Why I Am Not an Apple Shareholder

By Markets Fool.com

I am not an Apple shareholder. I have never have been, and I probably never will be. This puts me at odds with many of the other writers here, notably Evan Niu and Daniel Sparks, as well as some of the Fool's newsletters.

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To their credit: With Apple currently trading near all-time highs, and paying a steady dividend, it's been a great investment for virtually everyone that has bought shares. With the exception of a few downturns, Apple bears have been dead wrong.

Still, I would not touch the company. Nothing against their products -- they make the best in class. But rather, the central philosophy underscoring the business, its focus on consumers, and its current product mix gives it -- at least in my opinion -- an uncertain future.

Apple's core philosophy
Apple's central philosophy, established by Steve Jobs, and reiterated by Tim Cook, has been a relentless focus on creating a few great products: Not the most products, but the best products. More than that, however, it's been a commitment to Apple software running on Apple hardware.

This is central to everything Apple does: You'll never see Lenovo selling a Mac OS-powered laptop for example, or an Asus tablet running iOS. Apple Pay is exclusive to Apple-made devices, as is iMessage. iTunes for Windows is a significant exception, but it is the exception, not the rule, and its release was a source of controversy within Apple (according to Max Chafkin, Steve Jobs was strongly opposed to the idea).

The conflict between Apple's closed ecosystem model and other, open platforms has been raging between the company and its rivals for decades. Microsoft won the first battle to such a great extent that it almost put Apple out of business, establishing that the traditional PC market was better served with an operating system developed independently from the machines that ran it.

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Google has won the second battle in a similar fashion, as Android-powered handsets represent more than 80% of the smartphones sold globally (a trend that seems likely to repeat itself in tablets).

Android's growing dominance, however, has not managed to cripple Apple. To the contrary, the steady growth in Android's market share has coincided with Apple's steadily expanding profits.

Christensen's warning
Still, I think it's ultimately short-sighted to declare that market share doesn't matter, and that Apple can continue to generate billions no matter how dominant Android becomes. When questioned, Apple's executives consistently downplay its importance, but Steve Jobs himself warned about the dangers of dwindling market share: Below a certain threshold, developers (and eventually users) lose interest.

Since almost the beginning, the iPhone's primary appeal has been its ability to run more and better third party software than its competition (compared to other, even more locked down smartphones, the introduction of Apple's App store was revolutionary). That's still true today: Developers continue to favor iOS devices over competing handsets. But the situation could shift, and if Android were to become the preferred platform, much of the iPhone's appeal would vanish.

That transition could happen slowly, mostly in particular geographies where Android is more dominant. Last month, a Facebook executive told Business Insider that it was seeing a growing number of European developers releasing their applications for Android before bringing them to iOS.

Famed Harvard professor Clay Christensen isn't a fan of Apple's business model (ironically, Jobs was a big fan of Christensen's book The Innovator's Dilemma), believing that open platforms will always, ultimately trump closed systems in the long-run. In a recent interview with Henry Blodget, Christensen warned that the iPhone remains ripe for disruption:

[The] basis of [the] concern for Apple is another theory that we have ... in the early years of an industry's life, almost always the dominant products are proprietary and interdependent in their architecture ... In the smartphone world, the first one was Nokia excruciatingly interdependent architecture then RIM, which was an even more excruciatingly interdependent architecture, and then Apple. And Apple was kind of halfway. Inside of the device, it's proprietary, but it initiated the modularity in that you could develop apps and stick them in. But then ... Google gave us Android ...

If Apple keeps its strategy of very high prices, their share of that market will diminish. And so ultimately they'll make a lot of profit on 100 units. And Samsung, if they win, they will be making all of the units in the industry but no profit. Either way you're screwed, but that's the theory behind why I said Apple won't succeed, because in the end modularity always wins...

You can never predict where the technology will come from, but you can predict with perfect certainty that if Apple is having that extraordinary experience, the people with modularity are striving. You can predict that they are motivated to figure out how to emulate what they are offering, but with modularity ... [Apple's] options are hopefully they can come up with another product category or something that is proprietary because they really are good at developing products that are proprietary. Most companies have that insight into closed operating systems once, they hit the ceiling, and then they crash.

What is Apple?
Some Apple bulls side with Christensen, admitting that, sooner or later the iPhone's almost magical profit margins will be eroded or market share will collapse to the point of irrelevancy -- but at that point, it won't matter, because Apple will be on to the next big thing.

It's certainly happened before: Long before its competitors could muscle it out of the mp3 market, Apple pre-emptively disrupted iPod with iPhone. But iPhone appears to be a once-in-a-generation sort of product, one who's runaway success will be exceedingly difficult -- if not outright impossible -- to repeat. Apple's next product category -- Apple Watch -- is, tellingly, an iPhone accessory rather than a potential replacement.

When you buy a share of Apple, you're really buying one thing: the iPhone business. Sure, there's Mac, and Apple TV, and iPad and some iPod sales, but at this point, iPhone is really the only thing that matters.

In fiscal year 2014, iPhone sales accounted for more than 55% of Apple's revenue, far more than any other category (iPad came in at a distant second with just over 16%). Apple's fourth-largest category (iTunes, Software and Services) represented about 10% of Apple's revenue, but is somewhat a derivative of iPhone sales, as app and music sales are driven largely by the use of iPhones. By some analyst estimates, iPhone generates about two-thirds of Apple's profits.

It's likely to get worse before it gets better. In recent quarters, iPad has been suffering steadily declining unit sales and while the recently released iPad Air 2 is both lighter and faster than its predecessors, it doesn't offer anything that would meaningfully change that. Meanwhile, the iPhone 6 and iPhone 6 Plus has driven the iPhone business to new highs -- Apple is selling as much as it can make. If these trends continue, it would not be surprising if iPhone generates 60-70% of Apple's revenue in the next few quarters.

The history of phone manufacturers is frightening
That makes Apple, in essence, a phone company. By far the largest, and most successful phone company in history, but a phone company nonetheless. Unfortunately, phone companies have a long history of disappointing investors and, often times, end in ruin.

15 years ago, Nokia dominated the market for phones, and investors were all too eager to buy in. The stock rose to record highs in the dot.com boom, before beginning a slow, and painful decline that would see investors lose more than 85% of their capital. The same was largely true for Motorola (its Razr is still among the best-selling phonesof all time) and BlackBerry, and it may also be true for Samsung.

Apple is very different from all these companies, but these companies were equally different from eachother. Still, they all generated massive profits before eventually succumbing to a newer rival with a more appealing handset.

Maybe this time it's different
Of course, all of this could be unfounded. Perhaps Apple will, despite rising competition, continue to sell millions of iPhones year after year at fantastic margins. Perhaps Android's market share will never matter, or a new phone will never come along to displace the iPhone. Perhaps Apple will succeed in creating something else that's just as big as the iPhone long before that happens.

But to me, it's not worth the risk. I hope Apple shareholders continue to compound their money for many years to come. I'll be watching from the sidelines.

The article Why I Am Not an Apple Shareholder originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.