Is Apple Headed for a Lost Decade?

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For more than ten years, Apple's (Nasdaq: AAPL  ) stock has been heading to the stratosphere. The company revolutionized music, redefined the cell phone, and virtually invented the tablet market, leading to incredible profits for investors.

We've seen similar revolutionary companies with successful businesses and stock prices in the past. The one commonality is that they all, eventually, cease to become the darlings they once were. The phenomenon is two-fold. People don't blindly support the top dog for long, and competition takes aim at successful businesses, which limits upside and profit margins. There's a good chance Apple will head the way of many successful companies a decade ago: toward a lost decade.

Questioning Apple's practices
Until now, most people have blindly marveled at Apple's dominance in the smartphone and other markets because the few flaws the company has shown didn't seem to gain traction with the media. That narrative may be changing now that Apple's manufacturing practices are coming under increased scrutiny. The New York Times ran such a damning article last week that CEO Tim Cook felt the need to respond personally.

Whether or not allegedly poor work conditions at Apple supplier Foxconn are true isn't something I can comment on directly. What it does point out is the increased scrutiny on Apple, and which it will continue to come under as an industry giant with such a consumer base. We saw this when Nike rose to sneaker dominance. When people started to investigate the companies Nike used to outsource production around the world, some consumers began to think about sweatshop workers when buying Nike shoes.

Consumers often eventually turn on a brand when it becomes "too popular." These kinds of investigations can be the catalyst that drives consumers to question their allegiance to Apple.

Competition getting fierce
The biggest difference between Apple ten years ago and Apple today is the bull's-eye now on the company's back. A decade ago, the Mac was a computer reserved mostly for graphic designers and K-12 students. The iPod was a cute new music invention that had yet to really show that it would disrupt the entire music industry.

Now, Apple is a dominant player in smartphones, music, tablets, and has a growing presence in the PC market. The copycats and legitimate competitors are seeing the markets Apple has built as areas they can grow into as well.

Google (Nasdaq: GOOG  ) has been extremely successful moving into the smartphone business. It can also be argued that some of the phones run on Google's Android platform are better than the iPhone. The Samsung Galaxy X2 took just five months to hit 10 million in unit sales, and the competition to top Apple in the tablet market is coming on strong as well.

Amazon's (Nasdaq: AMZN  ) Kindle device is starting to make major inroads against the Apple iPad at a lower price point. Analysts estimate 5.5 million to 6 million in Kindle sales during the fourth quarter, and estimate that Android holds around 40% of the nascent market's operating system share.

The bottom line is that competition in Apple's core products will only get stronger. No one can match the quality, ease of use, and interconnection between these devices today, giving Apple a great competitive advantage, but the tech market adapts quickly and the switching costs will be relatively low for consumers in the future.

Law of giant numbers
The biggest thing that keeps me from being overly bullish on Apple's stock is a feeling that I've seen this before. I've seen companies reach such a level of size and success that it appeared no one could challenge them.

But eventually companies that obtain this size and success see their growth slow as they struggle to maintain current product lines and expand into new ones. While it seemed easy to take Apple from a single computer product line to a company with three major product lines (Macs, iPhones, iPads), expanding to six or ten major product lines will be much more difficult.

Microsoft (Nasdaq: MSFT  ) was in this position a decade ago. It dominated the PC landscape, introduced new innovative products, and was piling up profits for investors. A decade later the company is still highly profitable, but the market doesn't "ooh" and "aah" at its products anymore -- and neither do customers.

The same can be said for Dell (Nasdaq: DELL  ) and Best Buy (NYSE: BBY  ) , who upended their industries in their own ways. Dell cut the middle man out of the computer supply chain and Best Buy brought gadgets to the world. Their success in the '90s, however, was followed by a lost decade in the 2000s as competitors caught up, expansion became harder, and they failed to impress investors. Too often, a successful decade is followed by a decade of marginal returns, as these three companies below saw for themselves.

  Annual Return Last 10 Years Annual Return Previous 10 Years
Microsoft 1.9%               28.2%
Dell -4.7% 55.9%
Best Buy -1.0% 44.9%

Source: Yahoo! Finance

As a comparison, in the last ten years Apple has provided shareholders with a 44.1% annual return, tellingly similar to the comparison companies above.

Something to think about
None of this is to suggest that Apple will not be a major tech player in another ten years, or even not a successful stock to own. But history has shown that companies hit a wall at a certain point in their development. After remaking the music business, smartphones, and tablets, I wonder if that time could be now for Apple. 

Agree or disagree? Leave your thoughts in our comments section below. Or, if you want to find out who our analysts think will cash while Apple and Google fight for smartphone and tablet market share then check out our free report, "3 Hidden Winners of the iPhone, iPad, and Android Revolution." The report is free -- but only while it lasts.

Fool contributor Travis Hoium manages an account that owns shares of Apple and Microsoft. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of, Apple, Microsoft, EMC, Google, and Best Buy. Motley Fool newsletter services have recommended buying shares of, Microsoft, Google, Nike, and Apple. Motley Fool newsletter services have recommended writing covered calls in Best Buy. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. Motley Fool newsletter services have recommended writing covered calls in Dell. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (17) | Recommend This Article (7)

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 January 30, 2012, at 5:53 PM, brajaharidas wrote:

    You forgot to add one more reason that Apple could have a lost decade. That is:

    Journalists who write about other stocks who have had this lost decade after a succesful one and plant the seed of doubt in the minds of investors who were very happy to go about getting big returns on their portfolio till they had these little "doubts" implaned in their minds.

    I think if you leave these Companies well enough alone, they would do a lot better then when you mess up their investor's heads.

  • Report this Comment On January 30, 2012, at 5:55 PM, accelerando wrote:

    Apple will be the first trillion dollar company and very likely the first two trillion dollar company.

    The possibility of it 'hitting a wall' sometime in the future is baked into the stock -- a stock selling at around 5x cash discounted 2013 profits (around 55-60/share).

    More important this kind of analysis is completely airheaded. It has nothing to do with facts -- think of IBM or GM or GE -- companies which grew and dominated for decades. It is basically the whining of a short who is in the process of losing a ton of money.

    Apple dominates in markets that are growing. It has a bushelful of network effects. It is growing fast and can easily imagining it going through a period of total dominance of PC's, cellphones and tablets due to the networking effects of apps.

    Even if it doesn't totally dominate it should grow 20-25% for the next six or seven years.

  • Report this Comment On January 30, 2012, at 5:58 PM, sbhushan wrote:

    I often wonder with dismay, why some writers like this one, feel compelled to try to get publicity and raise controversy by being a contrarian and always look at the negative side.

    Why not try instead to see the positive and admire a company that is successful, contributing to the economy, take the good and learrn from it. I bet I could find similar articles in similar locations about Apple 3 years ago and 2 years ago and all through last year. Writers should learn to be a little more constructive and positive when the company deserves it. They will learn it is just as easy to sell their material.

  • Report this Comment On January 30, 2012, at 5:59 PM, bsimpsen wrote:

    @Brajaharidas, I don't think you have to worry about Motley Fool articles messing with people's minds. On average, the analyses here aren't terribly cogent.

    In this case, the author claims that competition is "getting fierce" although the most recent data indicates the opposite. The China problem is worse for Apple's competitors, who don't have the watchdog groups coming to their defense.

    Motley Fool is more likely to lose a decade than Apple is.

  • Report this Comment On January 30, 2012, at 6:01 PM, artlaz wrote:

    Microsoft hit the wall when they got 97% of the computer operating system market then floundered looking for the next big thing, when the next big things were right under their nose - mobile, tablet, music, apps - all missed by the geniuses in Redmond. Now Apple has quite a ways to go till they achieve 97% of any market they're in. We'll see, but I'm betting on a good 5 more years of PPS growth.

  • Report this Comment On January 30, 2012, at 6:01 PM, Needs2no wrote:

    Your article is so lacking detail it does not merit review. I give it an INCOMPLETE. You as a financial market journalist should know better.

  • Report this Comment On January 30, 2012, at 6:06 PM, YetAnotherNerd wrote:

    I think that one of the key differences between Apple and Microsoft/Dell is that those companies were never true innovators. Microsoft's "disruption" came years ago when Win 3.1 put the final nail in OS/2's coffin. Since then, they've simply been iterating and not innovating. Dell's "disruption" was never on the product side of the house, but in their process. It's been a long long time since anyone has said "I'm buying the Microsoft/Dell solution because it is the best solution" vs "I'm buying the Microsoft solution because I have no other choice" or "the Dell solution because it is cheapest or what my IT dept. insists I buy".

    That's not to say that Apple might not hit a reef and find it difficult to replicate the success of the last decade, but I think that the comparison to the other companies as an example is not valid.

  • Report this Comment On January 30, 2012, at 6:07 PM, Lebenia wrote:

    This is a very disappointing article and does not match Motley Fool's generally meaningful articles. T. Hoium states the obvious, that some day Apple might lose some of its dominance, that the stock could stop to grow, but yet, the stock may continue to grow. Reminds me of the weatherman who states "there is a 50% chance of rain".

  • Report this Comment On January 30, 2012, at 6:15 PM, Thompr97 wrote:

    Considering that every company that hit this level of market cap before did so under 3 conditions that don't apply to AAPL:

    (1) They had complete domination in markets that were getting near to saturation,

    (2) Their PEs were sky-high, indicating unfounded confidence in the companies' growth prospects (see point number 1), and

    (3) There was a general market euphoria (i.e. bubble) going on at the time, which ended shortly thereafter.

    Considering these reasons for the lost decade that followed, I would say that it is a bit early to declare that Apple is about to follow their same path, just based on an observation of market cap.


  • Report this Comment On January 30, 2012, at 6:25 PM, ConstableOdo wrote:

    I don't mean to be rude or anything, but where the hell do you bloggers dig up these stories. Why are you talking about RIM or Nokia or even Microsoft when you're talking about lost decades. I guess you just use Apple in the topic just to draw clicks or ire. I don't think you'd know a successful company if it fell on you. Do you even see what Apple is doing to the rest of the computer and smartphone industry or did you just wake up from a three year dirt-nap?

    Your law of giant numbers is about to be repealed. There is no set limit on the wealth of a company. It grows to whatever size it needs to fill the void of product demand or can't you figure out something that simple. This BS about how soon a successful company will topple is nonsense. What theoretical wall has Apple hit with such a small amount of market share. There are no guarantees of a successful future, but usually the more cash and less debt you have, the safer and more stable a company becomes. In fact, Apple could probably coast for ten years just using reserve cash only. You won't find many companies like that, so stop this crazy talk about knowing how Apple will perform since Apple is rather unique when it comes to companies.

    Why don't you talk about companies that are really struggling now and ways to improve them before putting Apple into the lost decade.

  • Report this Comment On January 30, 2012, at 6:31 PM, kramsigenak wrote:

    Don't be silly.

  • Report this Comment On January 30, 2012, at 6:38 PM, ddavis8700 wrote:

    Lose this this article. The promise of the title totally unmet by a truly superficial thesis unsupported by any meaningful insight. The author's poor work is junk mail and the Mötley Fool is close. Rank speculation, no facts. Laughable argument. Insulting absence of thought. Be careful on the way home, get some one to guide you.

  • Report this Comment On January 30, 2012, at 7:23 PM, TomMcGrath826 wrote:

    Keep shorting until you are broke. They keep inovating and will have so much cash they will issue a dividend. This will attract value investors as well as dividend investors. Please don't waste my time with attention grabbing headlines.

  • Report this Comment On January 30, 2012, at 8:49 PM, bst62 wrote:

    Poor Travis, did you draw the short straw today? Have you been forced by your editors to write this story in an attempt to gerrymander some FUD regarding Apple? Foxconn? Really? Why single out Apple when Foxconn is the world's largest contract manufacturer and assembles products for just about every electronics company there is? Of course Apple's growth will slow eventually. I will die. Eventually. The sun will explode. Eventually. Eventualities do not help us in the here-and-now. Microsoft's lost decade was occasioned by the bubble valuation accorded it by investors, a trap that Apple investors have yet to confront bc Apple's earnings go up faster than buying demand does.

  • Report this Comment On January 30, 2012, at 10:59 PM, smartin619 wrote:

    When was Nike's lost decade?

  • Report this Comment On January 31, 2012, at 12:04 PM, drax7 wrote:

    Those that miss the uptrend, cannot wait to sell it. Here we have another example of the way a loser reasons.

  • Report this Comment On January 31, 2012, at 12:31 PM, HardRock747 wrote:

    Sorry Travis, looks like you lost this one.

    Neither Microsoft, nor Dell innovated over time.

    MS floated on new versions of it's old software, and Dell kept pumping out computers, just like the last ones. As for B-Buy... I bought 75% of my x-mas gifts online this year, from the cheapest places I could find... B-Buy only got approx. $15 from me this year...a trend that is increasing across the board.... why buy an Apple product from B-Buy, when Apple ships it for free?

    Apple has a good pipeline for the next 5 or so years, with new iPhones, iPads, and surely a TV coming at the end of this year/early next.

    If I were back in my University days, I would have had an iPad with all my text books on that one little device, rather than hauling a 30lb bag around.

    They are kicking a$$, and there is is really no stopping them in the near future.

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