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LONDON – Vitaliy Katsenelson, of Russian origin, has carved out a solid reputation among value-based money managers. The Denver-based Director of Investment Management Associates, author of the well-known Contrarian Edge blog, rarely badociates his original investment ideas with a gifted pen, which he shares with us in this article as to why he sold the # 39, one of his favorite songs last week. . Katsenelson is not the only one. Apple's shares have taken a bad step since the publication of its quarterly results earlier this month. – Alec Hogg
By Vitaliy Katsenelson *
Our company bought Apple stock for its clients' portfolios in 2013, and we're used to being a counter-current voice in the action (read here and here) – we loved it when it was hated. Now, we are again against the current – this time against the faithful of society.
Here are the main reasons why we sold all of our stake in Apple last week:
The iPhone, while indispensable, is a mature product. Since the introduction of the iPhone X, the prices of iPhones have increased. For example, iPhone sales in the last quarter jumped 24% despite the fact that the number of iPhone sold has not changed – all growth comes from the rise in iPhone prices. The penetration rate of smartphones is high in the world and most of the growth currently comes from replacement phones. Rising prices and the lack of significant incremental improvements will likely result in an extension of the replacement cycle from two to three years (or even four).
Apple recently announced that it will stop disclosing iPhone and iPad shipments. There is only one way to read this news: the iPhone is a mature product, of middle age, with a wife and two children. Apple's management is desperately trying to create the story that it is becoming a service company.
In Apple's second quarterly press release, "$ 10 billion in service revenue reaches a new record high." Apple tries to monetize its huge installed base of iPhone, iPad and Mac in selling digital goods and services to their owners.
It is there that we have again lost optimism. Apple has done a good job selling digital products (apps, movies, music, space) in its digital store, but so far it has proven to be a lousy service company. Its iCloud (email, calendar, data storage) and Apple Maps have been either absolute failures or much lower products. Apple's emails (originally MobileMe) and the iCloud data storage service have in principle been removed by Gmail and Google Drive (and Dropbox). Apple Maps is marketed only because it is the default mapping software for the iPhone. When it comes to maps, Google is light years away from precision: just ask everyone who has already tried using Apple Maps.
In addition to Google, Apple is competing with another giant, Amazon.com, which spends hundreds of millions of dollars on film and music production. Apple's streaming music service was initially a disaster. In all fairness, things have improved, but today the battle is tough, because Apple's wall-to-wall approach does not allow Apple Music to work with the Amazon and Google speakers. This gave competitors a lot of leeway, which otherwise would not have had the chance to do so.
PREMIUM: Amazon follows Apple up to the $ 1 trillion mark – The Wall Street Journal
Then there is Siri. At first, it was the most intelligent digital voice badistant, but not anymore. Do not be disrespectful to Siri, but his IQ dropped quickly compared to Amazon's and Google's badistants. Google and Amazon have opened the APIs (application programming interfaces) of their digital voice badistants to other developers. Soon, every appliance in your home will respond to "Hey Google" and "Alexa."
There are several reasons why Apple has done so badly in services. First of all, it's a product company. Macs, iPhones and iPads are incredibly complex devices that, although they have software, are marketed every year or two. Services are software – they require almost a gradual, if not daily, improvement. You publish an imperfect product, and then continue to improve it with continuous versions. This approach seems to go against Apple's DNA.
PREMIUM: Apple has a serious bug problem … in its software – The Wall Street Journal
The second and more important point is that Apple is faced with the innovator's dilemma: today, two-thirds of Apple's revenues come from the iPhone, and to survive, this creature requires a walled garden. That's why Apple's music does not work with Amazon's or Google's speakers. Oh, and what about the Apple speakers? As expected, Apple has adopted a "premium" strategy with its speakers, a strategy that worked very well with Macs, iPhones and iPads. However, the strategy has failed in the case of speakers because the product of Apple is several times more expensive than the "pretty good" offers of Google and Amazon. In addition, the walled gardens strategy has turned against us. For example, Apple speakers will not play Spotify, an extremely popular music service with 75 million paying users and 150 million users competing with Apple Music. So, to protect his iPhone cash cow, Apple services are fighting with an arm attached in the back.
As shareholders, we were concerned about future sales of the iPhone and did not really believe that Apple's service strategy would bear fruit. This is the biggest problem for Apple: it needs a new category of huge products. (Apple Watch was a rather successful product, but in the context of $ 265 billion in business turnover, it was a rounding error.) A car was supposed to belong to this category – that was Is the largest category of products in the world – but sometimes Apple has changed car strategy several times and has basically given up on this category.
When Apple's stock was down, we no longer had to worry about slowing growth, but we are doing it now. So we went out.
- Vitaliy Katsenelson is the CEO of Investment Management Associates.
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