Will investors ever see the Apple fall?

In light of Apple’s recent stunning quarterly results, it leaves investors begging the question: when should we be worried? When do we know that this Apple has started to rot?

With this in mind, what’s vital to realise is that Apple is re-writing the rules. With the tabling of this last quarterly, there can no longer be any question about that. In an off-quarter; that’s typically a gentle wind up to the manic back-to-school season in the US and then the global holiday season at the end of the year, their results blew the doors off. They also reflect Apple’s evolution into a truly global player. Soon the US back-to-school season will be a regional strength and sales bubbles are going to come from the Chinese New Year and back-to-school seasons in the world’s massive developing markets.

Considering this, Apple’s results are nothing less than a work of corporate art. Sales are booming as fast as they can produce hardware, a billion app downloads a month are blooming, developers are flocking to the iOS and OSX platforms and customers love the products. Sure competitors are rising fast, but whenever consumers are given the freedom of choice, as opposed to distribution agreements or exclusivities, they snap up the iPhone. This is driven home by the recent case in the US with the massive Verizon network selling the iPhone for the first time in February, which data now suggests is blunting Android smartphone growth in the US. Even more astonishing, is that 1-million Sprint users, which does not carry the iPhone at all, are Apple’s. That’s a whole boatload of users who have gone through the trouble of unlocking the iPhone 4 to work on Sprint’s network. Interestingly, Apple now sells an unlocked iPhone plan-free in the US, effectively addressing the entire market.

And Apple is already the world’s second most valuable company after Exxon-Mobile. Its innovations are beginning to invent the future, leaving entire industries scrambling in its wake. Some competitors like RIM are imploding, some like Google are playing a different game and some are so inscrutable yet powerful, we aren’t sure if they are confused, or just devilishly masterful (Microsoft, HP). Apple is also sitting on a cash hoard so huge, it’s hard to wrap your head around… but to quote Carl Sagan, “it’s billions and billions”… and the rate at which they are shovelling it in the bank is also magical, given that almost $11- billion of that 76-billion dollar hoard was banked in the last three months alone! With those kinds of reserves Apple could bail out Greece and still have some spare cash to kick around for pool parties or a new model iPhone or two.

So the rate of growth is relentless, and the numbers are becoming hard to absorb as coming from a single company but how long can it last?

Those not concerned with the day-to-day melodrama that is now Apple, can focus on one important canary for when things start going wrong for Apple, it’s when their zero defection rate falters. At the moment, the action is all one way… users are flocking to the Apple eco-system and products and are not leaving in any significant quantities. But get worried when you can see a viable enough competitor that is attracting users away from Apple by their choice…

When the toddler reaches out and delightfully interacts with a tablet without ever seeing one before. When a user buys another smartphone from his own personal money despite his company-issued iPhone. When cool factor apps like Hipstamatic or Instagram (a fusion of technology and personality) are spawned in rival ecosystems first, because of difficult to reproduce attributes of that ecosystem.

When no one lines up any more, to buy an iDevice or iProduct that Apple believes is significant. For example, I don’t expect lines for an Apple TV-type product launch, i.e. a hobby, but when Apple does a full court press as it did on say the iPad launch, and fails, then get worried. Otherwise, ignore the day-to-day, and as an investor enjoy the predictable largesse of what is now the world’s most profitable annuity income stream. Apple no longer sells hardware. Their users spend a predictable amount of money each year with Apple. Horace Dedieu estimates it as much as $150 per iPhone/iPad user per year.

And that number is only going up and the users are not going anywhere. Instead the eco-system is pulling them in as fast as Apple can make the devices that are the ante for entry.

But when Apple stops being magnetic to users and it loses its zero defection rate, then start worrying.