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Apple: Victim of Its Own Success

“Stay hungry, stay foolish”

– Steve Jobs

arvy’s teaser: Apple, the world’s largest company, thrives on iPhone dominance but faces a sobering reality: market saturation, soaring valuations, and the curse of past success. Can innovation reignite growth, or has Apple peaked?


Think Different.

An advertising slogan that was launched in 1997.

It could not have come at a better time. The company using it, which had literally started the revolution in personal computers, was on the verge of bankruptcy at the time (chart 1). Not long before the launch of this advertising campaign, the Board of Directors made the wisest decision in the company’s 20-year history. They brought back their founder. The rest is history, and to this day this marketing campaign is considered one of the best executed of all time.

The mastermind who came back to save his baby and the initiator of the entire operation was Steve Jobs.

The business that was saved by his success?

Apple.

Chart 1: BusinessWeek cover about Apple, February 1996, 90 days before bankruptcy

Source: BusinessWeek

Stay Hungry, Stay Foolish

In investing, the CEO and management are crucial to a company’s success, steering it through daily challenges.

Whether it is vision, leadership, capital allocation or building the right corporate culture. A strong management team with integrity is key to long-term growth.

Steve Jobs, one of the most respected CEOs, exemplified this. I have learned a lot from him, including his must-read biography, available in our book club (chart 2), or the 15 minutes that I will never forget.

His commencement speech at Stanford in 2005.

If you are familiar with it, I invite you to revisit it; if not, consider it your weekend homework😊.

It is widely regarded as one of his most inspiring and insightful talks. The speech is built around three key stories from his life, each illustrating an important life lesson.

Here are the three points and their core messages:

  1. Connect the Dots: Trust that the seemingly unrelated experiences in your life will make sense in hindsight. Follow your curiosity, even if the path is not clear now.
  2. Love and Loss: Find what you love to do and stay passionate. Do not let setbacks deter you; resilience turns failure into opportunity.
  3. Embrace Mortality: Life is finite – do not waste it living someone else’s dream. Follow your heart and focus on what truly matters.

Jobs, who also founded Pixar, the creators of Toy Story and Finding Nemo, closed with a final message. He urged the graduates to stay curious, take risks and embrace the unknown with enthusiasm.

His final words that each of us has heard before?

“Stay hungry, stay foolish”.

Chart 2: arvy’s book club, Walter Isaacson’s Steve Jobs biography

Source: arvy’s book club

Blessing Becomes a Curse

There are not many companies that touch as many lives as Apple.

Over the decades, its most important product has emerged as the iPhone. After its launch in 2007, it has taken the world by storm. It made its earlier successes such as the Macintosh (1984), the iMac (1998) and the iPod (2001) look almost small.

What comes with it still amazes many rational people.

Its price tag.

While competitors such as Samsung, Xiaomi or Google’s Pixel offer similar quality and functionality, Apple is the only one that can command significantly higher prices.

Apple has managed to build a cult-like following around their products and its visionary Steve Jobs. It is not for nothing that the quote “If you don’t have an iPhone, you don’t have an iPhone” has shaped the world. This is extremely powerful, and the success is also reflected in the stock price. Since the launch of the iPhone, the share price has risen almost 100-fold (including dividends).

The iPhone has been a blessing for Apple and the main reason why it has become the largest company in the world.

Why?

Because it is the backbone of the company’s revenue as the segment accounts for about half of the company’s total revenue (chart 3). Apple generates gross profit margins of around 50 to 65% with its iPhone models, which is 10 to 20% more than its competitors. In 2023 alone, Apple sold $200 billion worth of iPhones, generating an estimated gross profit of over $100 billion.

Insanity!

But now Apple has warned investors that future products may never be as profitable as the iPhone.

This is a problem, because Steve Jobs’ baby is becoming a victim of its own success.

A blessing becomes a curse.

Chart 3: Apple’s revenue by operating segment

Source: Quartr

Technology Adoption Lifecycle Completed

Technology is inherently competitive.

Yet, from time to time, a company emerges that dominates its space and generates massive profits over extended periods.

This typically involves navigating the entire technology adoption lifecycle—from Innovators (2.5% of the population) to Early Adopters (13.5%), Early Majority (34%), Late Majority (34%), and finally Laggards (16%). Apple exemplified this journey, successfully bridging the gap between these segments and achieving broad market penetration over time.

However, the market is now saturated with iPhone users. This saturation is evident in Apple’s stagnating sales over recent quarters. As a result, the company faces relentless pressure to deliver the “next big thing”—whether it’s an innovative iPhone iteration or an entirely new product capable of reigniting growth. For a hardware company like Apple, this is particularly challenging. Unlike software companies such as Microsoft, which generate predictable and recurring revenue through subscription-based services like Office 365, Apple must continuously develop and sell new hardware products to maintain its growth trajectory.

This reliance on innovation and physical goods creates a cycle of constant reinvention – a never-ending curse that Apple needs to break out of.

These challenges are exacerbated by the discrepancy between Apple’s share price, the largest weight in the S&P 500 at over 7%, and its revenue growth. While sales have plateaued, Apple’s valuation has skyrocketed, reaching the highest valuations in over 20 years. Simply put, investors are willing to pay significantly more for the same performance – we at arvy do not agree. The last time Apple was valued this richly – back in 2007 – it was launching the groundbreaking iPhone and firing on all cylinders.

The stakes are high for Apple. Because the history of the stock market reminds us of an uncomfortable truth.

Valuation does not matter.

Until it does.

Chart 4: Apple’s valuation, Price/Earnings and Price/Sales over the last 20 years

Source: arvy

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