Lots of folks find it incomprehensible that Apple’s stock is tanking. Here’s a tweet from earlier today that’s representative of the sentiment I’ve seen:
Apple has $145 in cash per share. Subtract from the $452 share price, you get $306. Earnings per share is $44. $306 / $44 = 6.9. O_O—
DHH (@dhh) January 24, 2013
But the problem with all this is that this isn’t a problem of investor math; it’s a problem of investor psychology.
In pure math terms as many people have pointed out, Apple stock ought to be a no-brainer buy for value investors. But value investors (like Warren Buffett most famously) like to buy and hold for the long term; and as Buffett himself has said in his annual letters many times, he looks for “economic castles protected by unbreachable ‘moats.”
I think the problem with Apple’s stock right now is that few investors are convinced Apple has a sufficient moat.
Does Apple in fact have a “moat”? If so, what is it?
If you asked someone senior at Apple I think they’d say this: their advantage is that they create and control “the whole widget” as Steve Jobs was fond of saying. That the marriage of world-class industrial design, proprietary operating systems (MacOS and iOS, and hardware gives them advantages over all other digital device makers. That is their moat – that they’ll be able to invent dazzling new digital devices we love and need for years to come.
Until recently, the industry and market effectively and essentially agreed with Jobs and that point of view. But the last six months — with the latest versions of Android hitting the market and devices like the Nexus 7 and Nexus 4, and the Samsung Galaxy III — have shaken people’s faith. They’re just good enough, and selling in big enough volumes, to make one question whether the advantages of vertical integration are less robust than we previously thought.
And, Google’s strategy has come into focus a bit more, and it looks like the winning hand played by another Apple foe twenty years ago. Google has essentially bet that if they bundle and control core essential services on mobile (search, maps, email, YouTube, Chrome) that Android and the devices that run it need to be “just good enough” for people to convert.
In other words, if the core services you use on your phone or tablet (browser, email, maps, video, and search) are just as good on Android as iOS (because Google provides them on both) and if enough third-party app makers provide “good enough” apps on Android, large numbers of people will choose or move to Android devices if they’re cheaper and not horribly inferior. And that’s essentially where we’re at now.
That’s not to say Apple is doomed. Rather, to believe they have a durable moat you have to convince yourself they can continue to marry design, hardware and software in a way that draws many of us to their devices — because they’re simpler, easier to use, work better, and look better. That’s not a crazy or outlandish thought.
But here’s the rub. It could be argued they went backwards in some fundamental ways on the “simpler and easier to use” parts of that formulation during 2012. And that’s because ease-of-use is increasingly about seamless integration with services that live in the cloud — a real weakness of Apple’s, and a strength of Google’s (it could be argued, correctly, that this is fundamentally what Google does).
Loathed is iTunes Match. The removal of Google Maps was a disaster. Photo Stream feels rough. Siri is often wrong or useless. iCloud still feels inchoate.
For me, this is the essential question about Apple and its future. Can it ensure that the core services offered on its devices are every bit as good, and perhaps better, than those offered on Android? Either by building great cloud services at Apple; by buying up great cloud-based companies and engineering teams; by providing a world-class development platform that attracts developers to solve these problems; or some combination of the above.