Are Apple’s best days behind it?

Apple is a fantastic brand that makes excellent products. But if it’s not careful, says John Stepek, it could turn into the Marks & Spencer of the tech world.


Apple's iPhone sparked the smartphone revolution
(Image credit: 2016 Getty Images)

I'm taking my life into my hands today. I'm going to write about Apple. I'm going to gently suggest that its best days might be behind it.

I'm battening down the hatches as I type...

Apple fans' devotion is understandable

It didn't invent the basic concepts or technologies that gave rise to these products. But it did design and package them in such an attractive and user-friendly way that they appealed to consumers. Apple made tech cool in a way that the likes of Microsoft never managed.

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Apple Macs are the professional designer's tool of choice. The iPod helped to change the music business. The iPhone saw the smartphone revolution take off.

Thanks largely to Apple, the majority of the British population right now has an object sitting in their pockets that allows them to do the following (assuming it's charged up): watch TV; listen to music; read books; play games; talk to someone on the other side of the planet; comfortably navigate an unknown city; get the weekly grocery shop in; access the sum total of human knowledge it's astounding when you pause, even for a moment, to think about it.

Apple products look good, and they are convenient and intuitive to use, even for people who just aren't that tech-savvy. It's no surprise that it's such a popular brand, nor that it inspires a strong level of devotion.

That brand strength has enabled the company to maintain spectacular profit margins on its products despite rampant competition - and has kept it going through various growth scares and constant questions of "where's the next big thing?" coming from.

The share price peaked last May at just over $130 a piece. It dipped to around $90 this May, and since then has been rallying solidly. It's at around $115 today. It's currently the most valuable public company in the world.

However, all good things must come to an end. And I'm wondering if Apple's best days are now behind it.

Apple sales fall for the first time in 15 years

Analysts were expecting this, so it's not a big shock. And the company has only just launched the iPhone 7. The iPhone is its key product accounting for two-thirds of revenue - and sales are likely to be strong in the next quarter to December.

But you have to look at Apple and wonder where's the growth going to come from to maintain its position as the most valuable company in the world?

Here's how Apple's business model works, roughly speaking. It sells smartphones at huge margins. Lots of people buy them because they are good phones.

That's worth highlighting. Fundamentally, Apple's products do well because lots of people find them more usable than their rival products. Branding will take you so far, but Apple's secret' is that it figured out how to turn using a gadget from being a faff to being a pleasure for an audience that went beyond tech geeks.

But for how long can it maintain that lead? More and more smartphones are being launched by more and more suppliers. So there are lots of competitors.

The number of people in the world without a smartphone, who have the means to pay for one particularly a high-end one like Apple is falling fast. So the addressable market is shrinking.

And the capacity to add "must-have" features rather than cosmetic changes is surely dropping off too.

That's a challenging backdrop for a one-product company.

Apple's arch-rival Samsung of course, has had to recall one of its premium smartphones the Galaxy Note 7 due to exploding batteries. But that might not help Apple as much as you'd think.

Google has just launched its first smartphone the Pixel and reviews suggest that it's on a par with the iPhone 7. Consumers who have opted for Samsung over Apple are probably already comfortable with the Android operating system. So the Google phone is the logical choice for them, rather than getting locked into Apple's "ecosystem".

There are other warning signs. As Lex points out in the FT, there's a wee bit of financial smoothing going on in Apple's latest quarterly results. "It released the new iPhone seven days earlier than last year", artificially boosting the quarterly revenues.

It's also "added an extra week to the December-end quarter". That means headline fourth-quarter sales will probably beat last year's but if you strip out the extra week, reckons Lex, they'll still be slightly down.

Meanwhile, there's not much sign of any exciting new products. There have been rumblings about Apple TV, and Apple cars for a long time, but there is no obvious progress on either of those fronts. Apple is working on an operating system for autonomous vehicles, reports Bloomberg. But it's not clear exactly what that would be for, or who would want to adopt it.

And the driverless car market isn't exactly uncompetitive. Google and Uber not to mention every major car manufacturer on the planet are already crawling all over that sector already, and Tesla has a major head start at the luxury end.

Apple might swoop in at a later date with a far better product once everyone else has made their mistakes (the iPod wasn't the first MP3 player, after all just the first to make a serious impact), but if that's the strategy, then it could be at least a decade away.

Same goes for TV. The content side is already well served by Netflix and Amazon Prime, not to mention the potential tie-up between AT&T and Time Warner you don't need the Apple Store with that lot.

If Apple's not careful, it'll turn into Marks & Spencer of the tech world

But as an investor do I want to buy a company where I can see all the challenges clearly lining up, and the management appears to have no real strategy for getting beyond them, other than relying on years of brand equity?

Sure, brand equity will keep a company going for years. Marks & Spencer has been trading off its reputation for at least 25 years now, and it's still gamely struggling along on the high street. But I don't want to invest in M&S either.

Anyway, have it out among yourselves in the comments below.

(Full disclosure on my tech tribe so you can see I'm not biased: I use a really old Samsung smartphone which I find a chore, but I prefer the open-ness of Android, so when the new Google phone is cheaper, I'll upgrade to that. I have an old iPad 2 tablet which I love, but don't intend to replace, because I play far too many games on it and I can do all the productive stuff on my laptop instead.)

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.