Commodities. It’s difficult to make money in the commodities business. Barriers to entry are low, and prices often fall so much that profit margins are very low indeed.
The snag for the likes of Apple is that the smart phone business is looking increasingly like a commodities game.
Apple had first mover advantage, just like biro once had it with pens, and Hoover with vacuum cleaners, but will it be enough?
Investors are having their doubts, and despite the company posting a 61 per cent increase in profits on the year before in its most recent quarter, shares have been falling.
They are 33 per cent or so off peak price. Apple’s market cap is $445 billion, why that is only $40 billion or so more than Exxon Mobil. If Apple ain’t careful, it will lose its mantel as the world’s biggest company. In fact it did, for a few days in January.
But then you consider Apple’s cash pile, and that the forward earnings ratio of market cap to expected annual profits, or p/e ratio, of just 10.78. Strip out the company’s cash from the equation and the p/e ratio is not much more than seven. That’s a pretty tiny multiple for what has been one of the fastest growing companies in the world over the last ten years.
Investors are fretting over Apple’s profit margins, which have been falling, and are scared that the company cannot carry on growing when the smart phone business is looking like a commodity business.
But whatever you do, don’t write the company off yet.
Steve Jobs may no longer be with us, but Apple’s design man – the fellow said by some to be as important to Apple’s success as Jobs – Jonathan Ive is very much part of the company still.
Last year, while in London and collecting his knighthood, he said that the product he is working on now feels like Apple’s most important product to date.
So what is it?
Most are expecting Apple to release its iTV player.
But now the rumour mill has churned out talk that the company is planning a smart watch. The breakthrough technology for this to work must be a screen that can curve. Well we know Apple has been working on precisely this technology.
So what will this smart watch do? Your guess is as good as anybody’s – except Tim Cook Apple’s CEO and Jonathan Ive that is.
But it sounds intriguing, doesn’t it?
Apple has no God given right, no irreversible reason why it should out innovate its rivals. The company one day will fall victim to reversion to the mean, and will be just another player. That day may be close. Or it may not be.
It is possible Apple is about to do for smart phones what the wrist watch did for those old fashioned pocket watches. And that will be something to watch.
© Investment & Business News 2013