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Calling the End of the Apple Bubble
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Apple‘s stock price is down nearly 10 percent from its September all-time high. Does this presage a fundamental change of direction or is the stock merely taking a breather before soaring to new highs? It is a big question with countless billions riding on the answer.

I have been around long enough to know that trying to call a stock price’s top is a fool’s errand. But I have also been around long enough — and have spent enough time studying Apple’s crucial and much underestimated East Asian suppliers — to sense that the stock has for more than half a year now been looking toppy. Although I don’t rule out AAPL exceeding its September high, I am prepared to bet that three years from now, it will on balance have tanked. It is not a popular view and most analysts remain strongly bullish, with an average target price of 780, an increase of more than 20 percent on today’s 641.

The recent share action looks like a case of the old adage, “Up like a rocket, down like a stick.” The U.S. technology sector is full of stocks that once seemed to defy the law of gravity but eventually fell to earth. Apple’s return on equity last year was more than 35 percent. All history suggests that such a return attracts potentially lethal competition. Certainly with the exception of Xerox in its patent-protected heyday in the 1960s, no major corporation has ever sustained such a return for a more than a few years at best. More generally stock markets are perennially prone to bubbles. I particularly recall the Tokyo stock bubble of the late 1980s — and the lonely experience I had for a while when I predicted that disaster lay just around the corner. With a market capitalization of more than $600 billion, Apple will have to produce an unending series of miracles to keep all those stock market bubbleheads happy.

Let’s be clear: Apple’s products are superb. I speak as a satisfied customer.

But Apple does not exist in a vacuum. In fact much of the magic of Apple’s products is not proprietary. Rather it has been driven by the miniaturization prowess of countless partner companies in Japan, Korea, Taiwan, and Singapore. In the circumstances it is hardly surprising that Samsung has been so successful in reverse engineering the Apple iPhone. More trouble lies ahead as well-funded, well-managed U.S. companies like Google muscle in, and expertly tap the East Asians’ miniaturization talents. Then there is the passing of Steve Jobs.

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Even more ominously, Apple is facing a patent auto-da-fe. It was a foregone conclusion that a Korean court would favor Samsung in one recent patent suit. Of considerably more significance is that a Tokyo court also sided with Samsung. This fact has gone virtually unreported in the West and has been swept under the carpet by the bulls. But for anyone who knows Japan — I lived there for 27 years — it is an ominous development. The truth is that Japanese courts are far from independent. Their decisions on cases like this reflect a concern for the Japanese national interest. (Anyone who doubts the degree to which Japanese courts are establishment surrogates should recall Japan’s so-called peace constitution: although on paper in the late 1940s Japan renounced forever the right to maintain armed forces, for most of the post-World War II era the scale of its defense spending has been second only to that of the United States. Supposedly the defense forces have been legitimated by some revisionist interpretation of the constitution but, as the great French Japanologist Robert Guillain long ago authoritatively pointed out, such an interpretation would be laughed out of any serious court. In reality the Japanese courts have kowtowed to the Tokyo establishment by consistently sidestepping their responsibility to rule on the issue.)

A reasonable conclusion is that the Japanese establishment has decided to cut Apple down to size. Does this matter? Put it like this, when Japan went after General Motors, the latter seemed to hold all the cards. That soon changed. Similarly, when Japan targeted IBM, that company’s luck soon changed. Whereas IBM’s market capitalization was once by far the world’s largest, it was recently little more than one-third of Apple’s. Of more significance from a Japanese point of view, IBM’s revenues now trail well behind those of its erstwhile puny Japanese rival Hitachi.

When American patents are challenged by East Asian corporations, the Americans generally cave and cross-license on unfavorable terms. Those who bet that Apple can buck the trend know little of the strength of the forces on the other side.

Eamonn Fingleton is the author of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Boston: Houghton Mifflin, 1999).

(Republished from Forbes by permission of author or representative)
 
• Category: Economics • Tags: Apple 
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