Gene Munster was the last analyst to ask questions on Apple's (NASDAQ:AAPL) latest conference call. He's the guy that predicted Apple would release a television set in 2011 and 2012, and 2013, and, of course, 2014. Now, he has Tim Cook on record saying the company is on track to unveil a new product category in 2014.
It was Cook's answer to Munster's final question, however, that investors in Apple need to hear in order to understand the company that they've bought. As Apple goes up against technology giants like Google (NASDAQ:GOOGL) and Samsung (NASDAQOTH:SSNLF), which are making hundreds of different products, the company has stayed true to its mission. Tim Cook waited until the end of the call to remind investors exactly what that is.
Focus on 2014 and beyond
What does Apple do? It's an easy question, but when I ask friends they usually tell me they make smartphones and computers. That's technically correct, but misses the mark.
Tim Cook really got to the heart of the company when he said:
There's still so much of the world that is full of very complex products ... We have zero issue coming up with things we want to do that we think we can disrupt in a major way. The challenge is always to focus to the very few that deserve all of our energy. And we've always done that, and we're continuing to do that.
That is to say, Apple takes complicated solutions and simplifies them, so that anyone can understand how to use the technology. This takes immense amounts of focus, so the company only makes a few products.
Focus is risky
There's no doubt that focus implies a certain amount of risk. Samsung hedges that risk by introducing products in numerous consumer-facing market at every price-point with a multitude of form factors. Google hedges that risk by diversifying into products outside of its core search business. Modern portfolio theory tells us diversification is the most prudent thing to do in order to protect returns.
A focused portfolio, however, has the best chance of outperforming (or underperforming) the market. Warren Buffett made billions by focusing on his best ideas and eschewing everything he was less confident in. It's not that he has trouble coming up with ideas, he simply chooses to ignore most of them.
Apple is the same way. So either you believe in Apple to select the right investments, or you don't. You either believe in Buffett, or you don't. Most of the time, they select winning investments.
Out of focus
Management at Apple has repeated on numerous occasions that the company doesn't concern itself with making money; it makes great products. At some point, however, people are uninterested in the best and just need something good enough. This is the problem Apple faces in emerging markets.
To be sure, consumers in emerging markets still want Apple products, but simply can't afford them. In Apple's first week selling the iPhone with a moderate subsidy from China Mobile, the company had its best week ever in China.
Meanwhile, domestic manufacturers like Xiaomi have grown to be most popular in the country as Android phones proliferate the market. Samsung, with its low-end offerings, still holds a large chunk of the market, but it's shrinking. In fact, Samsung appears to be seeing pressure on its high-end devices as its operating profit shrunk for the first time in two years last quarter with mobile profit tumbling 18% sequentially.
At the same time, Google is seeing pressure on its Nexus line, even as the company is all but shut out of China. In fact, the company may have plans to refresh and rebrand the line in order to take better advantage of its Motorola acquisition.
Those same pressures are affecting Apple despite the company's record revenue and earnings per share. The company may further diversify its product lines with a bigger iPhone and iPad, but that shouldn't take too much focus away from whatever it's working on behind the scenes.
Apple has a process for making great products, just as Buffett has a process for finding great investments. Apple only invests in its best ideas, putting in the time and research and waiting for the market to be ready. (Buffett wouldn't buy a stock if the market priced it too high.)
What Apple plans to release in 2014 is unclear -- a TV, a wearable, a payments platform. The advantage it has is that its really good at investing in the right ideas.