Apple’s Reality Distortion Field Relocates to Wall Street

I’m baffled. As an industry observer and analyst who studies this industry and the companies within it, I am baffled by how Wall Street thinks about Apple.

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People walk in front of the Fifth Avenue Apple Store in New York City on Jan. 14, 2013

I’m baffled. As an industry observer and analyst who studies this industry and the companies within it, I am baffled by how Wall Street thinks about Apple.

I do, however, have a theory. It’s called the reality distortion theory. The late Steve Jobs was said to have what was referred to as a reality distortion field, meaning that he sometimes had a view of things not always grounded in reality. My theory is that for the foreseeable future, there will always be a reality distortion field surrounding Apple. The only difference from then to now is that the so-called reality distortion field has moved outside out of Apple and now is alive and well with Wall Street analysts and the headline-seeking mainstream media.

I study this industry for a living. I study markets, trends, the companies that comprise it, and the business strategies being employed. I see dysfunction and unhealthiness running rampant throughout the industry. I see once-dominating hardware and software companies now struggling to make money. I see those same companies struggling to differentiate their products amidst a growing sea of sameness. I see operators, MSOs, and other service providers all struggling to keep happy loyal customers and profit off them. From a business standpoint, a product strategy standpoint, and a market awareness standpoint, many companies face a gamut of problems.

Then we come to Apple. Apple’s main problem is that it can’t make enough tablets and smartphones to meet demand. In the last quarter, Apple made more profit than anyone by a healthy margin. In fact, at last week’s shareholder meeting, Apple CEO Tim Cook stated that Apple’s revenue grew by about $48 billion dollars, which happens to be more revenue growth than Google, Microsoft, Dell, HP, RIM, and Nokia combined. Then a few days ago, Fortune released its list of most admired companies, as voted by executives and directors from corporate America, and Apple was number one in four major categories. Apple was voted by its peers in corporate America as the most admired company in the world. In essence, Apple’s industry peers voted it the MVP.

So to recap: Apple is the most profitable company, can’t make enough products to meet demand and is the most admired by its peers. Yet Wall Street and media fanatics are claiming Apple is doomed. The reality distortion field is in full effect.

Apple has a lower P/E ratio than Amazon, Facebook, Google, Microsoft and now Dell, to name a few. I find this baffling and I would challenge any analyst to articulate to me how Apple is not healthier and stronger, competitively, in the long-term than many of those companies.

What is truly unfortunate about this is the effect this reality distortion field is having on Apple’s investors. There are many wise investors who have done the analysis and come to many of the same conclusions I have: Apple is highly differentiated in the market, Apple’s products are found valuable by the mass market (meaning Apple doesn’t need to compete on price), Apple is strategically positioned for success in both major global growth markets (tablets and smartphones), and Apple continually demonstrates growth and profit. These wise investors who have come to these conclusions and more are being punished for their sound analysis and wise long-term outlook. Too many investors live in the reality distortion field and view Apple more from an emotional standpoint than an analytical one.

This is truly unfortunate because many Apple investors, especially the individual ones who have done the sound analysis and made long-term bets, often depend on these investments for retirement. I don’t own any Apple stock but if I did and saw my retirement funds dropping, I would not be pleased. Those investors are the real losers here, while Wall Street continues to profit at their expense by playing a huge mathematical game.

I understand Wall Street looks at these things competitively as well, but right now Apple’s only competition seems to be Samsung. Apple and Samsung make the majority of the profits from the smartphone space and Apple makes the majority of the profits from the tablet space. So even with this healthy competition, I don’t see how anyone can make the case that Apple’s long term future is not secure while companies whose futures are certainly in question are getting the benefit of the doubt from Wall Street.

Apple, the company, will be fine. It has more cash than anyone, and in my firm’s analytical conclusion, we believe Apple will continue to be competitive, producing products that are competitive and get adopted in large quantities by the mass market. As I pointed out a couple weeks ago, commercializing innovation is one of the most difficult things to do and right now only a few companies can do it. Apple is one of them.

Bajarin is a principal at Creative Strategies Inc., a technology industry analysis and market-intelligence firm in Silicon Valley. He contributes to the Big Picture opinion column that appears here every week.

36 comments
RolStain
RolStain

Everything that Wall Street do is about money, follow the $$ path and find out who benefits most from the situation?

The answer seems quite obvious.

Greetings.

Rolstain

JimH
JimH

How Apple was able to get around the commoditization was the significant part of why I still have patience with its sometimes fussy ways. The iPhone is a small mobile computer. It puts you on your own network. No, it almost definitely is not perfect or inimitable. But it is itself an attempt to be the opposite of a commodity, to be as much the product of philosophy and design from the beginning. Not only is this a very self-limiting corporate idea, but the commoditizers are guaranteed to "win" in terms of sheer market force. What Jobs was able to do was make your computer a constant friend and a work as much of art as instrumental device. Am I an Apple fan? Yes. Why? Because there is a strong track record of them being able to blend science and art and philosophy. And all the rest imitate them. Do I know that someone is at Apple now who will find the right way to continue the Apple legacy? No. But there's a much better chance they have lots of people working on something that follows in the tradition. And I buy into it because I really like the story. Get Apple. The UnCommodity. Of course you can make a lot of money on iPods and iPhones and iPads. Why didn't anybody do that before them if Apple is supposed to be such a pure marketing success? I'm sure I could have a free Android phone by now that does all that, and maybe one or two things I can't do now. Apple has few SKUs. That's the way they've evolved as a unified platform. 

harveylubin
harveylubin

Ben, you are talking about a society that believes that the way to reduce gun violence is to have MORE guns.

There are too many gullible people who can easily be convinced that up is down, and white is black. And there are "analysts" (the only part of that word that applies is "anal" ;-) who take advantage of the ignorant, easily manipulating AAPL's price by spreading false rumors about how Apple is "doomed".

JAWebuser
JAWebuser

I think you're reading far too much into past success.  We're talking simple gadgets here, with a very short operational lifetime (a few years?), and easily commoditized functionality.  Like the PC before it, a touchscreen smartphone is really just a tool that enables certain tasks or pastimes (a voice call or e-mail, or mapping is a task, a game or browsing is a pastime).  

It's absolute a given that the smartphone playing field is almost flat now, where all manufacturers of smartphones are just offering incremental tweaks on baseline functionality that the buying public has come to expect, and most importantly, need. 

Brand cachet has some value, but ask yourself how well that worked for Mercedes and Cadillac when Lexus appeared out of nowhere and took away massive market share in a few short years, and we're talking about a very visible personal status symbol here, not a pocketable appliance.

Apple took a tool (the cellphone) and morphed it into a -viable and useful- information appliance far earlier than any technology pundit ever could have dreamed of, and in doing so, captured a huge, basically unserviced, market.  The progression to the iPad was a no-brainier with 50 million iPhone devices already in the hands of basically happy customers, another entre into a massive, unserviced market.  

The huge question that looms is are they any more under/unserviced markets that Apple can leverage to sell -millions- of expensive, high-margin devices?  The undercurrent looks to be leaning towards "no".  TV, in any form, is a non-starter, as are any other ways to compete in an incredibly crowded content distribution market. (iTunes, as a 3rd party media (not software) distribution service, is a costly distraction for Apple now, not adding to the bottom line any significant manner)

With respect to existing Apple product lines, audio players are a quickly declining proposition, and the Macintosh is a dead-end that will be rolled into a "desktop-centric" iOS platform in the near-future.  FYI, today's "convertible" tablet is dancing around the edges of the long-ago envisaged desktop information appliance, but currently tries too hard to be all things to all people.  Apple may get this right, or someone else may before them, it's an unknown factor at the moment, but still a significant (but not huge) market opportunity nonetheless.

A little understood aspect of Apple's success also lies in the most basic of American ideals, which is one of simple patriotism.  Apple has a rich history, centered in California, with much mythology and almost evangelical zeal attached to the original developers and their products.  Americans might know that Motorola is actually an American company, but Apple epitomizes the American dream, and benefits hugely by it.  Foreign and emerging markets are basically free of this unwitting bias, and it is clearly demonstrated in sales numbers overseas.

Apple sells expensive commodity widgets at very high margins, which is a completely different market paradigm than Amazon, or in particular, Google.  Contrary to Apple, Google's stock price is based on the fact that their business has no viable competition now, or in the foreseeable future, and has a colossal lead in a marketplace that does not rely on direct-to-consumer sales in any way.  Android has helped them significantly, but mobile is still a small portion of their revenues, and only has an upside in the future.  Apple, on the other hand is selling widgets directly to a notoriously fickle consumer, in a much more saturated market than a few short years ago.

The bottom line is that regardless how Apple is doing now, or has in the past, what worries Wall St. is where the long-term growth is, and how do you compete in what is quickly becoming a completely commoditized marketplace?

pauldwaite
pauldwaite

"The late Steve Jobs was said to have what was referred to as a reality distortion field, meaning that he sometimes had a view of things not always grounded in reality."

That's not what "reality distortion field" meant. It meant that he was capable of making *you* believe his view of things, regardless of "reality", through sheer force of personality.

melvinwalker
melvinwalker

Anyone who believes that Steve Jobs was the only force of innovation at Apple, and that more than decade of hiring didn't manage to snag a single innovative person, is too stupid to be trusted with my 401K. Do you hear that Wall Street?

afinta
afinta

Unfortunately (if you are an AAPL investor) the stock is just in a technical free fall. The stock price really has NOTHING to do with the company. People always will tell you otherwise, but it just isn't so. AAPL the stock is under distribution, the selling pressure is huge, and the chart is broken. You can't fall in love with a stock. You have to think at some point it bottoms - and when it does we will all see it in the chart. 

The company is obviously rocking, as your article points out. I guess all you can do it enjoy (or as some seem inclined to - hate) the products. But I sold my shares at 450 and promised myself not to buy it again until I can see a clear uptrend in the chart.

dpn0209
dpn0209

Opinion pieces such as yours are part of the reason why apple shares inflated (and have more recently corrected as the markets become more grounded and cautious in this very competitive yet very dynamic tech world). You may be a tech "analyst" but I'm guessing you are not a financial expert, but an apple insider with a clear idea of their secret products, nor have an accurate crystal ball. Neither am I, but at least I don't write Generalised and overly pro apple opinions that influence many readers. To someone who is a bit more skeptical of apple, your work comes across as preaching to the converted which is much easier than taking a critical and balanced view. Then again, as you constantly remind readers, this is your job as a consultant with such vast experience. I wonder how many other time readers agree with this and whether this will be published.

sneydman
sneydman

It seems like people expect the Apple/PC wars to play out the same way again in the phone and tablet spaces. There's a belief that what Apple did to RIMM and everyone else will be repeated, but to Apple this time (without Jobs Apple is too complacent, not innovating, etc.). Both arguments seem fundamentally flawed to me - Apple is hugely successful and still growing, and the markets it dominates are growing at a staggering pace. There's still billions of people who have yet to buy a smartphone or a tablet. And Apple is undoubtedly studying and developing new products (TV, watch, smart-houses) with vast untapped potential. Apple only enters a market where it sees the potential to reap dramatic profits. I don't know how many multi-billion dollar quarters in profit and revenue this is going to take to sink in, but it's depressing and infuriating to watch as an investor.

ArtRios87
ArtRios87

I don't think Google is ready for what its coming their way. They have declared war to Apple by jumping into the phone market. It's going to get nasty, either way its good for the costumer when two companies go head to head. I am putting my money in Apple, just not right now.

stefn
stefn

Ideas are cheap. Innovation without disruption is easy. Google’s Glass and Pixel are gimmicks, not products. Google’s prices are tells: Pure puerile posturing. When Apple produced the iPhone and iPad, it manned up with CE product commitments that that bet the farm and uprooted multiple market sectors. Google just dabbles. While Samsung eats its lunch.

brp1515
brp1515

@JAWebuser Very well said. Ben, you may analyze companies in the tech world, but you clearly don't analyze stocks. Margins margins margins... 

benbajarin
benbajarin

@pauldwaite True, but you are talking about the egg and I am talking about the Chicken.  He first believed it and was so convicted by it that his passion could suck you in.  

brp1515
brp1515

@melvinwalker who is Wall St in this situation? Do you even know who manages the money in your 401k? Because it's not a "wall street" firm.

andrerichards2010
andrerichards2010

@melvinwalker Exactly right but that's not the whole story and I think people focus way too much on little innovations and miss what Jobs was best at. Jobs was remarkably gifted at spotting promising but unrelated ideas and concepts floating around in the tech industry and bringing them together. He didn't invent the PC or the GUI or high-quality typography, but he was amongst the first to figure out that bringing all those elements together in one machine was a killer idea and it helped set off the desktop publishing explosion in the 80s and 90s. Likewise, he didn't invent the smart phone, the touch interface or the music player, but he saw how the three could come together in one device. Finding innovations and new ideas isn't really the hard part. Seeing how they can fit together into a product or device that people want is.

dpn0209
dpn0209

I'm sorry if I came across as overly negative. My main issues with your article are that it conveys the message that Apple stock is undervalued by the market and on the decline. However the share market is influenced by many complicated factors and I don't think you or many commentators recognize this when writing your story. I think you appropriately recognize in your link below that you are not a financial expert. However your article builds on this notion that the market views Apple is doomed. In reality, the current valuation is still massive (which obviously demonstrates the market's support) and eclipses other tech players. The share price is still very good compared to pre- 2012 and will likely rise again in the longer term (as you and another reader refer to, they fluctuate in the short term). I actually agree with you that apple's foundations are solid and they have a strong future because of their unique and market leading approach. However, one of my criticisms of your article is that you refer to the same tired praise as you have in previous articles - you might be pleased to know I read your articles and notice many references to the strengths of apple. You are right in that you refer to facts and supported assertions in this article and previous ones. However, they are the same points that many other commentators/analysts/observers have made and the average tech reader is well aware of. Yet, you present this as the big picture. On the other hand I recognize you have a reader reader base who (like the others who have replied) perhaps like to often read about apple and it's strengths, even though it is no longer a revelation - It feels good to know you're right... When I open your articles I would like to read about bold new ideas, but I found this one too simplistic and obvious.

sidewinder3000
sidewinder3000

@dpn0209 wow, dpn0209, you must be opposite man! 

when a writer makes a case and backs it up with indisputable, readily available facts, you call it opinion. when he uses specifics, you accuse him of being "generalised"!  and when a company is the most profitable in the world, with an insane balance sheet and products so popular they can't keep up with demand, you won't be fooled by their smoke & mirrors!  bravo, opposite man.  thank you for staying true to yourself by filling your typo-infested, 3rd grade rant against someone's supposed pro-apple bias with a opposite dose of anti-apple bias! 

please let me know if you have a blog where you post other unfounded opinions and conjectures you have about the stock market. so that i can do the opposite.

jlist
jlist

@dpn0209Let's see...

a) popular products that people happily pay more for (if you can't afford them I'm sorry, sucks to be you)

b) a chain of massively successful retail stores that, for me at least, represent just about the only reason to go to a mall

c) a bright future in emerging markets. Yes, Android will probably have a better footing in the third world but only Samsung makes any money from it, no one else does

d) there's a bright future in China. 

e) everything else, e.g. iTunes, iOS apps, etc. 

Can any other company touch this? HP? Dell? Microsoft? Is there anything to feel positive about future-wise in the tech industry with any of these companies, especially as an investor?

benbajarin
benbajarin

@dpn0209 You are free to look up what an industry analyst does and/or my firm and our credibility within the industry if you like.  It is all there. 

I'd love it if you pointed out how my analysis and my conclusions are not true?  You say I haven't done a critical analysis in order to come to these conclusions.  Yet I have pointed out that after a careful study of the markets, trends, adoption cycles, history of business, competitive landscape, etc., that I have not, or at least that I have come to the wrong conclusions.  So rather than make an accusation or a generalized sweeping statement, I suggest you attempt to prove my analysis wrong.  Then we can have a healthy discussion on the subject. 

Woochifer
Woochifer

Leap/Cricket Wireless also happens to tie the iPhone to a poorly priced prepaid plan ($55/month for unlimited data, voice, and texts), and charge the unsubsidized price for the phone up front.  Virgin Mobile's prepaid plan for the iPhone undercuts Cricket Wireless by $20/month ($35/month for unlimited data and 300 voice minutes), and Straight Talk lets you install your own SIM card into an unlocked iPhone at $45/month for unlimited voice, data, and texting.  These are the woes of a single carrier, yet the iPhone had another record-breaking quarter. 

benbajarin
benbajarin

@SVjeunefille That's leap.  The big guys worldwide are still moving a ton.  iPhone was over 80 percent for AT&T last quarter. 

benbajarin
benbajarin

@brp1515 @JAWebuser True, but I am highly tuned into the margins discussion since we do analyze the business part of this industry.    Apple's margins aren't in as much trouble as people believe.   Look at the capex spending and you will see how they plan to invest more in supply chain and proprietary processes to maintain margin in transfer cost.   This is what Samsung does and the only reason their margin on some devices is over 20%.

iPhone ASP on the other hand has held steady despite the clear trend of within 6month asp decline average of their competitions flagship products.  Apple purposefully gives margin back on the mini, but look for services to grow and revenue to build more amongst software and services.   iTunes made more money than the Mac last quarter.   I thought that was interesting. 

JimH
JimH

@andrerichards2010 @melvinwalker Innovations are a dime a dozen. What Jobs did was synthesize things, reuniting the past with the future. I think that's why he was fond of skeumorphism. The leather like the old phone book on the table with the black telephone is a corny way of explaining to grandma what this thing is. "Oh, it's an address book!" 

As for the market, why should we take that as gospel? Oh, here's reality: what a bunch of Wall Street billionaires manage to make happen because they will make more money shorting Apple than going long, because they're waiting for Apple to pay the ransom with a good part of their cash reserves. It's not about anything but greed. I agree, Apple's stock is falling, and the panic has been started on high. Relax. The reason Apple succeeded with Jobs had nothing to do with the market, nor does it now. 

benbajarin
benbajarin

@dpn0209 No worries and I appreciate the dialogue.   I do write quite a bit about other things like the tablets in general, wearable computing, sensors, etc., but obviously those pieces are more few and far between because writing about the future is much harder than the here and now.   I just thought this was an important issue to bring out and I think my main point is that people who study the industry are wise to separate Apple the company from Apple the stock.  Due to the many points I bring up which live in the reality distortion field in regards to the stock and Wall St.  

dpn0209
dpn0209

@sidewinder3000 @dpn0209

I don't have a blog. Nor am I in grade 3. I am however replying to you on a phone, so it is not easy to have perfect formatting. I think you missed my point. It is very easy to state facts, especially obvious ones like the ones you refer to. "Apple is a successful company and has great long term potential". There. A fact that even a child would recognize. To suggest the market has "a reality distortion field"? There is truth to that based on the overall performance of the market, literature in behaviour finance, and even finance theory. But to suggest that the share price should be more; now that is opinion. Otherwise supply and demand by other people with the facts would not have allowed the drop in the first place. As I state in my reply, I think apple is not doomed. I however, the author uses that sensationalised premise in the media to remind us of his belief in apple. If I wanted to hear that, I could ask anybody on the street and they would state the same facts and stats (eg cash reserve, design quality, and innovation). These articles just remind me that I shouldn't always expect detailed critical Analyses from time.

MicahIverson
MicahIverson

a) Popular products always become un-popular (quite quickly usually), especially in tech
b) Their stores are successful, but a lot of people are getting irritated with the long lines, crowded spaces, and employees are starting to talk about the poor work experiences
c) Android and Nokia are going to eat up the emerging markets, Apple will be an after thought
d) China is anyone's game at this point, and I think Android, Nokia and Apple will balance out
e) Other companies have very strong software markets as well - Google for instance, and Microsoft if coming up fast

I'd say Microsoft, Google and maybe even Amazon can quite easily match Apple in hardware and software, some might argue that Apple doesn't even have the best overall experience

Apple has maybe 3-4 billion dollar products - all of which are starting to get some really big competition (phones, tablets, marketplace, can't think of a 4th).

Microsoft for instance has 13+ divisions making more than a billion dollars a piece, 750+ million Windows 7 users (this is more than their are iOS devices I believe), Windows 8 is steadily growing, Wndows Phone is growing, Surface is growing, XBox is huge, Kinect, etc.. Microsoft too has had record breaking reveues the last few years.

I think people underestimate what Microsoft has in terms of ecosystem, software, services and hardware. Apple can't even match it.

So yes, another compnay can match Apple, and quite easily.

JimH
JimH

@MicahIverson Everybody else in your story gets all the advantage, and Apple gets only the negatives. Google phones don't shut Apple out. People buy other phones. If brands aren't sticky for Apple, why should they be with Google? Again, Apple makes money on the phones. And the software. And the iPad that's coming out next week. If people use G-mail, so what? You know, Google pays Apple, too?

MicahIverson
MicahIverson

Amazon is a powerful company, they are making plenty of revenue to continue being powerful

Every phone Google sells with Android is a phone Apple didn't sell which means $0 revenue for Apple. Even if Google only makes $1 from that phone it's more money than Apple ended up making. Now add in the fact that now that user will use other Google products, (email, google docs, google maps, google Play). Apple loses, do this enough times and Apple loses a lot, just look at Windows vs. Mac to get the picture.

Microsoft is growing in nearly all of it's divisions, how can you say they are on their way out? ps. IBM is actually really successful still in the industry. IBM had 10 strong years, MS had 10 strong years, Apple is just about done with their 10 strong years.

It's anyone's game.

kibbles
kibbles

@MicahIverson amazon is not profitable. end of story. 

google makes a notable profit on ad revenue, nothing else. they wont say how much theyve made via android, but it's estimated to be not much. in fact, its estimated that theyve made more on iOS ads than Android ads.

microsoft? really? geeze. if you dont understand theyre on their way out (to become another consulting services company akin to IBM), then theres little point in trying to discuss it.