“The IBM case was the Antitrust Division’s Vietnam.” – Robert Bork
“Apple is worth nearly as much as Tesla, Meta, Berkshire Hathaway, United Health, and Visa – the sixth through 10th most valuable American companies – combined.” –Forbes; June 30, 2023
On January 17, 1969, the last day of the Johnson Administration, the U.S. Department of Justice filed an antitrust suit against IBM. The suit was filed under the Sherman Act and claimed that IBM was trying to monopolize the market for “general-purpose digital computers.” There followed six years of discovery and 700 trial days over seven years after that. The latter involved 87 live witnesses, 860 deposition witnesses, 104,400 trial transcript pages, and 17,000 exhibits. On the government side, the case spanned the terms of five Presidents, nine Attorneys-General, and seven Antitrust Division chiefs. On the defense side, the lead firm was Cravath, Swain & Moore, some of whose attorneys worked on nothing else for 13 years. And, after those 13 years, the U.S. Department of Justice abruptly declared the case to be “without merit” and dropped the charges.
Now comes Apple, the 1976 garage creation that became an American innovator nonpareil. On March 21, 2024 the U.S. Department of Justice once again decided to go down the Big Tech/Sherman Act rabbit hole and filed suit alleging that Apple has a phone monopoly that “harms consumers, developers, and rival companies.” Maybe this foray against yet another paragon of corporate achievement will become a multi-year IBM 2.0, maybe not; but what we do know is that Apple, like IBM before it, faces years of time-consuming, unproductive legal maneuvering. And this at a time when the company is at “the crossroads of technological change,” as the WSJ’s Tim Higgins put it. More specifically, AI is changing the landscape, and several of Apple’s equally well-heeled competitors have built up sizable leads in the race to integrate and innovate. At the same time, a couple of large Apple bets on the next big non-AI thing, e.g., driverless EVs, have been abandoned. Clearly, the search will be more muted if Tim Cook and others at Apple have to spend valuable time in the weeds of antitrust litigation.
Speaking of which, what about Big Tech antitrust in general? Going back to the IBM case, Alec Stapp in “The Ghosts of Antitrust Past: Part 2” estimated that, by the time the trial started in the mid-70s, more than half of the practices cited as Sherman Act violations were related to IBM products that did not exist when the suit was filed in 1969. Then, as now, the world of technology was changing fast. In the words of Luke Froeb, a former government economist and current professor at Vanderbilt, “With IBM, the Justice Department was trying to hit a moving target, but the target had moved so much there was no point in shooting anymore — so they dropped the case.” Can anyone deny that Apple among others is much more of a moving target in 2024 as IBM was in that long-ago time?
The March 21 stock market focus, however, was on the filing itself, not on the merits of the case — Apple, the stock, fell 4% or so on that day. But the spectre of IBM 2.0 is just one of several clouds on the Apple horizon. For simplicity sake, let’s lump them into the macro and the micro.
Macro. Leaving aside the company’s current pluses and minuses, of which there are many under both headings, history teaches that, in general, sustaining greatness is hard. Apple clearly was a superstar of the 10-year period ending in 2023, i.e., earnings grew at 16% per year and the stock price at 27% per year, however, one period’s superstar rarely is a superstar in the next. Success fosters competition; key people want to do their own thing and leave; the necessary sales increases become ever-larger; etc, etc. “Never” is not the right word. “Rarely” is the right word, and that means we’re talking probabilities. Let’s just say, though, that sustaining true greatness in Corporate America is hard.
Micro. Investors may be scratching their heads a bit in the wake of the March 21 filing, but Apple, the company, remains a beloved symbol of consumer-friendly innovation with very few enemies. In other words, near-universal acclaim and a stock valuation to go along with that acclaim. And, as we constantly preach, valuation matters. Cisco was probably the stock market darling of the late-90s. The company’s products were considered vital to the Internet, and the stock, selling at over 100X earnings, did not have an enemy in the world. And, it turns out, those analysts gauging the company’s fundamentals weren’t entirely wrong. In the 2000s decade, the company’s earnings did grow at a solid 6% or so (S&P 500 earnings declined at a rate of 2% per year), however, the stock went down at a rate of 8% per year simply because Cisco’s starting valuation had been so high. Granted, Apple’s valuation is nowhere near the valuation accorded that earlier can’t-miss innovator, but Apple’s valuation (26X earnings) leaves little margin for error. Of course, “the next big thing” may be just around the corner. The stock market and the company’s many fans breathlessly await that next big thing.
So, where does that leave us?
First, we as investors and citizens once again are witnessing an ill-advised foray into the Big Tech antitrust rabbit hole where little is what it seems to be and a great deal is changing rapidly. No one wants an IBM 2.0, but nobody envisioned a 13-year IBM 1.0 in 1969. However long and involved, this foray is a serious distraction coming at a somewhat complicated time for Apple.
Second, antitrust rabbit hole aside, for a number of reasons the odds of Apple, the stock, remaining on the trajectory of recent years are slim. Tim Cook is indeed a worthy successor to Steve Jobs and, in fact, has made his own mark on the company; but Apple probably has entered its middle years. If true, that will have an obvious impact on the company’s growth rate and the stock’s P/E ratio in the years ahead. That does not mean we’re looking at serious problems. What it does mean is that investors considering Apple should realize we’re now talking about a different set of dynamics.
Full disclosure, we have held Apple shares on behalf of our clients and continue to hold shares in some accounts for tax or other reasons. In each case, we are comfortable holding on, but the portfolio weighting in almost all cases is below what it once was.