Oops, I wrote an article. I’m working on the book, but I took a slight detour … well, actually this article wrote itself.

Some additional random thoughts on Apple:

Being contrarian – taking a position that goes against the grain of commonly held opinion – is not easy and not comfortable. Humans take comfort in consensus. We love it when the crowd agrees with us. However, being contrarian for the sake of being different is idiotic and dangerous. People don’t normally step in front of moving trains; being contrarian in this regard would make little sense. When it comes to investing, being contrarian means trusting and following through on the findings of your research, whether you agree or disagree with the crowd.

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Bucking the crowd is rarely comfortable even for seasoned contrarians. Think of it this way: Brave people are not the ones who don’t have fear but the ones who can overcome it. When you’re making a contrarian decision, it’s not like you won’t have a tingly, discomfiting feeling in your stomach. You will. This is the time when you need to have a healthy dose of arrogance; yes, this is when you need to stick with your research and basically say “The crowd is wrong; I am right.” I have talked plenty of times about the situations in which you need to be humble, but there are times you need to be arrogant, too. And the tricky part is to know when to be which.

Recently, I felt the same tingly, uncomfortable “contrarian” feeling when we were selling the bulk of our Apple stock as I did in 2013 when were buying. Then we could not kill the stock; today … we can.

I shared a draft of the following article with a friend. He said “You’re probably right, but Apple is going to $180 first.” There is little value I can add there. But let me tell you where I could be wrong: India may prove to be a very fruitful market for Apple. iPhone penetration there is very low, Apple is building new stores, and India has a billion-plus people. I think 5G – which will allow much faster downloads – may end up creating another super upgrade cycle for iPhone. Also, Apple may come up with incremental innovations that keep people excited about iPhone, and the upgrade cycle will remain stable. Augmented reality – AR – may be another driver that I am underestimating. The iPhone may turn into a delivery device of earth-shattering innovations for Apple.

China. Well, China is supposed to a growth engine for Apple, but that may or may not be the case. WeChat is a huge problem for Apple. Someone described WeChat to me as a Chinese version of Facebook plus WhatsApp. The more I learn about it, the more I realize it is so much more than that. It is basically “the mobile internet” in China.

People turn on their phones, jump on WeChat, and don’t have to go anywhere else. It’s Facebook and WhatsApp, but it’s also an app and game store, payment platform, Yelp, and a whole lot more. From a mobile phone perspective, WeChat is an operating system layer on top of iOS or Android. If you are a WeChat user, you don’t really care about any improvements in the underlying operating system, because you barely use it. Samsung comes out with a new, spiffier phone a year now, and your switching “inconvenience” costs are almost zero. WeChat basically kills iPhone user loyalty and the recurrence of revenues that Apple masterfully developed in the West.

A more expensive iPhone will boost Apple’s earnings, but it will surely have an unintended consequence: It will likely elongate the upgrade cycle. Next week, with the introduction of the shiny new i-Object, will definitely be exciting; and as an Apple junkie (I own so many Apple products it’s almost embarrassing) I’m excited for Apple. But I’m less excited about Apple stock than I’ve been in years, and the current valuation demands more clairvoyance than I possess.

New iPhones are not enough to keep Apple’s stock going, it needs a new category

By Vitaliy Katsenelson, CFA

It is hard to find a bigger Apple stock cheerleader than me. I’ve been writing Apple stock love poems for years. For a long time, it was easy to love the shares because they were unloved by others and it was cheap.

Until recently, when Apple stock was still trading in the low $100s and at single-digit multiples, we were buying current product categories at a discount and were not paying for future product categories.

At today’s price that is not the case anymore. That is true with any company – the more expensive the stock gets, the more clairvoyance investors need to discern the company’s future growth.

At Apple’s size it is very hard for the company to increase its earnings significantly. Macs, iPads, and even iPhones are mature products.

The iPhone may have a few growth spurts left, but not many. It is facing an unavoidable headwind: the elongation of its replacement cycle. The iPhone improved substantially over the years, but as the i-marvels piled up, the incremental improvements that motivated people to buy a new phone every two years or so became less and less significant.

At some point the iPhone will face the fate of the iPad – its replacement cycle long in the tooth and sales stagnant and declining.

Will the iPhone’s sales stop growing in 2018, or 2020? I don’t know, but from a long-term perspective of the company’s valuation, a few years don’t make that much difference.

(A new iPhone is expected to be unveiled next week. The stock fell slightly Wednesday on concern supply disruptions could cause shipping delays with the new phone.)

Services is the only segment that can grow at a double-digit rate for a considerable period of time, but it only represents 13 percent of revenue. Even the Apple Watch doesn’t really move the needle.

They need another genius

But can Apple come up with new product categories? Let’s ponder on this question in the context of the following quote:

“Talent hits a target no one else can hit; Genius hits a target no one else can see.” – Arthur Schopenhauer

Apple has a lot of talented people designing and redesigning products in the categories that Apple already dominates. They are hitting a lot of targets no else can hit. Apple’s brand is as healthy as ever, and so is product satisfaction.

However, to create a new category of products Apple needs to “hit targets no one else can see,” and this requires a genius. But in an organization of this size with a lot of bright and talented people, it also requires a benevolent dictator – someone able to make bold, unconventional decisions (and own them), someone who in addition to everything else is able to inspire others to create what they may think is impossible. Yes, I am referring to the one and only Steve Jobs, he of the “reality distortion field.”


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