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The Apple Brand

Vitaliy Katsenelson's picture




 

I want to make a quick comment about the Apple brand. Apple’s research and development expense was up 27% last quarter. Annualized, it is running at $5.7 billion. Let me put that in the right context. In 2007, when Apple came out with its first iPhone, the company’s R&D expense was at $782 million. Other than PCs, most of the R&D for which is outsourced to component providers (Intel, Western Digital, Micron etc.), Apple makes only one product, iPhones of different sizes. Increasing iPhone size from 4 inches to 4.7 inches should not consume billions of dollars in R&D, even for perfectionists like Apple. Thus the probability that Apple will introduce a brand new product category in the near future is incredibly high.

Unlike Samsung, which will introduce dozens of products a year and hope that a few of them stick, Apple is far more careful with product releases. Samsung’s strategy is fine – unless you are one of the unlucky people who wasted a few hundred dollars on Samsung’s smart watch, which looked like something out of Seiko’s 1980 catalog. The strength of Apple’s unbelievable brand (about which its customers tend to be fanatical) is driven by the fact that it doesn’t introduce unfinished products.

Samsung just introduced new phone, the S5 – it was the non-event of the year. When Apple introduces a new product, no other news exists that day. The Fed could announce the sudden termination of QE, the European Union could announce it was breaking up, and Russia might invade several more countries – and all those headlines would be less significant and lost in the news vortex on the day when Apple introduced a new… I don’t know, an iPhone in a different color.

That is an incredible brand. Think about how much money Apple saves on marketing. This is why my kids have plastered Apple stickers (the ones that come with iPads) all over my house, including on my front door.

If you believe your friends, enemies, relatives or random strangers accumulated a seven figure portfolio and will benefit from our investment services, call Theresa at (303) 796-8333 and we’ll be happy to mail them a signed copy of The Little Book of Sideways Markets.

 

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.

Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).

 

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Sat, 05/03/2014 - 20:12 | 4724783 Jadr
Jadr's picture

I know there is a lot of Apple hate on these forums but as someone who has owned a IPhone 4 and now own a Iphone 5s I am really happy with the quality of the products they put out.  I think their product cycle is pretty crazy and I always skip generations but I think overall the products they put out are pretty good quality despite the premium cost built in.  I would never buy an apple computer as I think they are priced far beyond what they are worth but I still think their computer products are of good quality and things like the apple air are pretty interesting pieces of technology.  I agree that there are a lot of questions regarding whether they will be able to continually innovate into new product markets which is the key to their success with Steve Jobs no longer at the helm but that is to be seen in the coming years.  Apple can not compete without introducing game changing products which create markets that didn't exist prior to their product and it has been some time since they have introduced a truly game changing product but I don't think it is completely unlikely for them to find another innovative product to do so.  However, I feel like they only have a couple years to create such a product or they will begin the same slide they experienced when the company began their slide in the late 80's/early 90's.  Without a game changing product the company will continue to lose out to competitors who are able to create products which are further enough ahead of their competitors who are able to produce products of nearly the same quality at much lower prices.  The ball is in apple's court to create a new innovative product which creates a new market for goods than what is currently out there.  The more the clock ticks the less likely they are to create such a product which is necessary to maintain its dominance.

Thu, 05/01/2014 - 11:54 | 4716256 Father Lucifer
Father Lucifer's picture

Remember all the great flops when Jobs wasn't with the company. Well guess what, Jobs left again but this time he ain't coming back. Apple has so many billions to wash overseas to try and get it ito the US I'm sure that R&D is now a washing machine.

Thu, 05/01/2014 - 05:09 | 4715163 Fuh Querada
Fuh Querada's picture

My brother's sister's cousin has accumulated a 7 figure portfolio in Japanese Yen.

Wed, 04/30/2014 - 23:30 | 4714854 williambanzai7
williambanzai7's picture

1. You are very brave to post this here.

2. I was not surprised the Apple killed it with phone sales in China based upon observations of the Apple Stores in HK.

3. I was surprised that the China sales were driven by the 4s and not the 5, which makes a big difference in terms of product cycle length and margins.

4. My iPhone 1 (2007) still works although I can no longer get new Apps on it. So does my first iPod and MacBook Pro (both circa 2004). 

I don't give a rat's ass about the stock price.

Yesterday I walked past a local electronics chain and they had an 80 inch Samsung 3D TV running. Totally amazing and $266,000 HKD. 

Wed, 04/30/2014 - 20:36 | 4714366 Redneck Hippy
Redneck Hippy's picture

A non-event maybe, but the Galaxy S5 is a really nice phone. And a lot cheaper than the next Iphone.  

Wed, 04/30/2014 - 17:12 | 4713772 Jack Sheet
Jack Sheet's picture

You have to be joking.....

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