Is Apple Really Worth More than the Sum of Microsoft, Dell, Google, Facebook and HP?

Because that’s what the market cap suggests:

But not the book value:

Nor revenue:

And nor earnings before interest, taxes, depreciation and amortisation:

The data suggests that relative to other tech companies AAPL is significantly overvalued. And going forward there is no guarantee that AAPL can justify today’s value by keeping up its dominance of the sector. Tech is an extremely fickle and fast-changing sector where one year’s turkey can be next year’s prize pig. And AAPL’s product lineup is still dominated by products developed under the charge of Steve Jobs — it will take a while longer to fully assess whether or not AAPL can succeed at the same magnitude over the entire product cycle from conception to sales without his leadership.

But I doubt that anything like a sober look at the data will stop the Apple bulls. Because this time is different, right?

 

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Global Trade Fragility

Yesterday I got my new iPad.

Yeah, I bought one like millions of other suckers. Apple can take my dollars and recycle them buying treasury bills and so partially fund, at least for a short while, America’s debt.

But really, I bought one to enjoy the twilight of the miraculous system of global trade. An iPad is the cumulative culmination of millions of hours of work, as well as resources and manufacturing processes across the globe. It incorporates tellurium, indium, cobalt, gallium, and manganese mined in Africa. Neodymium mined in China. Plastics forged out of Saudi Crude. Aluminium mined in Brazil. Memory manufactured in Korea, semiconductors forged in Germany, glass made in the United States. And gallons and gallons of oil to ship all the resources and components around the world, ’til they are finally assembled in China, and shipped once again around the world to the consumer. And of course, that manufacturing process stands upon the shoulders of centuries of scientific research, and years of product development, testing, and marketing. It is a huge mesh of processes.

The iPad is an extreme example of the miracle of civilisation. There are less extreme ones. Take, for example, the hamburger. Hamburgers did not exist until the age of regional trade, and refrigeration. The ingredients in a hamburger were not in season at the same time. Cows were not slaughtered at the time when lettuce was harvested. Lettuce was not harvested at the same time tomatoes or onions were typically harvested. For thousands of years previous to this we ate seasonal concoctions, like turkey, yams and cranberries at thanksgiving, as well as smoked and cured foods all year round. In modernity, we have been able to use modern technology to bring about any combination of produce: from greenhouses, to air freighting, to refrigeration, and so on.

I look at the global trade system — which we here in the West rely upon for goods, resources, consumption, etc — and I see something akin to the problem with the financial system in 2006. We abandoned robust and aged local systems, local knowledge, artisanship, etc, in favour of a huge interconnected mesh of trade where all counter-parties are interdependent, and where one failure can break the entire system.

This is a beautiful age. We have truly allowed our imaginations to run wild.

But is it sustainable?

Paul Krugman notes:

The world economy was, to an extent never seen before, truly global. It was linked together by new technologies that made it possible to ship products cheaply from one side of the globe to the other, to communicate virtually instantaneously over huge distances. But it was also, more importantly, linked together by the almost universal, if sometimes grudging, acceptance of a common economic ideology: the belief that free markets, with secure property rights, were the only way to achieve economic progress; and in particular that a nation hoping to make its way forward needed to welcome foreign trade and foreign investors with open arms. And this shared ideology did indeed lead to unprecedented transfers of Western capital and technology to emerging economies – transfers facilitated by the fact that everyone knew that any country that strayed from the path would be punished by financial crisis, and would soon be obliged to accept the harsh austerity prescribed by teams of Western technocrats.

The year, of course, was 1913.

So a truly global trade system has come crashing down before, and we bounced back pretty well from that. But it was a painful time. That particular collapse seems to have arisen from the complex and internecine system of warfare pacts binding great powers to the whims of smaller ones. When small powers went to war, the great powers were dragged in alongside. It was a hyper-fragile system where one small breakdown could trigger a much larger one, just like the problem that led to the present system of financial derivatives. If one counter-party fails, the whole system can be brought down.

Great powers are once again aligning themselves around smaller allies. China and Pakistan and perhaps Russia seem willing to back Iran, while the United States is reluctantly backing Israel.

But there is a new factor at play today: the service economy. While nations in 1913 were freely trading, and while the concept of comparative was widely known, no nation took interdependence to quite the extreme that so many nations have today. And many nations have taken this idea so far that without imported goods and energy, their internal economies might completely collapse, or at very best struggle with the adjustment from supranational back to local.

Here’s the situation in the United States:


And for the United States, this hasn’t been a two-way street. America is importing a lot more than she is exporting. In other words, America is now dependent on international trade.

Here’s the United States’ current account balance as a percentage of GDP, (in other words exports – imports as a percentage of GDP):

Simply international trade has become too big to fail.

The problem is, we know from history that the system of international trade can fail, and as we move deeper into the ’10s, there are a number of obvious threats emerging. The boneheaded answer from certain tenured professors and high-flying MBAs might be that the incentives to keeping the international trade system wide open (and cheap) are enough to force countries to co-operate. Tell that to Binyamin Netanyahu, who seems increasingly fixated on striking Iran, and forcing Iran to retaliate with a closure of the Strait of Hormuz. Tell that to Mitt Romney who seems ever-more intent on starting a trade war with China. Tell that to Barack Obama who — instead of pushing for the United States to mine its own deposits of rare earth minerals has run squealing to the WTO complaining of Chinese price manipulation.

This post is not a prediction. I am not necessarily predicting a breakdown in the global trade system, although there are surely many obvious dangers as well as hidden black swans. I am merely forecasting that the world is extremely fragile to one, and that the consequences to certain countries with a negative current account balance could be, shall we say, painful.

Governments are advised to go out of their way to make sure that back-up systems in terms of medium-to-long-term food supply, fuel supply and medicine supply are in place so that the consequences of a breakdown in the system of global trade can be minimised.

This is an example of a process that the philosopher Nassim Taleb has called robustification.

Unfortunately, governments seem very busy doing other things, which are far less relevant to national security.

Nations ignore figures like Taleb — surely the Nietzsche of our homogenised and manufactured age — at their peril.

The New iPad

Now that Apple’s market capitalisation is larger than $500 billion — and more than the GDP of some developed countries — I have been intending to write an iBubble exposition, going even further into the evidence that Apple is spectacularly overvalued.

But today, Apple provided perhaps the strongest evidence that while I do not expect to see Apple’s share price to collapse any time soon, the company is — in terms of innovation — gradually running out of steam.


Yes: it’s called The new iPad. This is an absurd monicker: clumsy, cumbersome, self-righteous, but most of all incredibly boring. When the name was unveiled I wasn’t even sure that it was the thing’s name. I thought that at the end of the ceremony, there would be a grand unveiling: iPad 3, or even the cliched and technically-inaccurate iPad HD. But no; it is (loathsomely) called The new iPad.

The thing itself is fine; it receives a decent spec-bump, a gorgeous retina display, and of course includes access to the iTunes App ecosystem, which is easily the richest in the world. It will be a popular product, probably even more so than the iPad and iPad 2. But from an investment perspective, all of that is largely irrelevant. I am not trying to analyse the shape of the product; I am trying to analyse the shape of the company making the product, and its shape in years to come. Simply, I think Apple is missing Jobs’ talismanic leadership, and I think Apple’s wackier innovators are being crowded out by slick, corporate management. Tim Cook is a thoroughly corporate managerialist; not an acid-tripping bipolar Renaissance tech-evangelist like Jobs. Being the market leader is entirely different than being an innovative outsider, which is the company Apple was for so long; being the market leader means that the bean-counters become paranoid about not wanting to fix something that isn’t broken, and that kills innovation. Apple are going backwards; or worse Apple is turning into a Microsoft — dominant, but static.

Worse still is Apple’s latest OSX update, Mountain Lion. Gizmodo’s Jesus Diaz writes:

[Mountain Lion is] the antithesis of Jon Ive’s minimalistic design, all essence devoid of artifice. In fact, it goes against everything Apple used to defend when it was king of user interface development: that everything should follow the same language in order to make everything intuitive and familiar to the user. With iOS, Apple backtracked, saying that the application should mimic the real-world item it was to replace. It made a little sense on a phone, but almost none on your desktop. And it opens the door to a fragmented design language that could make the future of Apple design very unappealing. It is a slippery slope heading to a future in which every app has their own interface—a garish clusterfuck of onscreen gadgets.

And that is Apple today in a nutshell — it is going back on being the sleek, elegant and intuitive creature that it once was. Apple has lost its capacity to think different. Perhaps that is Jobs’ fault for promoting the wrong people, or perhaps that is simply the inevitable endpoint of bureaucratic-technocratic managerialism (I tend toward the latter).

The biggest issue, though, is this:

The market is already deeply invested — both emotionally and financially — in Apple: the brand, the products, the process, the people, the mythos.

And while Jobs claimed to have left Apple a little innovative dynamite in the iTV, I think after the iPhone 4s, and the new iPad (see how cumbersome that is?) it is safe to conclude that its launch will be safe and successful, but not industry shattering.

Unlike the NASDAQ, Apple is less likely to crash or to drop precipitously. More likely it will simply stagnate as technology’s have-nots — led by braver and younger minds than Cook — innovate more.