Apple: Is It HP All Over Again?

Apr.22.13 | About: Apple Inc. (AAPL)

On the surface there is an eerie, disturbing parallel between what's going on at the top of Apple (NASDAQ:AAPL) and at the top of Hewlett-Packard (NYSE:HPQ), another technology giant that, by all counts, is still quite a powerhouse, albeit a mere shadow of its former glory. After Mr. Steve Jobs tragically passed away, reins were handed over to Mr. Tim Cook, Mr. Jobs' hand-picked successor and a master of supply chain management. His early days at Apple were considered a success as the stock price rallied to its all-time high of $705 before crashing 44% to the most recent close of $390. Is it time for Mr. Tim Cook to be shown the door (or perhaps demoted to COO), or are investors simply exhibiting a knee-jerk reaction to the stock price?

HP's Executive Problems

HP has been plagued with executive issues for years now. The Street wasn't particularly happy with Ms. Carly Fiorina, infamous for overseeing a number of bad acquisitions, ill-conceived product ideas, and essentially being the "Anti-Steve Jobs". After she was forced to resign (much to shareholders' delight), Mark Hurd took the reins. Quite frankly, Mr. Hurd seemed to do a good job, and the share price reflected this, nearly tripling during his tenure. Of course, Mr. Hurd was apparently hit with allegations of inappropriate sexual conduct towards TV actress Jodie Fisher, and as a result resigned. A shame that his personal shenanigans cost shareholders a very competent CEO.

Of course, then HP's board hired Leo Apotheker, who was ultimately responsible for shaving off ~40% of HP's market capitalization during his less than 1 year term at the company. Yet another strike against the board: first they failed to keep a solid CEO, and then they replaced him with a completely unqualified individual.

Now, finally we have Ms. Meg Whitman in the driver's seat. She seems like she's got a good head on her shoulders, and everything she says actually makes sense. And, hey, her TV appearances aren't all that bad. Perhaps HP has finally found a CEO that can help to unlock the real value that still remains in this company?

But this is an article about Apple, so what did what I just wrote have to do with Apple? Potentially everything.

Is Tim Cook Another Leo?

I don't think so. While Apple's share price has also tanked 40% under his tenure, they're still actually up since he took over. Further, Apple's problems don't actually have anything to do with Tim Cook, but instead with the fierce operating environment. Is it Tim Cook's fault that other companies can make smartphones and tablets, too? Is it Tim Cook's fault that Samsung is a beast? No!

Apple's margins will come under pressure, but this is not Tim Cook's fault. People are expecting the "next big thing" from Apple to juice up sales and/or margins, but the truth is that the playbook is probably played out. Apple had a great run, and it was the first to bring truly portable computing to the masses in a way that went beyond the traditional cell phone's limited functionality. But let's be honest - it was bound to happen, and it didn't take long before others followed suit.

Processors are always getting smaller, faster, and cheaper, so it was an inevitability that someone would think to try to stick a fast processor into a handheld device, layer a competent OS on top of it, and sell it. I mean, it's just a hand-held computer, right? Computers have been around for ages now (and no, Apple didn't invent the computer), and they've been getting smaller and more capable each generation.

Ultimately, Apple is a marketing company first and foremost. They sell slick, well-designed, and well-built products at the right time - that is, when the technology is feasible to make such devices non-awkward. But really, don't blame Tim Cook for not coming up with the "next big thing" because such "innovations" don't happen at a regular beat rate, and they're certainly not the product of one person. The iPod, iPhone, and iPad all were built from a logical, incremental progression over time by teams of highly skilled designers and engineers. There was nothing radical here, just a lot of hard work from a lot of talented people.

The Stock Price

Yeah, a lot of you are bummed out because you're sitting on paper losses. That's not Tim Cook's fault. The correction in the share price is merely an acknowledgement by the broader market that the obscenely high margins on handheld computers are coming to an end. Who didn't see this coming? Desktop PCs have lousy margins, laptop PCs have lousy margins, so why on earth would handheld PCs or laptops without keyboards attached have great margins indefinitely?

Apple has a lot of cash, but it refuses to use it to help the owners of the company. The best hope that any Apple shareholder has is that Apple announces a big buyback to reduce the float significantly and to introduce some buying pressure onto the shares. I think that they will announce some new capital allocation plan at some point, which will help give the shares a nice bounce, but this doesn't change the long term problem that smartphones should and will be $100 unsubsidized.

Conclusion

Does Tim Cook deserve the boot? No way! He's doing a fine job running the company. The problem is that at the end of the day, Apple sells cell phones, and the margins will erode. It happened to Nokia (NYSE:NOK), it happened to BlackBerry (NASDAQ:BBRY), and it's going to happen to Apple. And there's nothing Tim Cook, Steve Jobs, or anybody else can really do about it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.