Will Cook Use Apple's Cash to Build Market Confidence?
Pity Tim Cook. Regardless of how brilliantly Mr. Cook performs as Apple's (AAPL) CEO, he knows, for the entirety of his tenure, his efforts will be benchmarked against those of a visionary.
The media, analysts and shareholders are scrutinizing every decision being made and are quick to opine that THIS IS: a) initial evidence, b) further evidence, or c) the last nail in the coffin lid, showing that It Is All Over For Apple.
The fact is, with Jobs gone, it is highly likely, even if Apple was to post record revenues into the foreseeable future, that the most popular headline for the company will continue to be, "Has Apple Lost It?"
For example, Cook has been savaged by analysts and the media alike for such notable failures as the Mac G4 Cube, MobileMe and Ping. Wait. No. That was another guy.
No, what Cook did to herald the downfall of Apple was to release Apple Maps and the iPad Mini. Now, Apple Maps truly was more beta-stage that fully cooked, but the iPad Mini, from market reports, is tremendously successful and has firmly entrenched Apple in the 7-ish inch tablet space. Critics bemoan the Mini for its lower margins, while Maps has been roundly panned for its excessive mapping errors.
While Maps certainly can be viewed as an initial failure, the impact of iPad Mini margins can't be quantified as yet - certainly Apple has guided margins lower, but that is likely more of a temporary effect of aggressive product refreshes for the Sept-Dec quarter vs. the Mini's slimmer profits.
However you measure these product moves, it seems a stretch to label them as "game changers" or harbingers of Apple's demise.
My point: While Jobs made his share of mistakes, Apple shares may have been more resilient based on the market's confidence in Mr. Jobs. The ongoing decline in Apple shares may be simply an indication of increased market doubt in Mr. Cook's abilities to lead Apple.
Certainly there have been other arguments for the recent decline in Apple shares, notably:
- Margin compression
- Slowing growth of iPhone
- Slow down in product innovation
- Fiscal Cliff Sell-off
But, as an observer, it's difficult to swallow these arguments based on current company execution:
While Apple has guided margins lower for the current quarter, the company is notorious for its conservative guidance. Also, the following chart shows margin compression still remains a theory, not a reality, and seems unlikely to be responsible for a 30% correction in Apple's share price over the past 3 months.
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Slowing iPhone Growth
The median analyst estimate for Q1 2013 iPhone sales is 49.5 million units, a 45% percent YOY increase over Q1 2012 (adjusted for 13 week Q1 2012). While growth is down from the scorching 128% YOY rate for Q1 2012, this still equates, conservatively, to incremental revenues of $7.5 billion for the quarter, or, to put it in perspective: The total revenues collected by Major League Baseball in 2012.
Again, slowing growth rates will lead to softening in stock price, but when the reduced growth rate is still 45%, you do not expect a company to be valued by the market at levels significantly below the S&P 500 average.
(click to enlarge)
Slow Down in Product Innovation
Demonstrating a slow down in product innovation is difficult as there is no benchmark in how often a company should introduce a new product category (iPod in 2001, iPhone in 2007, iPad in 2010). And once a product is introduced, incremental improvements are likely to be seen by the media as "boring," regardless of sales results.
Also, even when new product categories were introduced by Jobs (ex. iPad) the remarkable innovation, at the time, was viewed negatively by the media and analysts. (Remember all the articles and analyst reports detailing how the iPad was just a big iPod Touch, and would never sell?)
Over the past 12 months I have read innumerable articles that state that Apple's product refreshes, which involve changes in color, size, weight and speed, as singular proof of a lack of innovation at Apple. However, these are the exact changes Jobs has made over time to every other product line he introduced. Perhaps you remember the iMac or iPod?
In short, analysts and the media have spent a great deal of time and energy proving that they would be unable to recognize "innovation" even if it were to burst into flames and take residence in their backside. Given this telling "blindness" to innovation, it seems highly unlikely that a sudden and steep decline in innovation a) would be noticed, and b) would be so quickly incorporated into Apple's stock price.
Fiscal Cliff Sell-Off
Of all catalysts for Apple's share decline, this seemed the most tenable, as there was significant risk of tax rate increases going into 2013. However, as the 30-day rule expired on stock sales, you would have expected to see some recovery in Apple shares price if the current sell-off was largely due to avoidance of tax risk.
Does The Market Lack Confidence in Tim Cook?
Based on the lack of evidence to support a steep Apple decline based on margin compression, iPhone growth erosion, innovation slow down or the tax risks of the Fiscal Cliff, I am posing the theory that current declines in Apple stock may be based on the market's lack of confidence in Tim Cook's ability to lead Apple.
I suspect this lack of confidence is largely driven by a "confidence vacuum" left by the death of Steve Jobs.
Apple operates in a tremendously competitive space, and over the past decade, has shown the ability to thrive while earning outstanding margins. Meanwhile, the majority of Apple's competition is either at risk (Nokia (NOK), RIM (RIMM), Microsoft (MSFT), or operates at lower margins (Samsung). As competition continues to heat up, with the shift to developing markets for growth in mobile, Apple investors no longer have the "risk mitigating comfort" of Steve Jobs.
I personally don't agree with what I perceive to be negative sentiment of the market for Apple's CEO. For example, Cook has demonstrated his operations prowess with the ramp and execution of the extremely aggressive global launches for the iPhone 5, iPad 4 and iPad mini. Also, the iPad Mini launch, in my opinion, was brilliant -it appears Apple has captured an important segment of the tablet market, while minimizing margin loss. Recall the naysayer's attacking the $329 price point as being too high?
Regardless of your opinions on what is driving Apple stock down, it will be interesting to see if Tim Cook and the Apple Board choose to act to support the company's stock price during this weak period.
If they do, the most likely action would be to announce a larger stock repurchase program, with the goal of increasing EPS and boosting the stock value for the investor. (Recall, the company previously announced a $10 billion buyback, but the primary purpose of that program was to mitigate dilution from stock option awards.)
A stock buyback seems to both support the share holders as well as demonstrate fiduciary responsibility given the tremendous cash reserves for the company and the stock's current low valuation. A stock buyback would provide support for the stock price while communicating to the market Apple's confidence that the current valuation is too low.
I think it is unlikely that the company will move aggressively to boost dividends at this time, since most companies look to create steady growth in the dividend stream. Any sudden increase in dividends at this time would likely be viewed negatively by the market.
The current reason's being touted for Apple's stock decline seem ill informed based on the evidence at hand. My theory is that the market is having trouble finding "a reason to believe," that Apple can continue its remarkable execution without the leadership of Mr. Jobs.
While time will hopefully confirm that Mr. Cook is indeed the man to lead Apple, given Apple's cash reserves and the current valuation of the stock, it seems likely that the motivation exists for Apple to materially increase its stock buyback program.
While Apple, historically, has shown little interest in placating worried shareholders, Cook has shown a greater willingness to engage where Jobs would not. A stock buyback could do much to communicate confidence in the future.
Disclosure: I am long AAPL.