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Apple's Moat Will Endure

Jeremy Glaser

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. We learned last night that Steve Jobs died at 56. He was the founder of Apple and a longtime CEO. I'm here today with Mike Holt, a senior analyst at Morningstar. He covers Apple, and we'll take a look at Steve Jobs' legacy and what it could mean for Apple going forward.

Mike, thanks so much for joining me today.

Michael Holt: Thanks for having me.

Glaser: So, let's take a look back at Steve Jobs' legacy first. Could you talk a little bit about the impact that he had, obviously not only to Apple, but kind of on the broader tech industry?

Holt: Sure. Well, he was clearly one of the pioneers of personal computing, but what we've really been just impressed with is his ability to focus on the usability of technology versus just having the coolest specs. And that's really what we've seen in the last decade, as he's just generated one hit after another in terms of the iPod, the iPhone, and the iPad.

Glaser: So, that focus on usability really seems to have spilled over into lot of other companies. Do you think that kind of focus can remain going forward, or do you think that the industry might move in another direction, now that he is no longer driving that conversation?

Holt: I think it's a setback for Apple to lose Steve Jobs because I don't think he's a replaceable individual. That being said, he does have a company that he has created in his shadow, and they have some of the same core values. So, there will be momentum and that philosophy going forward, but asking "What would Steve do?" is a lot different than having the right answer.

Glaser: Now, again looking at Apple, how long of its pipeline do you think the firm has of products that Jobs personally shepherded, and when do you think those start tipping over into new projects that were started under Tim Cook.

Holt: So, certainly, there is some momentum in the product pipeline, but as investors, what we're really looking at is what will keep the current customers tied to the Apple ecosystem. Historically, when we've seen a company fail in the consumer electronics space, like the Motorola RAZR for example, it's because the company had a one hit product and then there was nothing that brought those users to the next generation of the product, even if they have a hiccup in design.

With Apple, you've got a whole set of content and services and the iCloud initiatives. This is the really important stuff that will make sure that today's iPad and iPhone purchasers will be tomorrow's purchasers.

Glaser: And what about execution? Steve Jobs was kind of infamous in his ability to kind of push forward with execution to make sure thing came out just so. Do you think Apple is going to be able to continue operating at that extremely high level without him at the company?

Holt: Again, we don't think Jobs is a replaceable individual, but what's more important is that that economic moat is there. So, we do think there will be some stumbles in the next 15 years. It won't be as flawless as the last 15. But, while Steve was the creator of that economic moat, the economic moat survives him, and that's what keeps those Apple users tied to that universe. That's what's more important than questioning whether Apple will always have perfect execution.

Glaser: So, under Steve Jobs' watch, Apple built up this incredible cash hoard for about $75 billion, I think. Does his passing kind of force the firm's hand in terms of maybe paying out a dividend or using that cash instead of having it sit on the balance sheet, or do you think Apple is going to just continue to kind of collect interest?

Holt: That's certainly one of the hot topics with Apple, their cash balance. We don't really see this as the triggering event to force the firm's hand to do something with that, but eventually, Apple will have to do something with that cash. But for now, it just remains a big looming question over the investment.

Glaser: So, for investors in Apple today, Jobs had already stepped down as the CEO. There are probably not a lot of changes. So, really, it's more of a time of reflection than really worrying about the future of the Company.

Holt: Absolutely. We knew this ending was inevitable, and while the timing is a little bit surprising, it really doesn't change the investment thesis for now.

Glaser: Well, Mike, thanks so much for sharing your thoughts with me today.

Holt: Thanks for having me.

Glaser: For Morningstar, I am Jeremy Glaser.