Apple Without Steve Jobs

In a recent interview with Charlie Rose, Larry Ellison talked about the long-term prospects of Apple without Steve Jobs.


I agree with Ellison and based on his writings (see below), I guess  Warren Buffett would agree with him too.

My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row.”

“If a business requires a superstar to produce great results, the business itself cannot be deemed great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.”

“As investors, we will be skeptical of businessmen trying to shepherd companies through brutally competitive industries. Instead, we will examine the entire investment landscape looking for businesses with solid moats. If some industries are more structurally attractive than others, we can choose to focus on only them because the odds of finding businesses with solid moats are higher. We can even afford to write off entire parts of the market if we don’t think they have attractive competitive characteristics.


10 thoughts on “Apple Without Steve Jobs”

    1. Let’s not draw specific conclusions from Mr. Ellison’s fingers (about Apple) but rather focus on the general principle which is that, averaged out, superstar managers operating in deeply competitive, and rapidly changing and unpredictable industries can add value only during their remaining lifetime, while solid businesses with strong competitive advantages can and often continue to add value well after their CEOs retire, leave, or die…

      1. Sir,
        We have seen businesses run by very able business leaders outperform their peers by huge margin. Few examples are Mahindra group companies, HDFC group companies etc. Strictly speaking these are not very beautiful businesses. What are your views on whether one should invest in such businesses just for sheer out-performance till the time their is management continuity.

  1. they r already taking decisions which Steve wud have never approved. (to be honest i feel a touch sorry for anybody who fills steve jobs place, rohan gavaskar, abhishek bachhan learnt this the hard way!! i hope sachin tendulkar’s son learns and chooses a different profession.) Warren’s son chose his heart’s calling and is doing well. he wud have been ridiculed if he had been an investor.Being compared to the best in the business is like starting the game of chess minus the queen.

    Choose a business an idiot can run, I am afraid Apple is the exact opposite. It is where it is due to one man’s genius and these businesses with constant technological advancements are not boring and dull enough for a value investor.

  2. I’m inclined to a stand between the 2 extremely divergent views of Ellison and Icahn (who thinks the Apple stock is extremely undervalued). Apple still has a horde of loyalists. Their app store still offers the best apps on the planet (I’m a regular user of both the Play Store and the App store and can therefore say with some conviction). An Iphone 5 still invites the envious glances the likes of which a Galaxy 4 can just dream for (this coming from a Galaxy user). Agreed, the innovation sans Jobs has taken a beating. Still I wouldn’t right off Apple yet. Let’s see what Sep 10 has in store.

    1. The current market cap of Apple is $444 billion. People who buy that stock do it to make money, right? How much money do they expect to make? Let’s assume 10% p.a. post tax. That sounds reasonable, isn’t it? Assuming a tax rate of 30%, the pre-tax required return becomes 14.3% p.a. To make that over a decade, the market cap of Apple must appreciate by 14.3% p.a. for ten years. So, to provide a pre-tax return of 14.3% p.a. over 10 years, Apple’s market cap should become $1.7 trillion by August 2023. Assuming the stock sells for 10 times earnings in 2023, the company will need to deliver $170 billion in annual post tax earnings in 10 years. Applying the same tax/PBT ratio of 25% at present, this means the company will need to deliver pre-tax earnings of $227 billion and then further applying the same PBT/Revenue ratio of 35%, Apple will need to deliver revenues of $648 billion a year, 10 years from now. Revenues in 2012 were a mere $156 billion. I think it would be somewhat difficult for Apple to do this. 🙂

      But is it possible?

      Sure. But I won’t count on it.

      1. Invert ! Always Invert. 🙂
        Sir, But should we not apply same theory for Nestle’s and Unilevers of the world at current val ?

        1. Indeed, we should. Consider the following figures (based on current stock prices)

          Nestle’s Market Cap: $216 billion
          Nestle India’s Market Cap: $8 billion

          Over the next few decades, compounding $8 billion will be far easier than compounding $216 billion. Similar conclusions can be drawn from the following figures relating to Unilever.

          Unilever’s Market Cap::$120 billion
          Hindustan Unilever’s Market Cap: $21 billion

          When it comes to compounding capital, the two challenges faced by the compounder are: (1) Size; and (2) Embedded market expectations in current market valuation.

          While Apple may be selling at a relatively low P/E multiple (Current P/E of 12.5), it’s staggering size (current market cap of $456 billion) will make it very tough for the company to deliver exceptional returns in the future. It would be, to borrow Carol Loomis’ words (in a different context) “like pushing a boulder up an alp”

  3. I disagree with your assessment of the situation at Apple, the company. Apple, the stock is probably overvalued.

    Ellison is trying to predict a future based on analogy without regards to the fact the conditions are different. He is sitting there with Charlie Rose telling stories which viewers of Charlie Rose like to hear. What relevance is the question of Steve Jobs 2 years after he has passed away.

    Does anyone really believe that Jobs didn’t pass on his learning and trained his management team? Jobs was kicked out in 80s by a bunch of people he didn’t approve of while the current team was a smooth transition.

    Here is Jobs from a 95 –

    “… a wonderful thing that a lot of people made called the Macintosh, and they got very greedy and instead of following …the original vision..and get this out there to as many people as possible….They made outlandish profits for 4 years.. What they should have been doing is making rational profits and going for marketshare which is what we had always tried to do… [Apple] might have been Microsoft..”

    If Jobs knew that lesson in 95, he has probably taught that to the current management team.

    As a result, when Apple today sees Android being a competitor, they are going to release a low-cost version of iPhone at reasonable profit margins and get marketshare.

    They already did this once for the richer markets by keeping the current version priced at $650 (iPhone 5), older version at $550 (iPhone 4S) and $450 (iPhone 4). As they see competition moving at lower price points, they are scheduled to release another SKU at $250-300 range, maybe even lower.

    I believe Apple is following a nuanced strategy of meeting price expectations and not leaving any money on the table. They are not going to crater as Ellison hints.

    On the Buffett quote, I again have to disagree and say Apple has a very very deep moat in the smartphone/tablet business. Technology industry is definitely rapidly changing and uncertain one. However, companies can and do built deep moats lasting decades (see Microsoft, Google and Oracle).

    None of this means that Apple stock is priced right.

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