Many investing opportunities can arise from a rapidly changing environment. However, you need to ensure that you are always one-step ahead. As Apple has learned, it is not an easy thing to do.
This past week, Apple, with fanfare and brilliant showmanship launched new iPhones, a new mobile operating system and the new Apple Watch. You would think with all that went into this launch, Apple would sit back and bask in all its glory. Yet, the likelihood is, Apple is already planning its next release of iPads, new iMacs and possibly a new Apple TV.
Technology is evolving so quickly that it is impossible to enjoy the rewards you have reaped and remain stagnant for very long. This not only applies to tech companies like Apple, but to manufacturers of say motor vehicles and even shavers, products whose life span has become shortened. Another example is the music industry. The past three decades have seen the rise and fall of three media formats (records, tapes and CDs) and the industry is continuously looking to market the next best format.
If you cannot be innovative in this environment, the prospect of long-term survival is slim to none. Competitors are constantly working to find the next product that consumers are going to want. That is the nature of capitalism.
Is Apple unstoppable?
While it may seem that they are unstoppable, even Apple must be constantly on its toes if it plans to survive. One company that nobody thought could be stopped was Nokia. Nokia was eventually sold what was left of its mobile phone company to Microsoft for just US$7bn. Nokia was still making a great product, but it missed the boat when it came to making the transition from phone to personal device. It just never developed the software that was necessary to compete in the market.
On several occasions, Apple reached a point where they could have gone the way of Nokia. The difference was that they were able to reinvent themselves and revitalize the company. Chief Executive, Tim Cook, learned a lesson from Nokia’s failure. He said, ‘I think Nokia is a reminder to everyone in business that you have to keep innovating and that to not innovate is to die.’ It is important to remember that just because you recognize that something is going to be difficult does not mean the fight is going to be easier.
The question then is how do you value an earnings stream that will have to evolve every few years or die? It’s safe to say that none of the units it is selling now will even be on sale in a few years. Indeed the products of 2025 will have barely made the drawing board (or interactive white wall).
Easy, yet hard
The only solution is to try to value what has the best chance of bringing the best new products to the market. This means focusing more on the creative environment than the products or the earning streams themselves. This means putting a value on the business’ network of suppliers, design culture, its complex system of apps, routes to market and the perception of the company held by consumers.
If you are thinking that valuing these factors is hard, then you are correct. It is. In 2000 Warren Buffett said that he had ‘embraced the 21st century by entering such cutting-edge industries and brick, carpet, insulation and paint’. Even these types of industries are beginning to change more rapidly.
The positive about this all is that investing is only as easy as it is hard. Imagine that companies were easy to value. They would be valued perfectly every time and investors would never make a profit. On the other hand, a complicated and rapidly evolving environment is perfect for creating opportunities for investors. The key is remaining a step ahead of everyone else. That is what Apple has been doing and needs to continue to do in order to survive. It is as easy as it is hard.