Tuesday, February 14, 2012

The upper limits

Yesterday after a very nice three year run, Apple's stock price hit $500 a share.

If you own it, you might want to think about selling.

Not that Apple doesn't make great products. Not that Apple won't continue to make great products. Not that Apple won't continue to be successful. But Apple's upside does have it's limits.

As the premium provider in all the categories it competes, Apple can only expand so far and maintain the price premiums they charge for their MacBooks, iPhones, iPads and iPods.

Apple is like BMW, Bang and Olufson, and Ritz Carleton. There's a limit to the market share premium brands can command. All these brands must innovate to maintain margin rather than grow share.

The share leaders always exist in the low to mid range of the market – Toyota, Chevrolet, Sony, Holiday Inn, HP, HTC, etc. – brands that compete on price and struggle with margin. Apple can't and shouldn't play that game.

Right now Apple owns about 10% of the PC market, 27% of the smartphone market and 58% of the tablet market. In all except the PC category, their share is declining due to the growth of lower priced competitors. I fully expect that when the latter two categories reach maturity, Apple will own a profitable 10% of each.

That means their only real opportunity for growth is to create new categories like they did with iPod/iTunes and iPad/App Store. My fear is, without Steve Jobs at the helm, their chances of doing that are greatly diminished.

So had I been smart enough to buy Apple stock instead of all those MacBooks, iPods and an iPad, I'd be hedging my bet right about now.

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