketing, as it has a vested interest in users...its profits don't come from the manufacturers (ala MSFT, again). Its profits come from the users. Google's business model isn't contingent on handset makers' building usable devices and marketing them properly. Google's model ALLOWS handset makers to build top-tier devices and makes it EASY to market them.

    This is one of the most fascinating spaces to observe in business today. Two top-notch companies with differing philosophies and business models, both succeeding on the same field. Good stuff!

  • Report this Comment On June 17, 2010, at 11:09 PM, shanghaid wrote:

    @negrodamus

    The stock value reliance on Jobs is certainly true - at least for short term movements. I bought in at 96 and then health announcements a week later dropped it to below 80, before they were resolved and the stock began marching to 270.

    My own plan is to sell out in 2 years at 500 - betting on good health - since Apple has potential to double profits in the next 3 years given the underlying rapid growth of iPhones/iTouches and iPads and still good prospects for Macs. After that, retirement and/or health issues do indeed concern me. I am not aware of another stock that bounces on news of the CEO so much like this one. Possibly Berkshire Hathaway would be another one.

  • Report this Comment On June 18, 2010, at 1:17 PM, INoFoolin wrote:

    Apple has successively defined and dominated the tsunamis of the 21st Century music business, and mobile communications. Not just hardware architecture, but software, software development environments, and media distribution. They have built 'complete solutions' with 'defensible competitive advantage'. When you invest in AAPL you are buying into the enterprise with a brilliant future based on a culture of innovation and excellence that cannot be displaced by cheap imitators. None of the other examples (UNH, MSFT, AIG) had these characteristics.

  • Report this Comment On June 18, 2010, at 4:42 PM, daveshouston wrote:

    Will Apple top out one day and go into decline? Duh. Of course they will.

    Is it going to happen in the next few years? I really don't think so.

    Jason Schwarz has an enviable track record when it comes to technological forecasting. He thinks Google stock will hit $300. Take a look at his recent article on Google which you can find here:

    http://seekingalpha.com/article/195229-war-with-apple-will-p...

  • Report this Comment On June 23, 2010, at 8:07 PM, ikkyu2 wrote:

    "Any sufficiently advanced technology is indistinguishable from magic-" That's Arthur C. Clarke's famous quote, Ditty, which you're probably familiar with.

    Apple is the one advancing the state of the art in consumer technology these days. Remember the Danger Hiptop? Apple finally delivered on that device's promise with the iPhone. And recall, Danger's original name was "General Magic." A lot of those employees from the original Hiptop team are now at Apple. So, Apple may not in fact be magic, but according to Clarke's definition, they are the ones deploying magic for the masses right now. That might explain their cash flow numbers.

    GOOG is in a different category. It's an ad firm. Why isn't it lumped in with the other ad firms? Because none of the big Madison Avenue or Hollywood agencies have ever been publically owned or traded. If you wanted a piece, you were out of luck - until Google's technology brought a slice of that pie to their shareholders.

    I still think it's an open question as to whether any of Google's "magical" innovations will ever be able to be monetized. You think so. We'll see.

  • Report this Comment On June 24, 2010, at 5:35 PM, riwaterman wrote:

    How much do you think aapl stock can appreciate by the end of the year? by 12/31/2011? by 12/31/2012?

    If you said the stock will be at $300 by 12/31/2010 that will only be an increase of 11% from now? Certainly aapl stock is worth more than a measly 11% gain ... or is it, especially in this market.

    if it gains 11% and an additional 30 points in value by 12/31/2001 that is only an additional 10% growth in the stock.

    I would have to say that both $300 by end of this year and $330 by the end of 2011 will certainly be surpassed. After that it really gets difficult ... to guess.

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