

The Apple effect

An iPopping phenomenon

What the rise of Apple’s share price says about the modern economy and the stockmarket

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Readers' comments




The most interesting thing about these comments is how the economic question of whether Apple is overvalued or not is so often sidetracked by a visceral defensiveness among Apple apologists when they perceive analytical attempts as an attack on Apple. They are treating the brand as a religion. I am old enough to have owned and used Apple products for decades, going back to even before the original Mac. I am one of the few (to my knowledge) who viewed a demo of the Lisa computer. I have always been impressed with their seamless user experience. But surely, such are peripheral issues that are entirely separate from whether or not the company is worth $1 T.

My own analysis is that Apple is riding a bubble. But more importantly, irrespective of whether it is bubble or pimple, Apple is a very high-risk investment. The comparison in the article to Exxon Mobile or GE is -- forgive the pun -- apples to oranges.

My biggest fear about Apple valuation is the very fanaticism that informs its apologists. This shows that a large part of Apple's performance is due to the fervency of its consumer base. And since such fervency is a notoriously fickle asset, this makes Apple a very risky company. By contrast, Exxon and GE are not big by virtue of their customer fervency (it would be hard to find customers less fervent): they are big because they are efficient and effective at producing commodities that form the very heart of our economic pulse. They have the character of utilities whereas Apple has the character of the great fashion houses. Both are legitimate industries, but not even remotely comparable.

Charel in reply to TMcFar

Why denigrate a company that turns a futuristic image in a movie into a serviceable product that people all over the world are clamouring to buy. No other “gadget” maker has ever done that.

Der Perfesser

From the "economic point of view" Apple is creating a set of completely new industries, in each of which the dominant company is Apple - number 1, the best position. As such, these separate divisions can be hived off as separate companies which can highly profitable as they dominate the particular industries they have created.

The implication is that at a PE of 22, Apple is massively under valued.

There are also two other lessons which should enter the lexicon of business analysis.

1. Apple is in the business of creating new industries - not new products per se. These new industries are hived off as 'bubbles' from their existing activities. Something like the speculation that new universes are hived off existing universes and then quickly expand. This is a new phenomenon. The old style companies kept to their last. Oil, metal bashing etc.

2. The much discussed 'money pile'. The MBA's hate this. It invalidates all they have been taught - much of which is nonsense. Apple is proving time and time again that having massive amounts of spare cash is far better than borrowing. I follow General Grant's advice to the Japanese Government on borrowing - don't. It vastly restricts your freedom of action, which far outweighs any investment margin made by borrowing. But then MBA's will disagree, but much of MBA advice I have found is fundamentally useless, even dangerous.

So not only is Apple doing well, but its fundamental philosophy is also highly successful. And no, the last I heard Apple is not reducing its expenditure on research or the introduction of new products. Some of which will fail (it has had a umber of major successes in a row - it can't last), but many will massively succeed.

And oh yes, the last I heard Apple is keeping its cap on employee numbers due to another of its philosophies. It maintains sufficient cash to pay each and every employee a full salary for an entire year, even if its SALES drop to zero. That breeds fanatical loyalty and long term commitment. (Another asset not mentioned by MBA's).

Pete Turner in reply to zerge

I recently switched to a new Asus ultrabook. It's amazing. Featherweight, lightning fast, silent, non-heating, non-buzzing, non-clanking with seamless Windows software. And cheaper than Mac Air. Go figure!


I recently switched from a Windows laptop to a Macbook. It is not the operating system that impresses me; it is superior to Windows, but marginally. What´s amazing is the hardware: it´s way more advanced than the wintel machines; it just feels futuristic: one solid, silent, non-heating, non-buzzing, non-clanking machine. Totally Star Trek.


The pimple analogy at the end is inappropriate and does not really reflect the writer's point. A pimple is filled with pus, making it theoretically worse than a bubble haha.

Pete Turner

Sell your AAPL shares, folks. Apple have had an enormous free ride from the press, comparing every launch of an iProduct to the second coming and urging a conga line of nerds to camp out to get one, but Apple's greatest contribution to industry has been its savvy marketing campaigns and monopolist control of onselling through iTunes and other avenues.
But the increasing flurry of iAds and iLawsuits against competitors shows that Apple is worried. No-one in the press seems to have noticed, but Apple is rapidly losing share of the smartphone/tablet market to Android devices. Not only are they cheaper, increasingly smarter and more adaptable, Google's Android software is open source technology, and open is a dirty word in the Apple world.
Not sure I'd want to buy GOOG either in this new tech bubble, but one look at the Apple chart will tell you it's headed for a crash.

Fascinated in reply to yauhooi2010

The reason that Beijing was mentioned is that China continues to promote state run businesses -where as Washington, Westminster and Tokyo do not.
(unfortunately can't include the Kremlin in this list).

tp1024 in reply to Zachary RAD Rouse

Apple is a shining example of selling slightly upgraded and mostly underwhelming products for the last several years on the basis of its brand alone. The cash-pile has tripled in the course of the last two years after the iPad came out, which hasn't seen any functional improvements to this day and is very similar to the recent iPhones and the iPod in that respect.

Goodwill only goes so far and reducing the quality of R&D has never had any impact on currently running business, but only on the future. Apple has seen this after Steve Jobs was ousted the first time around and the way it looks, it is set to happen again. Alas, this time the saviour won't come back.

jackdeguest in reply to Pete Turner

That's the beauty of this market. There are products for all tastes.
Personally, I prefer to stay away from the over 150,000 viruses that plagues the Windows OS.
On Mac OS X, I especially enjoy the virus-less environment and the seamless flow and interoperability between the application that work together to deliver a great user experience. Completely unparalleled.


The huge increase of Apples cash pile is merely evidence that money is no longer being reinvested into R&D and production facilities to create new products. In other words, Apple has turned from a sensible company (the kind you would find in China today) into the bland western kind of moneymaking machine that doesn't care about anything beyond short-term profits and without any idea what the purpose of its own existence is.

When the sole purpose of business is making money, what's the point of improving your products or company, when such improvements get in the way of making money?

The idea of improvement was behind the golden age of technology in the 60ies and behind Moore's law so long as it lasted (its definition has been bend out of shape time and again to hide the slowdown). The pure drive for profit has undermined this process.

It should be telling that the one disaster that had the greatest impact on the computer industry in 2011 was not the earthquake in Japan, but flooding of Thailands harddisk manufacturies. And given the kind of technology it takes to produce harddisks, this is not a question of cheaper wages, but of a business environment that is more conducive to industry.

I'm reminded of Adam Smith's description of China in the middle of the 18th century as unquestionably the largest and most important economy of the world, but also perfectly stagnant for decades.

Two centuries later, the times have changed.

iconomyst in reply to Der Perfesser

Der Perfesser: agreed, plus the P/E is not 22 - that figure seems not to take into account the latest Q1 earnings. Apple's twelve trailing months earnings are $35.54 according to Wolfram Alpha. That translates to a P/E of around 16.9. Plus, as I pointed out in my comment on the "iRational" article, even this exaggerates the (alleged) "bubbliness" of the stock, since a correct valuation methodology would factor out the $100 in cash per share, giving an adjusted P/E of 14. (Disclosure: long AAPL)

Robert Buss in reply to tp1024

I think your view is cynical at best. If Apple has invested a constant sum in R&D for each of the last 10 years, they have shown that this level of R&D spending is sufficient to produce products that are well received in the market. Since revenue has dramatically increased, the percent of revenue invested in R&D has declined dramatically, even though spending could remain constant. I have not looked into the numbers, but I suspect Apple has been increasing R&D consistently, just not as fast as revenue.

Further the situation illustrates economies of scale. The design of the iPhone cost X. Amortize this cost across 10 million phones and then the R&D portion of every additional iPhone sold goes into profits - the situation clearly present at Apple.


wasn't this article named iRational earlier this morning? Did Apple's public relations threaten to pull the Economist from the iPad store if it didn't change the title or something?


"It is impossible to imagine any of those designs being dreamed up by a Beijing bureaucrat."

Would be less impossible to imagine the iPod, iPhone or iPad designs being dreamed up by bureaucrats in Washington, the Kremlin, Westminster or Tokyo? Surely bureaucrats are in the business of running the country, not coming up with gizmo designs. Perhaps the Economist would like to think that Sir Humphrey Appleby would have had a fair shot at coming up with the next big thing that changes the world? One would think not.

Truly Yours in reply to Duck_Hook

As an extensive user of the Lisa, mother to Mac, I was an early convert to Apple's system solutions, user interface designs, and technical innovations. I often felt the need to educate PC advocates on the real-world advantages of a Mac. These days I seldom have to, because even geeks don't want to waste their time with buggy, cobbled-together information appliances.

Having used the Newton, forgotten mother of iPhone and iPad, I can attribute the successes of the latter products to Apple's engineering discipline, ergonomic leadership, product life-cycle management, quality control, and customer service much more than to fashion-based marketing. All these things must be gotten right consistently to yield outstanding values for everyone in the long run. These are very good reasons for users and investors to love Apple. Companies deserving of brand loyalty are rare indeed!


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