Yes, Apple (NASDAQ:AAPL) unveiled a new software, a new service and (unusually) teased a new product last week, but there's more under the surface than just that. In many ways, WWDC 13 marked a neat break with the past, clearly showing how Apple's best days as a company still lie ahead in the future. But will these also bring back Apple's best days as a stock? Even if I took a lot of heat, I actually wrote that the most recent pullback was coming. In this article, I'm going to ponder what the state of things at Apple is, and if its stock can yet again be the darling of Wall Street.
A new chapter
Nine months of silence wasn't exactly what the market was asking Tim Cook at a time when everybody makes it a hobby of forecasting Apple's demise, and its biggest competitor has never shined more. But when Apple's CEO took the stage last Monday, he reminded the world of something that is often forgotten: it takes time to make something great. If you look back at the end of 2012, almost every analyst was forecasting how Apple would have had to change its routine to shorter product-update cycles to keep up with a fiercer-than-ever competition. Well, guess what, quite the contrary happened; Apple is now en route to take a whole year to update all its bestselling products, something that arguably hadn't happened since before the iPad was unveiled more than three years ago.
The message here is clear. Contrary to what many are shouting - that is that Tim Cook is transforming Apple into a "normal" company - Apple doesn't care a bit of what the market
expects wants it to do.
In fact, there's no question this is now Tim Cook's Apple, but is it so different from Jobs' Apple and from what Jobs envisioned for Apple? The answer, in both cases, is quite surely a resounding no. Ben Thompson at stratēchery nails it once again in a recent piece:
Cook is clearly a different person than Jobs, with different skills, and different motivations. That's wonderful news for Apple; while a company can reinvent itself around new products and new categories, and continue to thrive, I believe culture is the sort of pie that can only be baked once.
Apple didn't need another Steve Jobs. The price of individual brilliance is collective friction, and only a founder has the cultural capital to make the elevation of the individual possible.
When Steve Jobs was alive, you could arguably identify Apple with his persona. But he was a genius and a visionary. Everything that Apple did (and does) bore his indelible touch. When you lose somebody of this caliber, trying to replace him is just futile. That's where Tim Cook is making a change; the same culture is still there, but Apple is not one person anymore, it's the result of many great people put together. And that's why eight months ago he fired Scott Forstall, the man who shaped the iPhone and iOS together with Jobs. Even though that decision received very little media analysis, Forstall's ouster was inevitably Cook's most difficult and, at the same time, most important decision.
iOS 7 wouldn't resemble slightly what it is today if Forstall was still at the helm. For this reason, I believe that WWDC 13 signed the beginning of a whole new chapter for Apple: iOS 7 is arguably the first Apple product that Jobs didn't envision. And it actually feels extremely good for Apple's future.
Last week the Wall Street Journal ran an interesting piece depicting the rise of Apple's new "star", SVP of software Craig Federighi, who brilliantly entertained the audience while passionately showing off iOS 7 and OS X Mavericks. What's most striking, but actually unsurprising, of Federighi is that he reportedly spends more time building consensus than Forstall, that he is known as one of the most responsive Apple executives, frequently replying to emails promptly, and that he often declines social invitations citing the need to work. I'd also add how he seems extremely down-to-earth and passionate about his job. It should come as no surprise, then, that Tim Cook found him the most suitable for the position, especially in the light of what he shared last month in an interview at the Fuqua School of Business. Asked what he looks for in terms of what he thinks will produce effective collaboration, Cook answered:
You look for people that are not political. People that are not bureaucrats. People that can privately celebrate the achievement, but not care if their name that is in the one in the lights. There are greater reasons to do things.
I've never met anyone in my life, maybe they exist, that could do something so incredible by themselves in companies with global footprints. In our world, in Apple's world, the reason Apple is special is we focus on hardware, software, and services. And the magic happens where those three come together.
And so, it's unlikely that somebody that's focused on one of those in and of itself can come up with magic and so you want people collaborating in such a way so you can produce these things that can't be produced otherwise. And you want people to believe in that.
These words (and a few other tidbits from that same interview) give some incredible, and totally unprecedented, insights into Apple CEO's mindset. Last October's big shakeup hinted that Cook was removing a possible source of friction while cementing Apple's leadership with people prone to collaborate with each other. Last month's interview confirms this thesis and shows the thinking process that drove that decision. This is a great sign for Apple: Tim Cook is masterfully executing, and those calling for his head don't (and probably never will) understand Apple.
Compromises and goals
What seems apparent of Cook is his intention of not compromising, or settling (even juridically speaking, since Apple is now fighting where others have settled). When everybody was calling for Apple to manufacture a sub-$200 tablet, it didn't settle for a mediocre tablet like the ones manufactured by its opponents, but it came out with what is currently considered by most the best tablet on the market at a 65%-higher price point. Furthermore, it has been more than 2 years since analysts have started calling for a "cheap" iPhone, but the only cheap iPhones that Apple seems okay with selling are the older models, which receive a $100 haircut each time a new model is unveiled. I contend that this won't change anytime soon. Apple is the one that pushes itself to such high standards and precision in its manufacturing process that it may happen that 20% of the phones assembled by the contractor don't meet its standards - and get sent back. It doesn't make cheap things for the sake of gaining market share, and it appears evident from the words of Cook himself. Asked about gaining market share during the most recent D-11 Conference, he said:
That's never been a cornerstone of Apple. Arguably, we make the best PC, we don't make the most; we make the best music player, we wound up making the most; we make the best tablet, we're making the most there today; we make the best phone, we're not making the most phones.
But it shouldn't sound strange. Ever since Steve Jobs came back in 1997, the goal at Apple has never been making the most money, but making the best products. In turn, there has always been the conviction that if Apple achieved manufacturing the best products, it would be extremely profitable. And I think you could argue that it was quite right.
But is manufacturing the best products on the market still sufficient to keep the EPS at the current level? Arguably the Macs have always been the best laptops out there, but they have never granted Apple great amount of profits. Furthermore, now that Samsung also seems to be having its problems meeting expectations for the Galaxy S4, will the iPhone still bring the same amount of profit, or will it go the way of the Mac?
The problem with investing in Apple at this moment is that it is nothing more than an act of faith. You know what Google (NASDAQ:GOOG) is working on, they tell you. On the contrary, you don't have the slightest idea of what Apple is currently working on.
As this article has tried to prove, there's no question Tim Cook is the best CEO Apple could ask for, now that he has managed to shape Apple in the best possible way for it to thrive even without its iconic founder. Even today Apple is manufacturing the best products in the world, and the only thing that seems to be able to prevent them from continuing to do so is the law of large numbers. The problem here is that even if the iPhone is recognized to be the best smartphone in the market and also the best-selling smartphone having topped customer satisfaction rankings for nine times in a row, sales have dramatically slowed down. And nobody says these figures couldn't start to contract. As Sameer Singh at tech-thoughts points out:
the biggest threat to Apple & Samsung is from "good enough" smartphones from smaller vendors. In the early stages, this competition may come from $400+ smartphones, but as we move forward, I expect to see greater cannibalization from lower priced phones ($250-$350). This means that the $400+, premium smartphone market may begin to lose its relevance in a year.
Since Apple sells 100% of its iPhones in the $400+, premium smartphone market and that even the yet-to-be-seen "cheap" iPhone is expected to have a roughly $400 price, this would certainly not be good news.
The bottom line is, Apple may still be manufacturing the best products in the world, and Tim Cook may still be the best man for the job, but it might not be enough. With iPhone sales - the product that drives 50% of Apple's profits - dramatically slowing, until Apple
proves to have releases another blockbuster device, shares will be in the land of uncertainty, and they will have difficulty moving up.
Disclosure: I am long AAPL. 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.