Seeking Alpha
Profile| Send Message|
( followers)  

Mr. Cook, The Market Is Betting Against You

In order to understand the magnitude of Apple's loss in market cap, you really need write it out: $250,000,000,000 - the amount of share holder value that has been lost under Tim Cook at Apple (NASDAQ:AAPL) over the past 8 months.

As a close observer of Apple (and a share holder), it's difficult to describe the frustration of the last 8 months. On the one hand, here is a company, that by most measures, is performing exceedingly well, after all Apple is the most profitible company, In The World.

Now consider this - Apple earns the majority of the global profits in personal computers, smartphones, tablet computers and mobile applications. Yet the company has lost over 40% of its value.

It's a unique situation. A company that earns record profits, yet the market seems to have little confidence in Apple's future.

The loss is really quite mind boggling. Not convinced? Let's view the $250,000,000,000 loss in different contexts. For example, imagine:

  • Google (NASDAQ:GOOG) dropped to $0 a share, or
  • Every man, woman and child in America flushing $1000 down the toilet, or
  • McDonalds (NYSE:MCD) serving the public free food for 9 years, or perhaps
  • Everyone in China getting drunk, crashing on the neighbors couch and losing $250 of change in the couch cushions.

Tim Cook's Tin Ear And Two Left Feet

On the bandstand it's called "playing clams" - hitting the wrong notes during a performance.

Over the past 8 months, Tim Cook has shown an almost perverse skill in hitting every possible wrong note when he opens his mouth. It's to the point where articles are being written documenting how much Apple stock drops each time Cook speaks. (Cook's current record: 6 appearances, 6 straight stock declines.)

And while it's painful to see Cook struggle to communicate, perhaps more troubling is Cook's apparent mismanagement of the day-to-day operations.

Specifically, it seems inexcusable that Apple experienced product shortages for the iPhone 4, iPhone 5, iPad Mini and iMac line of computers during the key fiscal Q1. Not only does this demonstrate questionable supply management (Cook's strength) these product shortages likely cost Cook and Apple the blow-out quarter needed to silence the negative sentiment dogging the company.

Further exacerbating the issue - the aggressive product release schedule for Q1 has left Apple to face two, possibly three quarters with no new product catalysts. This "dead" time, has left bearish analysts and the media with more than ample time to drive Apple sentiment to all time lows.

And Then There's The Cash...

Perhaps Tim Cook believes the prolonged delay in announcing the company's cash distribution plan communicates a keen level of fiduciary responsibility to the market. Unfortunately as time continues to pass with no decision on Apple's cash distribution, Cook is appearing more like a man watching his house burn to the ground while he tries to decide if the time is right to use the fire extinguisher he is holding in his hands.

Cook had a perfect opportunity to introduce his cash distribution plans this March at the 1 year anniversary of the company's latest dividend announcement. At the time, the company's stock had notched 4 days of decent gains in anticipation of some good news from the company. Instead, Cook remained silent, and the stock continues to wilt.

Current wisdom has Apple making an announcement a few weeks after it's Q2 earning call. At this point, a legitimate question to Cook during the earnings call might be, "Exactly what the hell are you thinking?".

In the past Apple's silence aligned perfectly with the Job's mystique as a product visionary. No news meant Jobs was preparing something wonderful for the multitudes. Unfortunately, the market is not affording Cook such a luxury. Cook's silence instead seems to feed a growing perception that 1) Apple's days as an innovator are over, and 2) Cook is out of his league.

Cook supporters will claim that the introduction of Apple's "next big thing" will set things right for the company. I am not as sanguine.

Recall the huge negative response when Jobs introduced the iPad? If not, please visit this site - it documents the overwhelming and absolute forecasts of doom for Apple based on the perceived "pointlessness" of the iPad. Fact is, if Cook announced the iPad today, given today's negative sentiment, there's no telling how low the stock might go.

When the Audience Is Screaming "Free Bird", You Play "Free Bird"

The market is doing its best to communicate to Cook that it really does not appreciate the tune he is currently playing.

The anxiety is reflected in a swooning stock price, as well as an ongoing avalanche of negative stories erupting from the media. The narrative tends to fall into five areas: 1) The lack of Apple product innovation, 2) Ongoing product margin compression, 3) Perceived problems for the iPhone in emerging markets, 4) The technical breakdown in the stock, and 5) The company's dismal capital allocation.

The good news for Cook: Problems 1-3 deal with the proper execution of company strategy - an area where Apple has excelled in the past

The bad news? Problems 4 and 5, deal with shareholder relations and communication - areas well outside the company's expertise.

Unfortunately, any near-term rebound in Apple's share price is likely contingent on Tim Cook's willingness/ability to embrace new company policies that fall outside Apple's comfort zone.

The question then becomes, does Tim Cook have the leadership chops and communication skills to 1) Address shareholder relations, and 2) Communicate strategic clarity in such a way that it overcomes market anxiety?

Based on Cook's actions to-date, there isn't much reason to be optimistic. However, hope does spring eternal. Appended are some ideas on how Cook might deal with the current market anxiety.

Time To Play Some Old Hits

Uncertainty is the main factor driving negative media and stockholder perception. Now is the time for Tim Cook to recognize the problem and take concrete actions that are in the interest of his shareholders.

Apple works best as an underdog. For years Jobs rallied the faithful by tossing barbs at the larger competition (Microsoft, Dell). Well, those days are over, and Apple has become the behemoth that people love to root against. A dose of corporate humility right now could go a long way in improving company perception.

Top Hit: Stock Split

Yes, I know, stock splits don't add tangible value to a stock. I don't care, since I'm interested in fighting perception. A 10 for 1 split puts Apple stock firmly in the double digits. It effectively removes the company from the "who will be the first to $1000" pissing contest it has with Google, and more importantly, makes the stock "affordable" to the retail investor.

Another thing - Apple needs more people in its corner. A stock split helps to make sure every small investor that wants to buy Apple, can. Nothing contributes to positive perception like a whole lot of folks holding 10 - 20 shares of your stock in their retirement portfolio.

In addition, with a 10 to 1 split Apple effectively removes the phrase "Apple is too expensive" from the lexicon of a simple minded media narrative.

Top Hit: Stock Buyback

It's actually kind of sad we're even having this conversation. With real interest rates effectively at 0% and Apple stock down 40%, even if it requires Apple talking on debt, it would still make financial sense for Apple to execute an aggressive stock buyback.

Apple's current repurchase plan is in place to prevent dilution from employee stock awards. A plan to repurchase $100 billion in stock provides an efficient way for Apple to transfer value to shareholders while gaining significant value from company cash.

Top Hit: Statement of Cash & Dividend Policy

Uncertainty over Apple's cash holdings has resulted in a company valuation that doesn't recognize the majority of the company's cash.

If Apple wants the market to value its cash holdings, the company needs to provide more transparency on the company's cash policy. For example, how much cash does the company feel it needs to carry? Also, Apple should consider providing additional clarity on the "trigger events" that may lead to an additional distribution of cash to shareholders.

Apple is a cash generating machine - providing clarity on a sound cash policy to the market would do wonders to driving value into the company share price.

Conclusion

Apple and its shareholders are currently suffering through the growing pains caused by the leadership transition from Steve Jobs to Tim Cook.

While Mr. Cook has shown indications of "being his own man" with the announcement of a dividend and stock buyback in 2012, it appears the current CEO doesn't fully appreciate the extent to which market perception has shifted for Apple.

There is a palatable level of market anxiety for Apple driven by the uncertainty in the change of leadership. That uncertainty is reflected in the technical breakdown in the stock price as well as the increasing calls for a cash distribution.

It is time for Mr. Cook to demonstrate leadership by addressing this uncertainty head-on. Any short term rebound in Apple stock price is likely contingent on Tim Cook's willingness to embrace company policies that are far removed from "What Steve Would Have Done".

Right now the market is communicating clearly that it doesn't trust Mr. Cook's leadership. It is time for Mr. Cook to demonstrate to all of us why the market is wrong.

Source: Tim Cook: The (Negative) $250,000,000,000 Man