I have written about Apple (AAPL) a few times in the past few years. The first IOI Tear Sheet, published on April 3, 2013, featured Apple. This Tear Sheet is worth taking a look at, by the way–if only to see how much IOI Tear Sheets have evolved over time. The chart we published nearly 3 years ago shows Apple’s pre-split price, but our first most-likely fair value in market capitalization terms was $589 billion. Compare that to a present market capitalization of $606 billion.

The next piece I wrote about Apple was a full valuation report I wrote as Director of Research for YCharts in October, 2014. I received more hate mail about this report than I have for any other firm in my career. Why? It could have been the lead-in to the report:

Apple is a failed computer company. If not for an emergency cash injection by Microsoft in 1997, the name Apple would now be nothing more than a nostalgic entry on a Wikipedia page in the same way that Atari, Commodore, Sinclair, Tandy, and Kaypro are.

But unlike its defunct competitors, Apple sprang out of the ashes of its personal computing defeat as a glorious phoenix. Its present incarnation is that of a purveyor of internet-connected portable entertainment devices—a product category that it has defined as its first mover and shaped as its greatest innovator.

Every success it has had in the last 10 years—every jump in revenues and profitability—has been a result of its status as a market leader in mobile entertainment, and its entire product line-up at present is comprised of products and accessories that support (or are being superseded by) its iPhone franchise.

The problem is that opportunities to define a new product categories happen only rarely. As such, Apple’s future growth depends less on its ability to innovate than on its ability to compete successfully within well-defined market constraints.

Characterizing Apple as a “failed computer company” is a sure way to raise the ire of the legions of Apple fanboys out there!

But over the years, my opinion about Apple has not changed. It’s not that I hate the company, I just think that many investors give it too much credit for being able to do no wrong. At the end of the day, it is a company that produces a line of gadgets and provides a line of services. Looking at Apple — or any company, for that matter — in this way — from a objective, scientific perspective — is I believe, the heart of being an intelligent option investor.

Every product and service has a demand environment associated with it and we can assess how strong that demand environment is and how long it is likely to last. Every product sold incurs a cost, and it is usually pretty easy to figure out a range of what profitability will be for a given company. Last, every company’s growth is influenced by the investment decisions its managers are making today; if those decisions are good, future growth will be fast and if not, it will be slow.

The other quality that defines an intelligent option investor is that they are always going back to test their valuation thesis about a certain company. This means that news stories about Apple tend to catch my eye, and usually I’ll skim them to see if I can find any evidence for or against my current best thinking on the company. That’s why a headline from TechCrunch caught my eye. It had the inflammatory title — With another Apple failure, it’s time to forget about hardware — so I had to read it.

The author makes a good point about Apple’s recent iPad Pro (or whatever) product launch:

Last week we didn’t see Apple’s thinnest products ever, but its thinnest event ever.

From a company obsessed with reductivism, we saw an event with little actual news and zero unexpected surprises — just simple linear iterations of devices we’ve seen countless time before.

And for a company that defined conventional marketing, we saw a lot of tricks like line filling and lifecycle marketing that used to only be used by lesser companies. Instead, we now have 77 SKU’s of iPad to chase ever dwindling sales.

This is the same point that I had made in my YCharts report. Namely, that Apple was able to succeed because it was an innovator in a completely new form factor (or “product category” is another way to put it), but that absolutely new form factors are not invented every day.

The TechCrunch author also makes the point that now that the boundaries of the “internet-connected portable entertainment devices” are well defined, important advances occur not because the hardware is special, but only when the way that users interact with the hardware is special.

It’s an interesting article, and for those interested in the Tech sector, one worth reading!

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