Blain’s Morning Porridge, March 8^th 2024: Has the worm finally got to Apple?

Not in AI, Not Magnificent. It’s a expensive Value Stock.

“Bright-shiny-white-thing make it all better… I want more…”

Apple doesn’t look so Magnificent these days. It’s made lots of money, but faces lots of challenges. It doesn’t look likely to lead in AI. It’s hardly a growth stock – it’s a mere value stock selling the same stuff it’s been selling for decades, while charging premium price to sell via its digital shopfront.

I like Apple and Apples. I buy the former. She-who-is-Mrs-Blain buys the latter. One of us saves much more money than the other. Me having less money means Apple has lots. (I eat the Apples at the top of the bowl. Eventually the ones at the bottom start to wrinkle, turning brown and soft. Leave them lying in the garden and worms get them.)

One of my chums works for Apple and usually reacts when I write anything blunt about the company’s prospects – but it really feels that something has changed. Five of the Magnificent Seven Tech stocks are soaring. Telsa and Apple are underperforming. Apple is down 12.6% since it peaked last December. I suspect it is no longer magnificent… but mature… (Crashing minor chords…)

You can list multiple reasons for concern:

• Sales of the iPhone are down 25% in China.
• It’s been fined €1.8 bln by the EU for restricting other streaming services (even though Spotify, the prime beneficiary of the case owes its very existence to Apple enabling the digital popularisation of music via the iPod.
• It’s under multiple investigations over its 30% service charge on apps and other restrictions on competition.
• The main factors keeping the stock price high are; a) its size in the indices – people have to buy it because it’s so expensive and therefore big… not how good it is, and b) the expectation it will continue to use its cash pile to fund stock buybacks!
• It’s abandoned its iCar project – concluding full level 5 self-driving autonomy isn’t going to happen (take note Tesla fan-boys)…
• You can now buy discounted Apple gear cheaper than at an Apple Store via Costco. Exclusive it no longer is.
• And worse of all… aside from Tim Cook promising jam tomorrow, Apple has no apparent AI product or strategy.

The reality of business-history is all companies have a limited shelf-life. Their relevance is constrained by the bounds and product cycles of whatever industrial or business revolution spawned them in the first place. Oil companies remain big and prosperous today because they remain prime beneficiaries of 120-years plus of sustained hydrocarbon usage as the key to global energy. In contrast, the shelf-life of “fake-meat” companies was somewhat shorter – lasting only as long as it took people to realise there was little point paying more for something pretending to be a not very nice meat burger, rather than the real thing.

Apple.. has proved a remarkable successful company. It has more money in the bank that it can point a sharp-pointy stick at. Although it has now been overtaken by Microsoft, it became the first multi-trillion dollar company and most valuable company on the planet by not being a traditional tech company – but by melding good tech, good design, lifestyle appeal, and smart marketing of “bright-shiny-things” to create an iconic mainstream brand. In tech it utterly dominates the high-end of its product range to the extent global fashion brands can only dream about. It succeeded by keeping that product range tight and finding ways to monetise itself as a digital store.

Yet, the simple reality is all its products are just commodities. I could go to any discount computer store this afternoon and buy a cheap laptop made by anyone Inc, a cheap Chinese or Korean smartphone, pick up a kindle from Amazon to read my e-books, and buy an e-watch. I could buy them all – which change left over – for a fraction of the cost of the newish MacAir I’m writing this morning’s Porridge on. I might feel soiled using lesser brands, but within a day I really would not notice the difference.

Apple has succeeded because, like much of my generation, I am an Apple Addict – I have the watch, the phone, the tablet, the laptop, the PC, and even the pointless Siri speaker thingy that watches my every move and records my every comment… I won’t be buying the headset though.

I rather suspect we have turned a corner with Apple. It won’t suddenly collapse. But it has a bit normal and unexceptional. Its options for change are limited – to buy other brands risks diluting its own.  Essentially, it is just an overpriced value stock. Ouch. That will hurt. I suspect Steve Jobs will be smiling – surprised we’ve taken this long to figure it out.

The real problems for Apple are multiple.

First there is a product problem. When did you last go into an Apple Store? Essentially, it’s a very small number of products lined up on tables which bright-young-techy-things will explain and sell you as something you don’t really need, but really deserve to have. Basically, there is a phone, a watch, a laptop, a PC, a speaker-something or other, and shelves of peripherals, watch straps and phone cases. As getting an appointment at the Genius bar is just too time consuming (and you can go to You-tube)… the Apple Stores are essentially…. boring.

There has not been a new, new bright-shiny-thing for a decade or so. iPhones are 58% of the sales – and other phones are available. At $3k, the Vision-Pro is not mass market. It’s essentially work-in-progress, a prototype for the smart-spectacles we expected to be wearing years ago. That’s proved difficult tech to develop. Smart-Headsets are not going to spawn the kind of new mass market similar to what the launch and innovation of the iPod, the IMac, the MacPro or the iPad created. We will get new iPads later this year. Yawn. Mac execs are worried as to who is going to buy them. (Current models are very cheap in Costco… just saying..)

In terms of product-cycle, Apple’s range has become a succession of incremental but expensive improvements – a new button, a different case, an extra lens (????) a marginally faster (and, of course,) more expensive processor. Yes, I bought the new phone, but frankly its same as my old phone… but a bigger number on it. And it didn’t fit my existing case, and it has a different charger. Dang. More stuff to carry when I travel.

The product range is not improving. There is nothing new or must-have I can imagine I need – and I am not seeing any sign that Apple has identified whatever it is I lack the imagination to imagine, but can then market to me as a must have product. That is a problem for Apple as an iconic design brand.

The second issue is regulation of what IOS has now become – the operating ecosystem for a digital app store. I have lots of apps – some of which I even use. Apple takes 30% of any revenue these apps generate. Ouch. You can see why the app developers are annoyed. But, I have some sympathy for Apple: developers are able to sell their products across Apple’s ecosystem – effectively that’s like allowing brands to set up and sell their wares on the Apple digital shop floor. In effect it is the Selfridges or Harrods of the Digital Age. If it loses these revenues, then much of the intrinsic value of the Apple ecosystem is gone.

The third issue is AI – and what does Apple plan for us? I have limited hopes. The thing is I may have Apple devices and I run my digital life on IOS but I use Microsoft Word, Outlook, Powerpoint (and yes, even Excel). I use Safari (Apple’s browser,) but also Bing and Google – because who does not? Apple says its developing lots of AI applications – but I don’t really use Apple apps on my Apple devices, I use others. When I am looking for AI tools… I will use the best available – which, history suggests, will not be Apple’s.. and the new wave of regulation is going to force Apple to allow us to side-load AI apps designed and run by others…

In short, Apple may be a tech stock… but that is so yesterday. It looks unlikely to become a Tech AI stock…. It will become a seller of stuff.. nice stuff… but stuff. Selling stuff does not justify the current multiples.

Out of time, and have a great weekend.

Bill Blain, Market Strategist and Author of the Morning Porridge