Success of Apple iPod, iPhone Trivial Compared to Aus Resource Boom

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Something annoyed us about yesterday’s announcement from Apple (NASDAQ: AAPL) that fourth quarter earnings were up 67%. The company shipped 1.1 million of those stupid new iPhones in the quarter. The share price was up US$11.80, nearly eight percent on the day.

At first we couldn’t pin down what annoyed us about the story. But in talking it over this morning with our colleagues at the Old Hat Factory, it became clear. How trivial. How frivolous. How utterly indicative of the state of the American economy that what happens to Apple is a barometer for the entire American economy.

Don’t get us wrong. We like the iPod. Being a good American, we have two of them. But Apple’s success and importance in the American psyche tell us two things about what’s happening in the States. First the de- industrialisation of America continues. Apple booms while Ford and GM rust. Second, American growth is based on consumption, not production.

Not that we have anything against portable music. It is nice, although we find the iPhone an annoying plaything for technology geeks. But Apple’s success seems so trivial and unimportant in the context of the major economic stories on the planet, especially here in Australia.

“A new wave of industrial development in Queensland gets under way this month with the start of work at Rio Tinto’s (ASX:RIO) AU$2 billion Yarwun alumina refinery expansion,” reports Robert Macdonald in today’s Courier Mail. “Nearly $15 billion worth of new Queensland projects-from mineral processing facilities to biofuel plants-are at various stages of planning. All are aiming to begin construction within the next two to three years.”

Where are all Queensland’s iPod factories?

We don’t mean to sound like a neo-Luddite. And after all, it’s demonstrably true that the profit margins on intellectual-property heavy products like the iPod are bigger than on industrial commodities. You outsource the assembly and manufacture to low-wage economies, and sell the finished product at a massive mark up to cashed up (or credit- carded up) consumers in Western countries.

Of course in a developed economy you will have a mix of companies. Some will be low-margin producers of raw materials. Some will be service companies. Some will be retailers. And some will be in high-margin technology businesses, or businesses where R&D and new intellectual property represent the most value on the balance sheet.

It would be simplistic to narrow it down to a contest between tangible assets and intangible assets. After all, the growth rates of stocks that are heavy on IP (pharmaceutical companies, for example) are high, but the chance for failure is huge too. High return, even higher risk.

On the other hand, companies that specialise in the production of tangible assets are easier to value, but there is typically less growth. Only higher prices of commodity prices or some squeeze in production capacity creates a situation where a resource firm would be valued like a growth stock.

It just so happens Australia has a lot of tangible asset firms at precisely the time the world needs a lot of tangible assets. There are also a bevy of construction, infrastructure, and mining service firms sprouting up. They’re growing fast, but they’re also burdened by high capital costs. That makes using traditional methods of valuing them even more important.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. The US technology companies will continue to do well in the long run.

    The sector will always faces risks. Retail product shelf lives are short and sales sometimes fall below expectations.

    Profits from this form of intellectual property are as real as any other profits. They are anything but trivial but they can come and go in an electronic flash.

    Coffee Addict
    October 24, 2007
    Reply
  2. Coffee Addict,

    I think Dan’s point is that Apple produces a lot of product that is non vital. The iPhone is a luxury phone. The iPod is not something you need either.

    Further, most people who use Macs do not use them for real work (software development, or even graphic arts). Yes, most graphic art work is now done on a PC. Most people get their job done on a PC.

    The point being that Apple is a fluff company that produces stuff that we really do not need, and they target trendy yuppies who think they are sophisticated. Further, most people do not use Apple products to create wealth.

    To be blunt, the fact that people look to Apple as some sort of symbol of the US economy really shows us in another dimension what a bunch of conumer whores Americans are.

    And of course, most people buying Apple product are doing so on credit.

    I would much rather own a ralroad stock than Apple.

    Reply
  3. Dan, I think you’re getting a bit carried away here – to take one other example, is the Boeing 787 serious enough for you ? I don’t see too many of them being produced in Australia – as usual, digging stuff out of the ground for others to use is our greatest talent (as well as real estate speculation).

    Keep it real
    October 25, 2007
    Reply

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