Let me start by saying that in terms of its products, I am an Apple (AAPL) hugger. I have a MacBook Pro and iPhone. I can still remember the excitement in the early 80’s when a high school friend got an Apple II. I was amazed when I ordered my first iPod from the on-line Apple Store and received it in Maryland—personally engraved in a cellophane package sealed in China—two days later. I don’t think I even asked for expedited shipping.
But as an investor, the current valuation of Apple shares ($260.83 at market close on June 1, with a peak on April 26 of $272.46) makes me nervous. Apple maintains a corporate image of a young, free-spirited growth company. While this may genuinely reflect aspects of Apple’s internal management, that is not the external reality. Apple has become one of the biggest companies in the world, now the second largest U.S. company by market capitalization, outflanked in the U.S. only by oil behemoth Exxon. Consistent with this disconnect between image and reality, Apple is the only one of the top ten companies by market capitalization not included in the Dow Jones Industrial Average. Tech powerhouses Microsoft (MSFT) (3rd in market cap), IBM (IBM) (8th), Cisco (CSCO) (15th), Intel (INTC) (18th), and Hewlett-Packard (HPQ) (23rd) are all Dow components. 1
All together, there are three reasons why I see Apple shares as risky for long-term investors at current prices. First—and I am not the only person to say this 2 —whether the company will be able to maintain its momentum when returning founder Steve Jobs eventually relinquishes his leadership role is open to question. I don’t give credence to rumors of that happening soon, but nobody can run a company forever so it’s always wise for long-term investors to consider potential succession issues. In Apple’s case—given the disaster to the company when Jobs was forced out in 1985—the question is particularly relevant.
Second, I believe that the intellectual and business forces allied against Apple are formidable. Companies that compete with Apple include in computers Microsoft (MSFT), Hewlett Packard (HPQ), and Dell (DELL); in wireless Google (GOOG), Sprint Nextel (S), and Motorola (MOT); and in on-line music Amazon.com (AMZN). It stands to reason that at some point so many minds working to make inroads into Apple’s pie will eventually make progress.
Third, history teaches that when a big company gets super lucrative, the likelihood that some aspect of its business model will cross swords with public policy interests rises. The breakup of the Gilded Age railroad and oil trusts, the 70’e era anti-trust suits against AT&T (T) and IBM (IBM), and the 2001 Microsoft anti-trust settlement all followed this pattern. There are already rumblings that investigators are poking around Apple’s tracks. 3
Heretofore, there is no particular reason to believe that Apple has crossed the line. Even so, when a company becomes ultra‑powerful political forces can change the rules, as many say has happened in the recent securities case against Goldman Sachs (GS). So even if Apple has done nothing that would get an ordinary player into the soup, the company’s newfound dominance may subject it to higher regulatory scrutiny.
This is not to say that Apple is in trouble. I think that the company itself is going to do just fine, and I wouldn’t be surprised if the stock makes a legitimate run at $300 a share given the iPad’s early success. But in the long term, there are reasons to be concerned that Apple’s shares may hit choppy waters.
The author is long on Microsoft (MSFT), Cisco (CSCO), Intel (INTC), Hewlett-Packard (HPQ) and IBM (IBM) as of the original publication date of this post. The author does not hold a securities position in Apple (AAPL), Dell (DELL), Google (GOOG), Sprint Nextel (S), Motorola (MOT), Amazon.com (AMZN), AT&T (T), or Goldman Sachs (GS).
- Market capitalization ranks are as of June 2, 2010. For a real time list of the largest U.S. companies by market capitalization, see http://247wallst.com/page/real-time-500/. [↩]
- See, e.g., Apple After Jobs, Kevin Maney, Feb. 11, 2009, Portfolio.com at http://www.portfolio.com/executives/features/2009/02/11/Analysis-of-Jobs-Leave-of-Absence [↩]
- See, e.g., “ABCs of Antitrust: What Apple Could Learn from Intel, May 28, 2010,” Dawn Kawamoto, Daily Finance, http://www.dailyfinance.com/story/company-news/apple-amazon-intel-antitrust/19492941/. [↩]