Is Apple Antifragile? – Seeking Alpha

Rethink Technology business briefs for March 10, 2017.

Is Apple Antifragile?

Source: Business Insider

UBS analyst Steven Milunovich issued a note to investors yesterday in which he is reported to have called Apple (NASDAQ:AAPL) an “antifragile monopoly.” Milunovich’s case for monopoly is a little weak. He points to Apple’s high ASPs for iPhone as indicative of monopolistic pricing power, and contrasts that with Google’s (NASDAQ:GOOG) (NASDAQ:GOOGL) decline in cost per click.

Source: Business Insider

The more interesting part of Milunovich’s description is the concept of antifragility, originated by Nassim Taleb and described in his book Antifragile. Taleb argues that there is no word for the exact opposite of fragility, where systems, people or organizations decline or fail as a consequence of some form of stress. Thus he invented the term antifragility to describe the opposite effect, where stress results in growth or improvement.

Strength training represents an example of antifragility, in which a stress such as lifting weights produces a response in the body of growing muscle tissue. As a consequence, the muscles involved become stronger.

At the cellular level, the stress produces damage to the muscle tissue, but it’s this very damage that stimulates the body to heal the muscle and produce growth. So it seems to me that the capacity for organic growth is very fundamental to antifragility, so much so that I don’t see how antifragility can exist without it.

Growth in the human body is regulated by human growth hormone (hGH). When we’re young and still growing, the body produces the most hGH. As we age, the body produces less, and as a consequence, we heal more slowly and benefit less from exercise. In a very real sense, as we age, we become more fragile, and we have to learn how to manage physical stress in order to avoid injury or illness.

As in the body, the capacity for organic growth in an organization seems essential for antifragility. Organic growth comes from R&D, and the funding for R&D is analogous to hGH. The R&D must be a directed response to the stress that the company is under, just as the body directs the healing process to specific injured areas.

These concepts applied to Apple indicate that it is behaving rather like a person reaching adulthood. There is a slowing of growth. There is a focus on managing stress rather than in using it to achieve growth. But the picture is mixed. Apple has greatly increased R&D spending, the vital “growth hormone” without which organic growth is impossible. How well the R&D is being directed is open to question.

The outward indications are that Apple is managing its R&D effectively. R&D is being converted into product features that consumers find appealing and new products such as AirPods and Apple Watch Series 2.

Just as an adult can still be antifragile despite no longer growing physically, Apple can be as well. But I would prefer, and I expect, to see y/y revenue growth from Apple this year. Growth is the best assurance of antifragility.

This Tech Brief is a summary of a longer article posted exclusively for Rethink Technology subscribers.

Rethink Technology recommends Apple as a buy.

Who Will Buy Toshiba’s Memory Unit?

As flash memory data storage becomes more important, it would seem that the business of making flash memory chips would be something to hold on to. Toshiba (OTCPK:TOSYY) was the inventor of flash memory, and its flash business is considered a crown jewel worth an estimated $20 billion.

Unfortunately for Toshiba, holding on to it hasn’t been an option since it disclosed that it would take a $6.2 billion write-down as a result of losses at its Westinghouse unit that designs and builds nuclear power plants. Toshiba has said that it wants to complete the sale of the memory unit early in its new fiscal year, which begins April 1. The Westinghouse unit is now considering whether to file for Chapter 11.

Toshiba delayed the release of its fiscal third-quarter earnings from February 14 and indicated a willingness to sell a majority stake in the memory business at that time, according to the Wall Street Journal.

Apple contract manufacturer Foxconn (OTC:FXCOF) had expressed interest in the Toshiba memory business, but the Japanese government may throw up a roadblock for non-US buyers due to national security concerns.

Potential US suitors for the memory business include Western Digital (NYSE:WDC), Micron Technology (NASDAQ:MU), Intel (NASDAQ:INTC), and Apple. Reuters quotes a source as saying:

“The United States is the only feasible partner from Japan’s national security standpoint.”

There may be other considerations besides national security. The possible bankruptcy of Westinghouse, which has two US nuclear power plants suffering cost overruns under construction, could create difficulties for Toshiba with the US government. Reuters quotes a Toshiba executive:

“It’s obvious U.S. players are more suitable bidders. We’ll probably need to fight over Westinghouse (with the U.S.), so we could cooperate over chips in exchange.”

The purchase of the Toshiba chip business would put some of Apple’s overseas cash to use, but it would be a departure for the company which has largely eschewed owning its own manufacturing facilities. Also Toshiba has tough competition from other manufacturers such as Samsung (OTC:SSNLF), SK Hynix (OTC:HXSCF), Micron and soon Intel. This might be an opportune time to sell, but not necessarily an opportune time to buy the memory business.

Manufacturing semiconductors is not a core competence of Apple, so I consider a semiconductor house such as Intel to be more likely to be interested. The problem right now is that Apple is the only US company that could easily meet Toshiba’s assumed price.

There is no such thing as absolute privacy in America”

In case you were wondering where the US government stands on the issue, now you know. FBI Director James Comey spoke the immortal words above at a cyber security conference this week at Boston College.

Comey tried to soften the blow, however. He said:

“All of us have a reasonable expectation of privacy in our homes, in our cars, and in our devices. But it also means with good reason, in court, government through law enforcement can invade our private spaces. Even our memories aren’t private. Any of us can be compelled to say what we saw. … In appropriate circumstances, a judge can compel any of us to testify in court on those private communications…

There is no such thing as absolute privacy in America… there is no place in America outside of judicial reach.”

It’s an interesting concept isn’t it? We have no absolute privacy, but we apparently have some form of semi-privacy. Kind of like a semi-private room.

I don’t have a problem with court authorized warrants as a necessary compromise of the right of privacy. The problem I have is that so much of the government’s surveillance is performed in secret.

For instance, the Foreign Intelligence Surveillance Court is the key judicial body that authorizes much of the government’s domestic spying. Originally intended to keep an eye on foreigners who might pose a threat to the US, the Court’s powers have broadened into widespread and indiscriminate surveillance.

This was made clear in a leak by Edward Snowden of a top-secret warrant issued in 2013 ordering Verizon (NYSE:VZ) to furnish telephone “metadata” for all calls in its system. But in case you were wondering, the courts have already decided that users of cell phones have no “reasonable expectation” of privacy.

There’s that phrase again: “reasonable expectation.” What it comes down to is that we have a “reasonable expectation” of privacy when it’s convenient for the government to allow it. Or perhaps too inconvenient for the government to forbid it.

I would like to see everyone involved become a little more respectful of the right of privacy, which is why I think we need a constitutional amendment that clarifies matters for the Internet Age. Such an amendment would spell out the privacy rights (as opposed to mere expectations) of individuals, organizations, businesses, and last but not least, the government itself.

Yes, I think the government has a right to privacy too, which is why I’m not overly fond of Snowden or Julian Assange. But they do have their uses.

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