With Steve Jobs’ passing, Apple (NASDAQ:AAPL) as we have known it for the last decade also ceased to exist. Apple can survive, but it won’t prevail.
In the last decade, Jobs did four things well:
- Product vision. With so many of the products Apple introduced in the last decade, Jobs demonstrated that he could see what consumer wanted years before he sold it to them. For example, this 1987 video of the Siri foreshadows the iPad by 23 years.
- Consumer passion inducement. Jobs was a gifted sales person who could make people want his creations. Or, as The New York Times reported, functional magnetic resonance imaging scans have found that Apple products activate the love parts of the human brain.
- Product execution. Jobs focused on turning his ideas into real products with an extremely refined sense of getting details right. This obsession with detail led him to reject prototypes because he did not like the layout of a circuit board that customers would never even see. And thanks to now-CEO Tim Cook, Apple was able to take the prototypes that Jobs ultimately approved and get millions of the devices from the factory into consumers’ hands.
- Business model creation. Jobs was not just great at creating products — he also built very profitable business models. For example, the iTunes store was a profit-free zone that made consumers want to own iPods — of which Apple has sold 300 million. And with the iPhone, Apple got people willing to pay a big price premium: $562 vs. $300 to $400 for competing devices. And Apple contracted that high-priced item out to manufacture at a far lower cost — $180 — yielding a whopping 68% gross margin, according to a Harvard Business School case study, Apple Inc. in 2010.
But despite hiring many capable people, there is nobody out there who can do what Jobs did. Though, one area I am confident that Apple will do well in is manufacturing and delivery — that’s because Cook did this so successfully before he took over the company.
The problem for Apple will be to come up with new groundbreaking products that people don’t realize they need until they have them. Unless Steve Jobs has secretly downloaded his product visioning skills onto a computer somewhere inside Apple’s Infinite Loop, Apple’s growth eventually will slow.
And by that measure, Apple’s low price/earnings-to-growth ratio of 0.83 (where 1.0 is considered fairly valued) makes some sense. After all, the company’s stock trades at a P/E of 14.9 and its earnings are forecast to grow 18% in 2012.
But that growth rate is far slower than the 80% profit growth that Apple enjoyed in the last 12 months. If analysts are right that Apple’s growth will decelerate so swiftly in the next year, it’s not hard to imagine an even more extreme earnings growth deceleration in the future.
For the next year, I would not be surprised if Apple continued to grow much faster than 18% — but over the longer term, I have my doubts.
Peter Cohan has no financial interest in the securities mentioned.