I write quite often about Apple (NASDAQ:AAPL) and am generally positive about many aspects of the company. Its engineering talent is world class, its marketing team seems to know what it's doing, and the company has a very shareholder-friendly capital allocation strategy. It is by all means a world class business that, in my book, deserves to be respected and admired.
And yet, despite my respect and admiration for this world class company, I do not hold a position in the stock and I don't intend to take one anytime soon. Here's why.
It's a very high risk business
Apple's business seems really risky. The company derives the vast majority of its revenue and profits from a single product -- the iPhone. Furthermore, the company controls the lion's share of the profits in the smartphone market (one recent estimate pegged it at 94%), by virtue of the fact that the company plays exclusively in the high end of the market.
I don't think the smartphone market in general will necessarily go south in the same way the PC market has. However, there are a few factors that give me pause:
- Can the high end of the market in which Apple plays continue to grow indefinitely, or will the market shift toward lower cost devices?
- Can Apple continue to defend/grow its share of this segment of the market while keeping its margin structure largely intact?
Thus far the high-end of the market has continued to grow and Apple has seen its iPhone shipments grow every year since 2007. However, according to longtime Apple bull Katy Huberty, iPhone could actually fall by 6% in the company's current fiscal year.
Huberty's pessimism comes even as she views Apple as a "share gainer" in the phone market.
The next risk, related to this, is that it's by no means guaranteed that Apple will maintain/grow its share in this market. Apple has done an excellent job of this so far, but with the company holding such a large piece of the profit pie, competitors will continue to try to take share from the company.
Apple can, of course, work diligently to develop new, differentiated products, and over the long run it should be difficult for competitors to invest anywhere close to what Apple is able to. However, as long as Apple has credible, healthy competition that can largely "copy" the novel features that Apple introduces within a matter of months, there will always be material risk that the company could lose high-end share, potentially dramatically impacting its revenue and profitability.
There doesn't seem to be opportunity at the moment
Apple's stock price has had an incredible run over the last decade or so, and I'd imagine that the majority of folks who have been diligently holding on to the shares for the long term have made a good chunk of change.
However, as somebody who does not currently own Apple stock, I'd be hesitant to buy in at this point. Analysts are beginning to take down their estimates for iPhone unit shipments for the current year and I suspect that Huberty's estimate reduction will be far from the last.
If Apple shares get clobbered ahead of the iPhone 7 launch (i.e., a 20%-plus haircut from current levels), then I'd be willing to buy in on the expectation that future iPhone cycles will be more prosperous than the iPhone 6s/6s Plus cycle is shaping up to be.