Our firm, Investment Management Associates, bought Apple shares for clients’ portfolios in 2013. At the time, the stock was not much loved, and we were contrarians (read here and here).

Now we are contrarians again, this time going against the company’s faithful. Here are key reasons why we sold our entire Apple stake.

The iPhone, though indispensable, is a mature product. Since introduction of the iPhone X, Apple — surpassed this week by Microsoft as the world’s most valuable company— has been raising its prices. For instance, last quarter iPhone revenue jumped 24%, even though the number of iPhones sold barely changed. All the growth came from higher prices.

Smartphone penetration is high globally, and therefore most of the growth currently comes from replacement phones rather than first-time buyers. Higher prices and lack of significant incremental improvements will likely lead to elongation of the replacement cycle from two years to three (or possibly four).

Recently the company announced that it will stop disclosing the volume of iPhone (and iPad) shipments. There is only one way to read that news: The iPhone is a mature, middle-aged product with a spouse and two kids.

Management is desperately trying to create a narrative that Apple is becoming a services company. The subtitle of its most recent quarterly press release says, “Services Revenue of $10 Billion Reaches New All-Time High.” The company is trying to monetize its enormous installed base of iPhones, iPads, and Macs by selling digital goods and services to their owners.

This creates further lost optimism. Apple has done a good job of selling digital goods (apps, movies, music, space) in its digital store, but so far it has proved to be a lousy services company.

Vitaliy Katsenelson

Its iCloud (email, calendar, data storage) and Apple Maps have been either outright failures or much-inferior products. Apple’s email (originally known as MobileMe) and iCloud data-storage service were basically rendered irrelevant by Google’s Gmail and Google Drive (and Dropbox).

Apple Maps is only in business because it is the default map software in the iPhone. Google is light years ahead in accuracy when it comes to maps.

In addition to Google, Apple competes in services with another giant, Amazon.com, which is spending hundreds of millions of dollars on movies and music.

Apple’s streaming music service was initially a disaster. In all fairness, it has improved, but today it is fighting an uphill battle because the company’s walled-garden approach doesn’t allow Apple Music to work on Amazon’s and Google’s speakers. This gave plenty of breathing room for competitors, who otherwise would not have had a chance.

Then there is Siri. In the beginning it was the smartest digital voice assistant, but not anymore. Not to be disrespectful to Siri, but its IQ has been dropping rapidly in comparison to Amazon’s and Google’s assistants. Google and Amazon opened the application programming interfaces of their digital voice assistants to other developers, and soon every appliance in your house will be responding to “Hey Google” or “Alexa.”

There are several reasons why Apple has done so poorly in services. First, it’s a product company. Macs, iPhones, and iPads are packed with software, but they are incredibly complex devices with updated versions released only annually or every few years. Services are more like software — they require consistent, gradual, even daily improvement. It’s about releasing an imperfect product and continually improving it with new releases. The approach seems to go against the company’s DNA.

The second, even more important point is the classic “innovator’s dilemma”: Today two-thirds of Apple revenue comes from the iPhone, and to survive that beast requires a walled garden. That’s why Apple’s music doesn’t work on Amazon’s or Google’s speakers.

Oh, and what about Apple’s speakers? The company predictably took a “premium” strategy with its speakers, which worked great with Macs, iPhones, and iPads. However, the strategy has failed in the case of speakers because Apple’s product is several times more expensive than the “good enough” offerings from Google and Amazon.

Moreover, the walled-garden strategy has backfired here. For instance, Apple speakers will not play Spotify, an incredibly popular music service with 75 million paying users and 150 million active users that competes with Apple’s Music. Thus, while protecting its iPhone cash cow, Apple is fighting with one arm tied behind its back.

As shareholders, we became concerned about future sales of the iPhone and not highly confident that the services strategy will bear fruit. Therein lies the biggest problem for Apple: It needs a new huge product category. (The Apple Watch was a mildly successful product, but in the context of $265 billion of sales, it was a rounding error.)

Cars were supposed to be that category, but Apple has changed its car strategy several times and seemingly has given up on that category.

When the company’s stock was lower, we did not have to worry as much about slower growth. Now we do — so we got out.

Vitaliy Katsenelson is the CEO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.)

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